The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Honolulu City Council on Dec. 11, 2024
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Dec. 11, 2024, 10 a.m.
Honolulu Hale
To: Honolulu City Council
Tommy Waters, Chair
Esther Kiaʻāina, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: Bill 46 (2024) — RELATING TO REAL PROPERTY TAXATION
Aloha Chair Waters, Vice-Chair Kiaʻāina and other members of the Council,
The Grassroot Institute of Hawaii opposes Bill 46 (2024), CD2, which would create a new “Residential E” real property tax class for so-called empty homes. The class would apply to properties in the Residential and Residential A tax classes that do not qualify for one of 17 exemptions listed in the bill.
First of all, the City and County of Honolulu has commissioned an expensive, half-million-dollar study on the feasibility of implementing an empty homes tax proposal. The Council should defer acting on this bill until the study is completed.
Beyond that, Grassroot opposes Bill 46 for the following reasons:
>> The proposed bill is likely unconstitutional and risks embroiling the city in expensive lawsuits.
>> An empty homes tax would create major administrative headaches for the Department of Budget and Fiscal Services and would invade the privacy of city residents.
>> Research does not indicate empty homes increase housing prices or rents.
>> The proposed empty homes tax surcharge would ultimately be just another tax increase that risks unforeseen economic downsides for Honolulu’s economy.
As to the bill’s legal vulnerabilities, San Francisco’s empty homes tax, due to go into effect in 2025, was recently overturned on constitutional and state law grounds.
In his order granting summary judgment, Judge Joseph Quinn found that San Francisco’s empty homes tax violated the U.S. Constitution’s due process and equal protection clauses as well as the state constitution’s right to privacy. Given the similarities between the San Francisco law and this bill, it seems likely that Bill 46 would be vulnerable to a similar challenge.
Regarding administrative headaches, the bill would defer all implementation responsibilities to the city Department of Budget and Fiscal Services, so it is hard to know just how much work the bill would require from the department’s staff or from property owners trying to comply with one of the 17 exemptions. But the magnitude of all this required paperwork, investigation and enforcement would be enormous.
For fiscal 2025, there are 251,787 parcels in Honolulu’s Residential class and 28,058 in its Residential A class.[1] Some of these properties would be exempt with homeowner exemptions, but there is no way to tell how much work it would require.
As for the goal of providing more housing, Grassroot pointed out in its May 2023 policy brief, “The ‘empty homes’ theory of Hawaii’s housing crisis,” that across all 50 states, vacant homes are not positively correlated with high housing prices or rents.[2]
Grassroot’s study did acknowledge such a tax could be useful for generating tax revenue, but it would be almost impossible to quantify how much.
Do we really want to create a headache for the city administration and city property owners in hopes of raising an unknown sum of money — especially when there are easier ways to go about raising revenue?
Finally, there is research indicating that empty homes taxes can increase housing prices in the long-run.
In 2020, economist Mariona Segu examined France’s national vacancy tax and found that the tax reduced the number of vacancies by 13% over four years, which coincided with many of the vacant units being converted to primary residences. Her study also noted that as rental affordability improved in the short term housing prices increased in the long term.[3]
Economists Lu Han, Derek Stacey and Hong Chen reached a similar conclusion in 2023. Vacancy taxes can reduce vacancies, they found, but they also can distort the home sales market, increasing housing prices and lowering homeownership rates.[4] Some sellers might be more reluctant to leave their properties on the market for long periods of time, as doing so risks being subject to the tax.
Please consider, too, that an implicit empty homes tax already exists as a function of the housing market. The fact is that anyone who chooses to leave their home empty for more than six months out of the year is already forgoing more than $12,000 in rental income, based on average rents.[5]
This suggests that anyone who leaves their home empty has good reason to do so, and that an empty homes tax surcharge might not motivate them to act otherwise.
All things considered, the Grassroot Institute of Hawaii urges you to reject Bill 46 and instead focus on alternatives that have good track records for meeting the goal of producing more housing.
Thank you for the opportunity to testify.
Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] “Number of Records by Land Use Class for Tax Year 2024-2025,” City and County of Honolulu, July 2024.
[2] Jensen Ahokovi and Mark Coleman, “The empty homes theory of Hawaii’s housing crisis: A tax on empty homes might increase rental occupancies and generate tax revenues, but there is no evidence showing it would increase the state’s housing supply or reduce housing or rental prices,” Grassroot Institute of Hawaii, May 2023, p. 11.
[3] Mariona Segu, “The impact of taxing vacancy on housing markets: Evidence from France,” Journal of Public Economics, 2020, p. 10.
[4] Derek Stacey, Lu Han and Hong Cheng, “Frictional and Speculative Vacancies: The Effects of an Empty Homes Tax,” Asian Bureau of Finance and Economic Research, May 2023, pp. 22-23.
[5] “What is the average rent in Honolulu, HI?” Apartments.com, accessed Oct. 7, 2024.
