The Vacant Homes Tax Is Not Good Public Policy

The Honolulu City Council is currently considering House Bill 46, a tax on vacant or “empty” homes. This tax would be added to the actual property taxes owed by property owners.

The the stated purpose of this bill to help address homelessness and the lack of affordable housing by encouraging landlords to rent or sell vacant properties, increasing the supply of housing, and raising funds for affordable housing and homelessness solutions. The goals of this bill sound nice and rosy until you look at the details and consider the potential ramifications.

The bill assumes that all homes are vacant unless the property owner applies for one of up to 15 exemptions (depending on the version of the bill), for example, the home is occupied by the owner or tenant for at least six months out of the year. To avoid being subject to the vacant home tax, an exemption declaration must be filed with the city each year, and they must approve it. The city may require driver’s licenses, vehicle registration, utility and/or bank records for owner-occupancy and lease agreements, and proof of income and excise taxes paid for rental income as proof of tenant occupancy. Other documentation may also be required.

Other exemptions include owner absence due to medical care, home renovations, owner assignment, unfit to live in, etc. Each of these exemptions also requires specific documentation.

Perhaps one of the biggest problems with this proposed tax is that every owner would have to provide an exemption certificate or face a steep tax. (The tax would be 3% of the assessed value of the property, but 1% the first year and 2% the second year. For a home valued at $500,000, that would be $15,000 after the second year. A home valued at $1 million would be taxed at $30,000.)

When the Residential A classification first went into effect, “many” homeowners faced a 71% increase in property taxes because they were unaware of the new classification and did not have homeowner exemptions. The council passed two resolutions authorizing tax compromises, or reductions in taxes, for homeowners who applied to the city by certain dates. Compromises were approved for approximately 600 homeowners.

In 2015 and 2016, again “many” homeowners were hit with a higher Residential A tax rate, and the council passed a resolution authorizing the city to make compromises, but the city opposed them. Even today, there are homeowners who face higher Residential A taxes simply because they did not apply for a homeowner exemption.

Given this history, it’s very possible that property owners are unaware of the vacant home tax and are not filing the necessary paperwork. The bill does offer an exemption period, but only for the first year. A large tax bill could be devastating for some property owners.

Another exemption is for resale homes, but this exemption is only allowed once every five years. This is particularly unfair for an owner who is the second person to sell a particular property within a five-year period.

Also, consider that this tax had been in effect a few years ago. The developer of an affordable apartment project in Kakaako had trouble selling 61 units and would have had to pay half a million dollars or more for each vacant year. This would have only added to the cost of our affordable housing market. A similar situation occurred a few years ago in Hawaii Kai, where units in an affordable rental project remained vacant much longer than anticipated.

An empty homes tax would make buying a home more expensive because the tax would likely be prorated for the new homeowner, and would also remain in effect for another year if the purchase was made after the deadline to apply for the exemption.

As if the proposed tax wasn’t outrageous enough, property owners who file their paperwork after the deadline would be subject to a late filing penalty of 5% of the tax, even if the owner qualifies for an exemption. The bill allows for an extension of the filing deadline for filing a property status declaration, but the 5% penalty still applies.

Other concerns about this bill include that in the current version, the medical care exemption only applies once every five years, and that vacant homes also include properties that are legally rented for consecutive months on a short-term basis. (A proposed committee draft would change both of these provisions.)

An empty homes tax is not good public policy. It is intrusive, unreasonable, and increases the administrative burden on both the city and taxpayers. It is also questionable whether it will actually be effective in its stated goal of increasing our housing supply.

Rather than adding another tax, the council should eliminate or at least reduce exemptions for organizations that qualify for the “charitable purpose” exemption but are not actually charities, such as labor unions, business associations, nonprofit organizations and social clubs, credit unions and for-profit child care centers.

It’s an easy goal that would make our tax system fairer and less complicated. (On the subject, we’re told the city doesn’t have a list of properties that qualify for the charitable exemption; they can only tell us how many properties qualify.)

Bill 46 and proposed committee drafts are currently on the agenda agenda for the Housing, Sustainability and Health Committee meeting on Wednesday.