A bill moving through the Honolulu City Council would create a new property tax class for bed-and-breakfast establishments, transient vacation units and other residential properties that are rented for fewer than 180 days.
Bill 35 was among five property tax reform measures that secured preliminary approval from the Council Budget Committee on Tuesday. They will now go before the full Council for a public hearing and the second of three necessary approvals. The bills were among 13 proposals heard by the committee that were based on recommendations made by the 2014 Real Property Tax Advisory Commission.
A slew of B&B and TVU operators, many of them members of the Hawaii Vacation Rental Owners Association, submitted testimony against Bill 35, warning that it would result in higher taxes that would put them out of business.
The bill calls for creation of a "transient accommodations" property tax classification. By definition, the tax class would consist of any property with "a dwelling unit or lodging unit which is provided for compensation for less than 180 consecutive days, other than a hotel," and is paying the state’s transient accommodations tax, also known as the hotel room tax. The grouping would include those properties with TVUs and B&Bs that have not been permitted to operate as TVUs or B&Bs.
Most B&B and TVU properties are in the residential class, which now pay property taxes at the standard residential class rate of $3.50 per $1,000 of assessed value or, if valued at $1 million or more and not owner-occupied, at the Residential A class rate of $6 per $1,000 of value. Those properties in the hotel and resort category pay $12.90 per $1,000, the highest among the city’s tax classes.
A new transient accommodations class would likely be paying at a rate somewhere between the residential and hotel-resort rates.
"If you do short-term rentals, you pay a higher tax," Council Budget Chairwoman Ann Kobayashi said Thursday. "There’s lots of them out there, and they’re just paying the regular (residential) tax but they actually have a business."
Those who operate B&Bs and TVUs should be paying taxes for operating businesses out of residential properties the way seamstresses, accountants and others who work from home need to do, she said.
Rena Wolfe of Waimanalo said many people rent out portions of their homes to help make ends meet. Wolfe said she already pays state transient accommodations taxes and that she would have to raise rates to make up for higher taxes. "No one will come with higher rates," she said.
North Shore resident Tara Sweet said it’s wrong and unfair for the Council to push a new, higher tax category for B&B and TVU operators when it has not passed legislation to open up a permitting and regulating process for B&Bs and TVUs. The city has not allowed any new permits in 26 years. Proposed legislation is currently before the Council Zoning and Planning Committee.
City Budget Director Nelson Koyanagi did not formally oppose the measure, but pointed out concerns.
The Caldwell administration "has concerns regarding the inclusion within the transient accommodations class of those properties for which a permit has not been issued for such a use," Koyanagi said. "This inclusion conflicts with (the Budget and Fiscal Services Department’s) policy to not assess or tax properties that are being used illegally."
The Budget Committee shelved several other major recommendations of the tax advisory commission:
» Bill 34, which calls for creating a new Commercial A tax category that would consist of commercial properties assessed at $1.5 million or more. Like the contentious Residential A class created two years ago, those in Commercial A would likely pay at a higher rate than the standard commercial category.
Kobayashi said it’s not likely her committee will take up the Commercial A bill again anytime soon since many of those that would be most adversely affected would be small-business owners.
» Bill 33, which redefines the Residential A category to include all single-family and condominium homes in residential zones that do not have a home exemption, regardless of their value. Currently, only those without home exemptions and valued at $1 million or more are placed in Residential A, which, as described earlier, are taxed at a higher rate than the standard residential group. A companion measure, Bill 32, would allow Residential A properties valued at less than $1 million to be taxed at the same rate as those in the standard residential tier.
The Residential A class has been a lightning rod, generating criticism from property owners shoved into the category; they argue the delineation is unfair and poses a financial hardship. Kobayashi said the Council will monitor the situation closely and likely look at other ways of addressing some of the concerns.
» Bill 27, which would increase the minimum tax — the minimum amount that owners of properties with various exemptions pay — to $1,000 from $300, was also deferred. The committee might still look at measures that would raise the minimum tax for labor unions and credit unions, Kobayashi said.
Other proposals that passed out of committee Thursday include:
» Bill 31, which eliminates a provision that allows property dedicated for agricultural use for one year to pay lower taxes but keeps lower taxes for those who promise to use their property for farming for longer periods.
» Bills 29 and 30, eliminating exemptions for Oahu’s for-profit child care centers and credit unions.
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To see copies of property tax reform Bills 27-39, go to bit.ly/2015CCHNLBillsLink.
