The union representing Hawaii’s public school teachers is arguing that a state tax on second homes valued at more than $1 million could bring in $200 million to $400 million in new revenue for public schools that could be used to raise teacher salaries, enhance classrooms, support special education and maybe even fund public preschools. But such a proposal could entail a hefty hike in property taxes that could prove politically unpalatable.
To generate such revenue could require a doubling or tripling of the current tax rate for such properties, according to a review of tax data.
The state currently doesn’t have the power to tax real property; only the counties do. But in November voters will have the chance to amend the Hawaii Constitution to give the state the authority to tax investment properties to support public education. If the ballot measure passes, it will then fall to the Legislature to debate and pass any proposed property tax increases.
The Hawaii State Teachers Association has worked to quell public alarm about a potential tax hike — and drum up support for the ballot measure — by arguing that their intent is to tax only expensive, second homes that are often bought by out-of-state investors, which in turn drive up housing costs for local residents.
“Hawaii has become a haven for outside millionaires and luxury developers who treat our aina like a commodity,” HSTA President Corey Rosenlee said recently in support of the ballot measure. “If the 1 percent want to call Hawaii home, then they should give back — and that starts with paying their fair share to ensure our children get the quality education they deserve.”
WHAT THE NUMBERS SAY
The HSTA proposal is modeled after a tax category recently created by the City and County of Honolulu known as Residential A, which taxes at higher rates residential properties without a home exemption that are valued at more than $1 million. These properties are taxed at a rate of $4.50 for every $1,000 of the home’s value for the first $1 million of valuation. Thereafter the rate jumps to $9 for every $1,000 of valuation. So the tax on a $2 million property without a home exemption amounts to $13,500 annually.
The tax on Residential A properties on Oahu, which applies to 12,320 parcels, is expected to bring in about $130 million for the 2019 fiscal year.
If the state added a $7.50 surcharge to the current rate — almost doubling it — and applied this statewide, which HSTA had suggested last year, it would generate about $191 million for public education, according to Tom Yamachika, president of the Tax Foundation of Hawaii.
“That gets maybe close to $200 million, but it doesn’t get you to $400 million,” Yamachika said.
To generate $400 million in revenue, the state might have to add a surcharge of about $16 on top of current rates.
Rosenlee disputed those estimates, however. He said HSTA is expecting home values to continue to rise and the number of homes that fall into the classification to increase statewide to about 20,000, which would increase the revenue base by the time a statewide property tax was implemented. He estimated that the total rate for such investment properties would need to be about $13 for every $1,000 of a home’s value.
Hawaii has the lowest property tax rates in the country. On average, property owners pay about $2.94 per $1,000 of home value. By comparison, in New Jersey, which has the highest property tax rates, homeowners pay about $21.40 per $1,000 of home value, according to state tax data.
Rosenlee said the increase in property taxes for mainland buyers would align more with what they are used to paying in their home states.
POLITICALLY CHALLENGED
House Finance Chairwoman Sylvia Luke said it’s unlikely that the Legislature would be comfortable taxing investment properties at the levels HSTA is proposing. The Legislature debated such proposals for the past couple of years, including one proposal that was expected to generate about $500 million. However, Luke said the bulk of the revenue would have come from an increase in the transient accommodations tax and resort fees, not from property taxes. After the Legislature imposed certain parameters on the proposed property tax, the projected revenue came out to only approximately $30 million to $50 million.
“Nothing has been determined on what type of property would be assessed and what type of legislation we would be comfortable with. So even if the property tax amendment passes, I doubt that the amount generated would be in the range … the teachers’ union suggests, because I don’t think there is an appetite by the Legislature to assess property taxes that significantly,” said Luke.
Still, Luke did see Hawaii’s low property taxes, which attract outside investors, as a problem.
“What that does is it artificially increases property values for local residents,” she said. “So I do think there is a disparity, and we are essentially selling off Hawaii’s land to rich outside investors, and I think one of the ways to curtail that is to look at different variations of how we can disincentivize that type of investment.”
If the constitutional amendment passes in November, she said that she would like to consider a property tax to support education, but one that allowed local residents to take it as a deduction. This is something the state could do because it has authority over income taxes but the counties couldn’t.
