Column: Isle’s vacation rentals bill holds irreversible consequences

The vacation rental tax legislation, Senate Bill 1292, recently passed in the Hawaii Legislature, now in front of Gov. David Ige for consideration, is a fatally flawed bill that could ultimately cost millions in property tax revenue, hamstring localities’ ability to regulate vacation rentals and ultimately lead to irreversible economic damage by increasing housing costs for average Hawaii residents.

The bill’s final version stripped out all the standard tax-compliance tools needed to guarantee that lodging platforms (Airbnb, HomeAway, etc.) collect and pay the right amount of taxes. Without clear language requiring retention of books and records, providing audit and collection authority, and enabling information exchanges, Hawaii officials cannot verify payments made by these lodging platforms or collect underpaid taxes.

Worse yet, the bill will hasten the conversion of currently affordable residences into short-term rentals, thus increasing housing costs for Hawaii’s people. One recent analysis released for investors seeking to convert apart- ments into vacation rentals identified Honolulu as a prime target for such conversions because of relatively low apartment rents. A high volume of these conversions will make apartments and homes increasingly scarce. Hawaii residents will be priced out of and displaced from their current residences. Senate Bill 1292 facilitates the rapid conversion of residences to transient lodging — especially by failing to support enforcement of land use requirements on these rentals.

The bill’s supposed public registration system is flawed and does not provide public information needed to ensure lodging platforms and lodging rentals comply with applicable laws. It creates a loophole that allows platforms like Airbnb to withhold lodging registration information until after a transaction is booked on its website — thus hiding rentals from officials who need to use the public registration system for enforcing laws.

Further, the bill includes language blocking information-sharing with county land use authorities. Thus, the bill enables online, short-term rentals to avoid compliance with Hawaii land use laws and facilitates illegal conversions of residential homes into transient rentals.

Senate Bill 1292 could also result in a loss of annual property tax revenues by an estimated $17.5 million, resulting in cuts to school and local government budgets or unfair property tax increases for other taxpayers. Under the bill, property tax assessors will not be able to identify and assess rental properties as commercial instead of residential property. Hawaii taxes commercial properties at three times the effective tax rate applied to homes and apartments. If assessors cannot locate residences converted to lodging rentals, they cannot apply the higher rates to them. The result will be a major loss of property tax revenues.

Lastly, Senate Bill 1292 does not create public transparency for short-term rentals. With the flawed public registration system and no authorization for aggregate information for short-term rentals to be released (as opposed to meaningless data for online platforms), the legislation does not provide Hawaii’s people and their officials with sufficient information to assess the societal costs of short-term rentals and formulate policies to prevent or mitigate those costs. The bill blocks the flow of information that the public needs to engage the policy issues surrounding short-term rentals and thus disables democracy on this subject.

While Gov. Ige should be commended for declining to enter previous voluntary tax agreements with Airbnb, which would give it preferential tax treatment over other businesses in the lodging industry, Senate Bill 1292 presents its own set of problems for the state — problems with the potential for even worse consequences.

The governor should reject these glaring deficiencies and veto Senate Bill 1292.

Dan Bucks is former director of Montana’s Department of Revenue and was executive director of the Multistate Tax Commission for 17 years. He authored the recent report, “Airbnb’s tax agreements are obsolete,” released by the American Hotel & Lodging Association.