Editorial: Hike property taxes for certain homes

With more pressures coming to bear on the city’s finances, city leaders must move in the next couple months to approve a progressive property-tax strategy to fill the coffers. Specifically, City Council Bill 20 looks to be a reasonable vehicle, proposing a new five-tiered system to collect more taxes on Oahu investment homes valued at over $1.3 million, homes not used by owners as primary residence.

The bill aims to expand tiers to capture more revenues under the city’s “Residential A” property tax rate, currently a two-tiered system for investment homes valued at over $1 million. Bill 20 intends to have wealthy individuals pay a higher property tax rate on homes they own on Oahu, but don’t even live in. This seems a sound proposition to middle- and lower-income workers here, many of whom are being priced out of their own hometown.

Bill 20 proposes that the “Residential A” investment- home category be expanded into five levels: Tier 1 homes valued at up to $1.3 million; Tier 2 homes between $1.3 million and $4 million; Tier 3 homes between $4 million and $8 million; Tier 4 homes at $8 million to $10 million; and Tier 5 homes at over $10 million. The property tax rates for each tier would be set by the City Council and mayor by June of next year, to go into effect July 2022.

(Currently, “Residential A” owners pay 0.45% tax on the portion of their property valued under $1 million, then 1.05% on the remainder over $1 million.)

“The idea behind the graduated system is that you put the tax weight more heavily on people who can afford it,” the Tax Foundation of Hawaii’s Tom Yamachika told Star-Advertiser reporter Ashley Mizuo. “So, income tax system, that’s kind of obvious. The more income you make, the more you pay, in terms of tax rate. They are trying to get the real property tax to behave the same way.”

Oahu homes are highly coveted and bidding has grown fiercely competitive — but property taxes, the city’s primary source of revenue, are among the lowest in the nation. That land-value dynamic presents an open invitation for out-of-town investors to purchase their pieces of paradise — for uses, especially pre-pandemic, that have included vacation rentals. Moneyed investors outbidding Hawaii families add to the housing shortage, and ratchet up property prices beyond the reach of local workforce wages.

Even in recent pandemic months, Oahu’s home prices have surged to record highs due to strong competition and low inventory, with March’s single-family home median price at $950,000, and condo median at $451,000. And, according to data from Coldwell Banker Realty, the 103 Oahu luxury homes bought in this year’s first quarter represented a 106% sales boom on homes valued at $2 million-plus, compared with last year’s first quarter.

Beyond housing issues, the additional revenue collected via Bill 20 would soften a sudden financial blow to the city by the state Legislature. In last-minute action last week, legislators passed House Bill 862 amendments, to seize $103 million in transient accommodations taxes (TAT) that would have gone to the counties. Traditionally, each county gets a percentage of the statewide hotel room tax — but under HB 862, if signed by the governor, no more.

And though each county could impose a new hotel room tax of up to 3% on top of the statewide TAT of 10.25%, it’s woefully unclear how such revenues would stack up to the current system. Honolulu Mayor Rick Blangiardi rightly ripped the legislators’ abrupt move to delete the counties’ share: “Pushing a major TAT initiative in the 11th hour, and in this economic climate, is not the way to create a law this important and impactful to all of our counties.”

Back, then, to one revenue stream that the city can control: a more progressive, multitiered property tax system — one that could yield millions of dollars from investors buying second homes here, which in turn could fund affordable housing development. Bill 20 is an overdue step to tap into today’s expensive real estate market and gain some trickle-down benefits for Hawaii’s working families.