Honolulu City Council advances bill that would create progressive property tax for second homes

A bill that would expand the tiers for property taxes on second and investment homes to allow for three different property tax rates as the home value increases, advanced at the Honolulu City Council Wednesday.

The tiers would apply to the “Residential A” Honolulu property tax rate, which is for owners whose homes are valued over $1 million and do not claim a home exemption. The home exemption is for homeowners who live on the property as their primary residence and keeps the rate at 0.35%.

Residential A currently has two tiers, 0.45% for the portion of the property valued under $1 million and then 1.05% for the rest of the value over $1 million.

Bill 20, introduced by Council Member Radiant Cordero, would break “Residential A” into three tiers:

>> Tier 1: up to $1.3 million

>> Tier 2: $1.3 million to $5 million

>> Tier 3: over $5 million

The tax rate for each tier has not been set.

The Budget Committee voted without objection to proceed with a public hearing on the bill.

Under the bill, the Residential A classification would start at $1.3 million up from $1 million. The increase is meant to better reflect the ever-growing property values on Oahu that often push homes to be worth more than $1 million.

“We’re talking regular houses in Kaimuki, single- wall built 30, 40 years ago— 50 years ago— now worth over $1 million,” said Council Chairman Tommy Waters.

“I mean, that really is the intent. I believe they’re trying to help these families out. But when we move the threshold up, we got to make up for that lost revenue.”

Department of Budget and Fiscal Services Director Andrew Kawano warned that if the bill were to pass, the properties that fall into the very top tiers would see a substantial tax rate increase to keep the revenue the same. The department’s projections for properties in the highest tier estimated a 55% jump from the current rate of 1.05% to about 1.6%.

That’s largely due to there being fewer homes in the second and third tiers.

Currently there are 6,900 homes in the Residential A category. Only about 370 of those properties are worth over $5 million according Property Tax Administration Chief Steven Takara. He warned that the department’s projections are not set in stone, as property values are calculated in December and could change the calculations significantly.

Those who own properties worth over $5 million would only be taxed the highest rates on the property value that exceeds $5 million.

For example, if the bill were to pass, a person with a second home worth $6 million would pay the Tier 1 rate on the first $1.3 million, the Tier 2 rate on the next $3.7 million, and then the Tier 3 rate on the last $1 million.

Kawano warned that he anticipates the department receiving complaints from those who fall in the Tier 3 category if the bill were to pass.

However, Waters did not think that taxing those with properties over $5 million at a higher rate would be unfair, and would possibly help renters who often bear the brunt of property tax increases on second homes that fall into the lower tiers.

“What I’m finding is they pass on that to their tenant, and it already is super expensive to live here,” he said.

“I apologize to all the people out there who own $5 million second homes, but you’re helping us, help just normal people. It hurts, and I apologize again, but if we can help just normal local people keep that second home, so they don’t have to sell it and allow them to rent it out to local people, tenants, that works for me.”

Waters also suggested keeping people at their current property value assessment if the bill were to pass as a transition period. That way, those who would see property value increases that would have pushed them into a different tier could have time to adjust to the new taxation structure.

Takara was also concerned that changing the property tax structure would affect Honolulu’s bond rating, which is currently good.

“When you intentionally change how things are calculated, you could have unintended consequences,” he said.

“We totally understand what we’re trying to achieve … But at the same time, if you have a process, you have a methodology, it’s always best to stick to it if you believe in it,” Takara said.

Property tax is the only tax that the city has direct control of.

Budget Committee Chairman Calvin Say also noted that if Bill 20 were to pass, the council would likely need to keep changing the tiers as property values increase to reflect the current financial situation for owners.

The new version of Bill 20 is expected to be scheduled to be heard again at the next budget committee hearing on Aug. 25.