Bill 4, aimed at taxing one type of short-term vacation rental on Oahu at lower tax rates than other tourist establishments such as hotels, moved closer to final approval this week.

The Honolulu City Council’s Committee on Budget voted unanimously Tuesday to pass the latest version of Bill 4, which proposes two taxation tiers for transient vacation units — or TVUs — at a threshold of taxable value up to or in excess of $800,000. Previously proposed city legislation would have seen tax rates for TVUs increased to those levied on hotels at nearly 14%.

According to the city, short-term rentals or vacation rentals are permitted only in resort-zoned areas and in two specific apartment-zoned areas on Oahu. There are two types of short-term rentals: bed-and-breakfast homes and TVUs, the latter also known as whole-home or unhosted rentals with a maximum of two adult guests allowed per room. To be legal on Oahu, the operators of TVUs must register their properties with the city or face fines.

The full Council is expected to review Bill 4 for possible adoption March 15. If approved, the measure would not take effect until July 1, 2024. At Tuesday’s meeting, Andrew Kawano, director of the city Department of Budget and Fiscal Services, said the measure’s effective date had to be pushed back to July 2024 because the city still has to go through the next tax assessment period in order to set tax classifications for TVUs.

Steven Takara, the city’s real property tax administrator, added that staff initially considered setting the taxation threshold at $600,000 for TVU properties.

“The data that we’re looking at now supports an $800,000 threshold,” Takara said. “That is based upon limited registrants and current activity and the values (of properties).”

Later, committee Vice Chair Esther Kia‘aina asked whether the city had any projections on how much revenue the measure would generate via property tax collections. Although he could not directly answer that question, Takara said the number of registrants for TVUs — the participants in this tax classification — are projected to be approximately 3,000.

“So that tiering — that $800,000 — comes into play as far as what rates are involved with it,” Takara said, adding there are other things at play when tax rates are established — in particular, that the operators of such rental properties already pay expenses such as registration fees and the city’s transient accommodations tax, or TAT.

“So is it harmful for the tax rates to be solely independent of those factors? Would it be discouraging to legal registrants? If you make it too punitive or too high, are property owners not going to register and stay in the shadows? I don’t think that’s what we want,” he said.

Testifiers at the meeting, including Paul Nachtigall, owner of a resort condominium, were in general support of Bill 4’s intent.

“I would respectfully remind folks that property taxes are paid by the owners,” Nachtigall said, adding that recent rises in property tax assessments on Oahu have detrimentally affected owners of such rental properties. “In many cases the property assessment doubled … (and) unfair high property taxes drive resort rentals out of business. Do not raise the price of local housing and residential neighborhoods. And short-term rentals are not a problem, and they deserve your kokua.”

Jill Paulin, a member of the property owners advocacy group Friends of Kuilima, also supported the latest version of the bill. “We support the idea of raising the threshold. We think that the $800,000 is still too low,” Paulin said, adding that she would prefer to see the amount increased to $1.1 million “to reflect the average TVU.”

After the meeting, Takara told the Honolulu Star- Advertiser that a prior city ordinance allowed for the registration of legal short-term rentals, including B&Bs and TVUs. He said in an email that Bill 4 would create a TVU class to accommodate legal TVUs, just as 2019’s Bill 55, now Ordinance 19-32, created the B&B class.

“Without the creation of the B&B and TVU classes, these legal (short-term rentals) would likely be placed into the Hotel and Resort class with the tax rate of $13.90 per $1,000 of the net taxable value.” That kind of high tax rate “may discourage the legal registration of STRs and would not foster efforts of Ordinance 22-07 to eliminate illegal STRs.”

But first, Bill 4 needs to be passed and enacted for the TVU class to be created, Takara said. If enacted, he said, tax rates for the TVU class would still need to be established for the tax year 2024-2025. The Tier 1 rate would apply to the next taxable value up to $800,000 and the Tier 2 rate to the next taxable value in excess of $800,000, Takara said.

Work on Bill 4 follows 2021’s Bill 40, which established a 3% TAT on visitors staying at hotels or short-term rentals. That same year, the Legislature ended sharing portions of the state TAT through which the four major counties received a total of about $130 million annually, with Honolulu getting 44%, or about $45 million. The measure passed by state lawmakers allowed the counties to recoup those funds by implementing their own TAT.

Under Bill 40, revenue from the TAT was to be split among the city’s general fund, Honolulu’s rail project and support for parks, beaches and other natural resources affected by tourism. The city’s 3% TAT is in addition to the state’s 10.25% hotel tax.