Honolulu City Council scrutinizes empty-homes tax

The City and County of Hono­lulu’s $500,000 Ernst &Young LLP study over a proposed empty-­homes tax measure asserts the city could garner tens of millions of dollars annually in new revenues.

But Mayor Rick Blangiardi’s administration appears lukewarm to the idea of an EHT program, one it says could become a huge administrative burden to oversee.

Conversely, City Council Chair Tommy Waters — who has co-sponsored Bill 46 to penalize real-property owners who leave their Oahu residences vacant for extended periods of time — claims his bill would largely exempt roughly 80% of households on the island from having to pay an EHT.

If enacted, the measure would ensure residential properties are used as actual homes instead of investments.

During the Council’s Budget Committee meeting Tuesday, Mohammed Bhamani, a Canadian- based Ernst &Young partner, presented an information-only briefing regarding his city-hired firm’s first-phase findings of a two-part study related to the feasibility of implementing Bill 46.

The study’s findings, he claimed, were based on similar EHT programs used by two of Canada’s largest cities: Vancouver and Toronto. “In order to do so, we estimated the potential revenues from the tax, and the costs associated with implementing and administering the tax,” he added.

Bill 46, if adopted, would create a new Residential E tax classification in Honolulu “in place of a more conventional, supplementary tax on empty homes,” he said.

“The bill has two key aspects that impact revenue estimates,” he explained. “First is the tax rate and structure.”

Previous versions of Bill 46 used a tax rate of 1% to 3% of assessed value, “which is consistent with other jurisdictions,” he said.

“But it is important to note that a 3% rate is significantly higher than existing property tax rates in Honolulu,” he said, adding that exemptions were another aspect of Bill 46. “Exemptions are an important part of an empty-home tax policy because they allow for legitimate reasons for a home to be empty and thus not be subject to the tax.”

EHT exemptions seen in other jurisdictions include:

>> Properties that are temporarily vacant due to the owner’s temporary relocation for work, education or medical treatment.

>> Homes undergoing significant renovations or repairs that make them uninhabitable.

>> Homes that are vacant due to the death of an owner and are being settled legally through an estate.

“As currently drafted, Bill 46 has 16 exemptions, most of which are aligned with other jurisdictions,” Bhamani said.

As proposed, at least 20% of the revenues from the Residential E classification tax will be directed to affordable-housing programs overseen by the city’s Office of Housing.

“We have seen in other jurisdictions that it is common to have the costs of the program to be recovered first, and then all remaining funds go to affordable-housing programs,” he said.

Based on tax year 2027-2028 — the first year of implementation of the proposed new law — the study determined between 287,000 to 292,000 taxable properties on Oahu are split between condominiums and noncondos, which include single-family homes and apartments, that are not exempt from the EHT on Oahu.

“We do this to reflect that condos typically have a higher vacancy rate than noncondo properties,” he said.

Condos on the island average about $726,000 in value, while noncondos like single-family homes average about $1.4 million, the study states.

To determine vacant homes on Oahu, the study relied upon water consumption data as well as electricity use to flag homes which may be empty.

“In this case 300 gallons per month in the conservative scenario, or 1,000 gallons a month in the optimistic scenario,” he said. “This showed a vacancy rate of between 2.4% and 4.2%, equating to approximately 7,300 and 11,200 empty properties.”

Of those, the study determined there was an exemption rate of 81% to 87%.

“This means that between 13% and 19% of the estimated number of empty homes would be subject to the tax,” he said. “This equaled between about 950 and 2,100 properties as the tax base.”

“We would expect that this tax would likely result in some owners of these properties releasing their homes to the market, either for sale or rent, so that they are not empty and not subject to the tax,” he added.

Based on a so-called Annual Behavioral Response Rate, or ABRR, Ernst &Young estimated that at a 1% tax rate, about 4% of properties — or 38 to 86 units — would return to the market annually on Oahu.

“As the tax rate increases, this rate is also likely to increase,” Bhamani said. “However, as with any tax, we must assume there will be some portion of homeowners who do not comply and that some noncompliant properties will remain unidentified through audits.”

At a 1% tax rate, there’d be a nearly 71% compliance rate, the study noted.

“Of noncompliant homes, we estimated that 65% would be identified and pay both the tax and penalty,” he said. “The remaining 35% of noncompliant homes would not be taxed and therefore not count toward revenue.”

As far as revenues from an EHT, the study determined under a 1% tax rate, which includes a 3% boost in the program’s third year, the city could gain $29.1 million in average annual net revenue over a 10-year period.

Over a decade, a 1%-only tax rate would glean $3.2 million in revenue; at a 2%-only tax rate, $19.2 million; and at a 3%-only tax rate, $34.5 million, the study indicates.

The study also noted it would cost Honolulu about $4.39 million annually to operate the EHT program, with a $2.34 million implementation cost.

During public comment Tuesday, those who testified had mixed reviews of Bill 46.

“Happy to see some signs of life on this (measure),” said Ross Isokane, part of a grassroots coa­lition of residents in support of Bill 46.

He’d cite a Department of Business, Economic Development and Tourism report that says since 2021, 20,000 units have been purchased “by outsiders.”

Hawaii Kai resident Natalie Iwasa opposed Bill 46, saying the stated purpose of the EHT was “to incentivize people to rent or sell, but this is via a punitive tax that is almost three times the residential (tax) rate.”

“Why not use a carrot, why not give them a credit in their real property taxes if they convert their home?” she asked.

“Bottom line, you folks are saying, ‘We don’t like the way you legally use your property, and therefore we are going to tax you,’” she said. “This is fundamentally wrong. It’s a bad bill and I do not support it.”

The legality of a new EHT was of concern, too.

Those concerns centered on a lawsuit that arose over the City and County of San Francisco’s Proposition M, a November 2022 initiative presented to voters in that city over a vacant-homes tax.

Notably, San Francisco voters passed the proposition — by 54.5% of the vote — which was set to take effect in 2025.

As a new law, Proposition M meant property owners would be charged an escalating amount for each “residential unit” that is “vacant” during the preceding calendar year.

However, in 2023 several plaintiffs — including the San Francisco Apartment Association, the Small Property Owners of San Francisco Institute and the San Francisco Association of Realtors — filed suit in the Superior Court of California over the pending city tax.

In November 2024 a final judgment in the case was rendered.

California Superior Court Judge Ronald E. Quidachay ruled in favor of the plaintiffs, finding San Francisco’s vacant-homes tax violated the “Takings Clause,” also known as the Just Compensation Clause, of the Fifth Amendment to the U.S. Constitution.

But at Tuesday’s meeting Waters, a lawyer, said San Francisco’s legal case involving its vacancy tax does not relate to Hawaii’s Constitution.

At the meeting, too, Deputy Corporation Counsel Reid Yamashiro declined to offer legal advice to the Council in public on the EHT. Instead, he suggested the matter should be discussed in closed-door executive session, though that nonpublic meeting did not occur.

Questions over how the city would gain compliance over empty homes also surfaced.

“What did you guys find in your other studies on how you would actually get people to comply?” Council member Andria Tupola asked. “Is that like a human person going there and talking to them? Is it like legal paperwork? And then how successful has that been to get people to comply through either of the two of those means?”

Bhamani replied, “So, typically the question asked, ‘Is your home vacant or not?’”

“And if you say, ‘It is vacant,’ then you are assessed a tax,” he added. “If you say, ‘It’s vacant, but I should be eligible for an exemption,’ the expectation is that you provide proof of that exemption.”

As far as actually implementing the EHT program, city Budget and Fiscal Services Director Andy Kawano suggested the city was not impressed with the findings of the study, particularly over revenues. And he’d note the study indicated only 1,000 units would be converted, “after all of the heavy lifting that we have to do.”

“If we evaluate what’s important to us as (a city) administration, in terms of addressing empty homes, we just don’t see it,” he added, “based on the effort that we have to put in and the fact that taxes will go up.

“And because of our laws, we cannot select and tax only people that are nonresidents,” Kawano asserted. “The tax will have to be applied fairly to all people who own property on this island.”