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The Honolulu City Council is currently considering Bill 46, a tax on vacant or “empty” homes.  This tax would be on top of the real property taxes already required to be paid by property owners. 

The is to help address homelessness and lack of affordable housing by encouraging owners to rent or sell vacant housing, increasing the supply of homes, and raising funds for affordable housing and homelessness solutions. The goals of this bill sound nice and rosy, until we look at the details and consider the likely consequences.

The bill presumes all homes are empty unless the property owner applies for one of up to 15 exemptions (depending on the version of the bill), e.g., the home is occupied by the owner or renter for at least six months during the year. In order to not be assessed the empty homes tax, a declaration for exemption must be filed with the city every year, and they must approve it. The city may require driver’s licenses, vehicle registration, utility and/or bank records for homeowner occupancy and lease agreements and proof of income and general excise taxes paid for rental income as proof of tenant occupancy. Other documents may be required as well.

Other exemptions include absence of the owner due to medical care, home renovation, deployment of the owner, lack of fitness for living in, among others. Each of these exemptions also requires certain documentation.

Perhaps one of the biggest problems with this proposed tax is the requirement that every owner provide documentation of exemption or face the outrageous tax. (The tax would be 3% of the assessed value of the property, except that the first year it would be 1% and second year 2%. For a home with an assessed value of $500,000, that would be $15,000 after the second year. A home assessed at $1 million would be taxed at a whopping $30,000.)

When the Residential A classification first went into effect, “many” homeowners were faced with a 71% increase in real property taxes, because they were unaware of the new classification and did not have a homeowner’s exemption. The council passed two resolutions authorizing tax compromises, i.e., reductions in taxes, for homeowners who filed applications with the city by certain dates. About 600 homeowners were approved for a compromise. 

In 2015 and 2016 again, “many” homeowners were impacted by the high Residential A tax rate, and the council passed a resolution authorizing the city to grant compromises, but the city administration opposed that. Even today there are homeowners who get stuck with the higher Residential A tax simply because they have not filed the homeowner’s exemption application.

Given this history, it is very likely that property owners will be unaware of a vacant homes tax and not file the required paperwork. The bill does offer a grace period, but only for the first year. A huge tax bill could be devastating to some property owners.  

Another exemption is for homes that are for sale, but this exemption is allowed only once every five years. This is particularly unfair to an owner who is the second to sell a particular property within a five-year period. 

In addition, imagine if this tax had been in place several years ago. The developer of the affordable condominium project in Kakaako that has had problems selling 61 of its units would have had to pay half a million dollars or more for each year of vacancy. This would only create additional costs for our affordable housing market. A similar situation occurred in Hawaii Kai several years ago, where an affordable rental project had vacant units much longer than anticipated.

A vacant homes tax would also make it more expensive to purchase homes, as the tax would likely be pro-rated for the new homeowner. On top of that, if the purchase were after the deadline for exemption application, it would be in place for another full year.

As if the proposed tax weren’t outrageous enough, property owners who file paperwork after the deadline will be assessed a late filing penalty of 5% of what the tax would be, even if the owner qualifies for an exemption. The bill does allow for an extension of the filing deadline for the property status declaration, but the 5% penalty applies regardless. 

Other concerns related to this bill are that under the current version the medical care exemption is available only once every five years, and empty homes also include properties that are legally rented consecutive months on a short-term basis. (A proposed committee draft would change both of these provisions.)

A vacant homes tax is not good public policy. It is intrusive and unreasonable, and increases the administrative burden of both the city and taxpayers. It is also questionable whether it would actually be effective at its stated purpose of increasing our housing supply.

Rather than add yet another tax, the council should remove or at least reduce exemptions for organizations such as labor unions, business leagues, civic leagues and social clubs that fall under the “charitable purposes” exemption but are not actually charitable organizations, credit unions and for-profit child care centers. 

This is low-hanging fruit that would actually make our tax system more equitable and less complex.  (As an aside, I was told the city does not have a list of the properties that fall under the charitable purposes exemption – they can only tell us how many properties are included in that exemption.)

Bill 46 and proposed committee drafts are on the for Wednesday’s meeting of the Committee on Housing, Sustainability and Health.