Too Many Exemptions From Empty Homes Tax Could Cost Honolulu $150 Million

The empty homes tax that Honolulu has been mulling for seven years includes a gaping loophole and two unnecessary exemptions that could cost the city nearly $150 million in lost tax revenue over the next decade while keeping urgently needed housing off the market.

That is the finding of global consulting firm Ernst & Young, which is recommending forgoing those waivers, including protections for local residents, which the consultant says aren’t the way other cities handle things. In consultant speak, the presentation put together for the Honolulu City Council frames it this way: “Review of the ordinance indicates potential opportunities to better align the policy and implementation with other jurisdictions.”

Council members have long said their target is offshore investors who buy up housing with no intention of living here — planning to sell at a profit years later while counting on low property taxes in the meantime — not local residents, some of whom may have inherited second homes from family members.

“The second home isn’t always something that they’ve planned for, and that they’ve either prepared, or budgeted for,” said council member Radiant Cordero.

Cordero and council chair Tommy Waters co-introduced Bill 46 last summer, shortly after the city paid Ernst & Young almost half a million dollars to do the study looking into how the empty homes tax could work in Honolulu.

The empty homes tax bill almost passed in December. But shortly before its final vote, it became clear that not enough council members supported it, with some wanting to wait for the results of the study.

Now, the first phase of the study is out. It used a simple means to determine whether someone was living in a residence: how much water was being used? An average Oʻahu household uses 9,000 gallons of water per month, and Ernst & Young flagged households consuming as little as 300 gallons per month.

From there, it estimated about 1,500 vacant properties that would be assessed an extra 1% to 3% property tax annually. Another 600 properties could be considered vacant if Honolulu’s exemptions matched those of other places, the study says, adding another $15 million to $20 million in revenue each year.

Those initial findings will get their first public airing Tuesday morning when the consultant speaks at the council’s 9 a.m budget committee meeting.

Imperfect Exemptions

As written, Bill 46 exempts 16 things from being taxed, but the consultants pointed to two in particular as going far beyond other cities: homes for sale and second homes of various types.

Second homes owned by Oʻahu residents are exempt. Second homes inherited by family members are also exempt, as are second homes owned jointly by members of two or more families as long as the owner is not a corporation.

Each of these exemptions applies to properties owned before a specific point in time – before 2024 if it’s jointly owned or owned by an Oʻahu resident, and at least 25 years before the bill’s enactment date if it was owned by a family member who passed it down.

The Canadian West Coast city charges 3% of a home’s value in addition to normal property taxes. It has exemptions, too, 10 of them — including if the property is undergoing renovation, if the owner is receiving medical care elsewhere or if the owner died and the property is in probate.

Like Vancouver, Honolulu’s bill would define a home as empty if it’s been unoccupied for at least six months. Vancouver taxes short-term rentals which Honolulu would have until North Shore council member Matt Weyer changed the proposed bill’s wording to exclude them in September.

Since Vancouver’s tax took effect in 2017, its inventory of vacant properties has dropped in half from about 2,200 to about 1,100. The city collects about $32 million each year in taxes and penalties.

Ernst & Young’s study expects Honolulu’s tax to yield a similar amount: between $30 million and $55 million each year from taxing about 1,500 to 2,100 vacant properties at a rate of 1% to 3%.

The goal is for the program to pay for itself, at a cost of about $2.3 million upfront and about $4.4 million for each of the first few years, including for enforcement, rising with inflation to $5.7 million by 2035.

Overall, the presentation says, the city could expect to accumulate between about $290 million and $550 million over the course of 10 years. It also estimates between 640 and 2,000 properties would be returned to the market over a decade, depending on the tax rate and its exemptions.

The Small Print

The study points out a potential loophole in Section 5 of the proposed bill, which says a property is exempt as long as a lease currently exists, even if nobody is truly living in it.

In addition, homes put on the market are exempt, which University of Hawaii Economic Research Organization researcher Justin Tyndall said could be a loophole if the owner sets the price high enough that nobody wants it.

Vacant property listed for rent or sale is not exempt from Vancouver’s tax. In Washington, D.C., vacant residential property listed for rent or sale is exempt for up to a year. Vacant commercial property is exempt for up to two years.

“Making sure the wording is careful so people can’t abuse these would be pretty important,” Tyndall said.

He estimated in a November blog post that Honolulu’s empty homes tax could raise between $50 million and $400 million each year depending on factors such as how many homes are found to be vacant and how many owners would fill or sell their properties.

Tyndall thinks the empty homes tax should be implemented even if the exemptions aren’t perfectly fine tuned, saying that the Ernst & Young study indicates it would yield benefits.

“Under any reasonable assumptions, this program would raise money and produce housing,” he said.

Legal battles are another potential hurdle if Honolulu forges ahead, however. San Francisco voters approved a similar tax in 2022, although it excludes smaller dwellings such as single-family homes.

There, the tax was supposed to start being collected this month, but it was ruled unconstitutional by a California state court. The City and County of San Francisco appealed in December, and its elected officials recently voted to suspend the tax until the court issue is resolve, the San Francisco Examiner reported.

In response to those concerns, the Ernst & Young study budgets about $260,000 in annual legal fees for potential challenges to Honolulu’s tax.

Supporters of Honolulu’s proposed empty homes tax have said it should be fine legally because it treats the tax as a new property tax classification rather than making owners pay it in addition to their regular taxes. This approach also means the city would collect about $79 million less over the course of 10 years, the study says.

These are among the issues that could be raised at the council budget meeting Tuesday, where Ernst & Young will present its findings and members will be able to question the consultant about methodology and projections.

Tyndall thinks the study itself is imperfect. Census data estimates Oʻahu’s housing supply to have a 10% vacancy rate, while the study, using the water consumption data, estimates a much lower vacancy rate of between 2.4% and 4.2%.

He also thinks the most straightforward way to figure out the true rate might be to just implement the tax.

“We would learn a tremendous amount about all this uncertainty,” he said. “People would be forced to reveal whether their home is in fact vacant.”