Vacant Homes Would Be Taxed At Higher Rate Under Possible City Plan

Honolulu officials are considering ways to boost city income and expand the pool of rental housing by raising the property taxes on homes that have been left vacant by their owners.

There are 34,253 empty housing units in Honolulu County, or about a 10th of the total housing stock, according to the 2020 U.S. Census.

City officials are preparing a request for proposals for a study that would examine why so many houses are vacant, whether and how to implement a special tax on them and and how much it would cost officials to enforce it.

The proposal is in the “final review process,” Andrew Kawano, director of the city’s Department of Budget and Fiscal Services, told the City Council at a special budget meeting on Tuesday. The study will be funded using money from the federal pandemic relief package intended for local fiscal recovery.

The idea of taxing vacant houses at a higher rate has been broached in the past and discarded as too difficult to implement but is coming to the surface again as the city confronts a housing affordability and shortage crisis. The discussion has been renewed amid a tough debate over a tight city budget and local residents’ concerns about rising property assessments.

The hope is that the prospect of higher taxes might encourage owners of vacant properties to open them up for rental and that a higher tax will generate more cash for strapped city coffers from out-of-state investors.

Many local housing advocates have enthusiastically backed the plan but others are already opposing it.

“Hundreds of condo units are dark every night in some of the highest demand areas of our city,” wrote Ellen Godbey Carson, former president of the Institute for Human Services and the Hawaii State Bar Association. “A blighted house near me on Pensacola Street is a constant health and safety hazard. Beach areas are filled with empty homes for vacationers. These are all empty homes. They all hurt Honolulu.”

Several people told the council that they believe that many real estate speculators buy homes on the island, essentially parking their money as a safe investment haven, removing essential housing stock, they said.

“These empty units drive up rental and sales costs for everyone; the median family home price is $1 million, which is unaffordable to most working people,” wrote Betty Lou Larson, testifying for Partners in Care, an advocacy group for homeless people.

Council member Esther Kiaaina also had strong words for some investors, who she said use Hawaii as their “playground.”

The conservative-leaning Grassroot Institute of Hawaii, on the other hand, recently published a report that said that while the proposed surtax might boost revenue, it would likely have little effect on the island’s available housing stock or home prices.

“It has become common practice in Hawaii to blame scapegoats such as foreign or mainland buyers for the state’s disastrous housing crisis,” said Kelii Akina, president and chief executive officer of the Grassroot Institute, in the report.  He said that surtax would not have the desired effect.

Instead, Akina said, the city should ease regulatory barriers to housing, which would lead to increased construction.

One reason that the island is attractive to investors is that Honolulu’s property taxes, while onerous by local standards, are the lowest in the nation, mostly because school expenses are paid by the state rather than the city. That means that many out-of-state buyers consider them a bargain and people from other countries view properties here as a safe haven for flight capital with low incremental costs.

“Hawaii is a very politically stable place to park an investment,” said real estate agent Choon James at the city hearing.

A proposal to tax empty homes was raised last year on Maui. There, county officials ultimately ended up increasing taxes on investment properties and second homes without specifying them as empty homes, while simultaneously reducing tax rates for local residents.

The idea has been circulating in the state legislature as well but has not gone forward. House Bill 440 would have imposed a surcharge on the state conveyance tax to “disincentivize the residential property speculation that makes the housing market so challenging for residents.”

How It Works In Other Cities

Honolulu is not alone among cities considering taxing empty houses.

“A lot of cities, from San Francisco to Buffalo, are looking at different variations of vacancy taxes,” said Anthony Flint, a senior fellow at the Lincoln Institute of Land Policy. The idea, he said, is to encourage property owners to keep homes and vacant developable land in active use.

Similar efforts elsewhere have had mixed results.

Vancouver, Canada, implemented a surcharge on empty homes in 2017, initially at a rate of 1% of the property’s value and later adjusted to 3%. According to Canadian news reports, it raised some $115 million over the five years, with the money directed to affordable housing initiatives, housing construction and renter advocacy programs. In addition, the number of vacant homes fell by 36%, the city reported in December.

Vancouver officials considered raising the rate to 5% this year but decided not to do so in the face of concerns about enforcing the law. Critics said the law unfairly penalized owners of recently built homes that had not yet sold, houses damaged by floods or other disasters and where the owners had moved elsewhere temporarily for medical treatment.

Property owners in Vancouver are now required to submit a declaration annually to determine if their property is subject to the tax and can revise the declarations for up to five years.

In November, San Francisco voted to approve a measure called Proposition M, which placed an additional tax on multi-family housing units left vacant more than 182 days a year. But the city was quickly smacked with a lawsuit calling the action unconstitutional and a violation of state law.

Even advocates of the concept, including Will Caron of the Hawaii Appleseed Center for Law and Economic Justice, say that any such measure here would need to be “carefully calibrated” to be effective at boosting housing stock, and also fair and equitable to owners.

Several City Council members urged the city administration to move as quickly as possible to get the vacant-house tax study launched.

Kawano said the proposal should be completed by June 30 and posted for solicitation of contracts by July 15. If all goes according to plan, he said, the study could be completed by the end of the year, and he would press for a quick turnaround.

“We know you have expectations on timing,” he told the council. “We understand there is a lot of interest.”