The Honolulu City Council has been looking at ways to adjust property taxes.
Last month, the council passed two bills that would increase exemptions for owner-occupants and seniors. Both measures add $20,000 in exempted tax value from those homes.
For example, a senior living in a house with an assessed value of $1 million will now have an exemption of $180,000. That means they only have to pay property tax on $820,000 of the assessed value.
However, there is another method of tax relief that has not yet been used, despite being on the books for about 10 years. Landlords who dedicate their properties as rentals for those making up to 80% of the annual median income can receive the lower residential tax rate.
"We don't exactly know why the program is not attractive and there aren't more properties under the dedication, but we believe that a lot of it is due to economics," said Budget and Fiscal Services Director Andy Kawano. He explained that, especially for properties valued under $1 million, the tax relief is likely not enough to offset the profits from renting at market rate.
"It depends on property values, because if you're looking at a condo or a smaller home on a smaller lot, simply built, maybe a little older, and the home is under a million dollars … you're paying residential tax," he said. "You may not have the home exemption benefit, but you're still paying residential tax rate. … As a result, the thought is, compared to market rentals, the program does not economically pencil out."
Properties that are not used as a primary residence and are valued at over $1 million are classified as “Residential A Tier 2,” which charges a significantly higher tax rate of $11.40 per $1,000 of assessed value on any value of the property over the $1 million threshold. That’s almost triple the residential rate for properties valued under $1 million.
However, as it is written now, the affordable housing rental dedication only allows properties that were purchased for under $1 million to participate.
Councilmember Esther Kiaʻāina is considering ways to make the program more attractive to landlords. She said the city needs to find ways to incentivize people to rent to local families long-term.
"Many of these are local families who likely inherited the property from their parents or their grandparents," she said. "We need to find out innovative ways of having people own homes that they may not be living in, to rent it out to local families."
A measure Kiaʻāina introduced would increase the affordable rental dedication to allow up to 100% of the annual median income, versus the current 80%.
She also introduced a measure that would increase the threshold for homes to be reclassified as a Residential A Tier 2 property, which was set at $1 million in 2017, and has not been changed since.
Her measure would increase the threshold to $1.3 million. It passed out of the Budget Committee on Tuesday and will next be heard by the full council.
How might the proposed tax changes affect city revenue?
Budget and Fiscal Services Director Kawano urged the council to create a permitted interaction group to consider all the changes to the property tax structure as a whole because the tax is the city’s main source of revenue.
"The responsible thing to do with regard to real property tax measures, new legislation, is to have a permitted interaction group with up to four council members and their staff to discuss all of the active tax measures, new tax measures as well, on a global basis," he said.
"Look at everything and think of everything strategically, knowing that we have to fund our services, our core services. So that's what we should do. We should not pass legislation on a one-off basis."
For example, the two recently passed expansions to the senior and owner-occupant property tax exemptions are expected to cost the county collectively about $10 million a year.
Kiaʻāina explained that she supports creating a permitted interaction group, and said that she intends to introduce a measure to initiate one. However, she disagreed that new pieces of legislation need to be tabled until that happens.
"We've talked about it at length over the last several years, and I'm a believer in working with the city administration to see what proposals would garner their support," she said.
Kiaʻāina wants the property tax laws to disincentivize people from operating legal short-term rentals and instead rent long-term to local families.
"There's a cost-benefit analysis. I wouldn't look at it quite simply as just: what revenues may be lost? I would like to think the increase in the number of housing units to local families who want to stay in Hawaiʻi is a positive, and the increase of housing units may not just be with new housing units," she said.
"It could be with existing inventory that is currently unavailable to most local families because they're used for other means."
According to the Tax Foundation, Hawaiʻi has the lowest property taxes in the country. Honolulu Mayor Rick Blangiardi has committed to not raising property taxes during his term in office.
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