The Empty Homes Tax

by Tom Yamachika, President, Tax Foundation Hawaii

One of the ideas that has been kicking around in the state and county legislatures for a couple of years now is the idea of an “empty homes tax.”  The idea seems to be gaining steam now since our federal court has struck down Honolulu’s recent ordinance clamping down on transient vacation rentals.

Basically, the idea is that if you own a house or condo, you don’t live in it, and you don’t allow anyone else to live in it, then you need to pay a hefty tax. The version of the tax now before the Honolulu City Council, Bill 9 (2022), sets the tax at 3% of the property value, per year.  So, a single-family home worth $1 million (which happens to be the median value of such homes) would face a $30,000 tax, in addition to the regular real property tax, for each year it is unoccupied.  Proponents of the bill say it’s a fair price for taking that property out of the housing supply and thereby contributing to our housing shortage here. 

According to testimony submitted in support of the bill, a similar empty homes tax now in effect in the city of Vancouver, Canada, resulted in a 26% reduction of vacant homes and $106 million in new tax revenues since 2018.

It certainly seems like the devil is going to be in the details, however. How are tax authorities to know whether a property is occupied or not?  The law provides that all property owners need to fill out an annual declaration form to tell tax authorities about whether the property was occupied.  But—and this should be no surprise to most folks—not all taxpayers tell the truth on such forms.  How do lawmakers expect that the City would know when a house is occupied or not?  Would the property tax folks need to stake out each property to see who goes in and out?  Or can they get an idea from the property’s water bill (or lack thereof)?

Worse, honest, law-abiding property owners might not even know about the form, miss the filing deadline, and then could have a problem because the law provides that if you don’t file a form, the property is presumed to be an empty home.  When Honolulu adopted its “Residential A” property classification some years ago; folks didn’t file the form necessary to get their home exemption, found themselves with a huge property tax bill when the property was reclassified, and came crying to the City and the Council to get relief.  The Council found itself passing a couple of rounds of relief because good, honest folks were getting legitimately confused.  Then, the problem was with people who lived in their homes and hadn’t already filed a home exemption form.  People who filed a home exemption form generally didn’t have to keep filing it again every year.  With an empty homes tax, the form is required every single year, so the amount of pandemonium city officials can expect will be orders of magnitude larger than that of Residential A.

The City’s Department of Budget and Fiscal Services, after speaking with Vancouver officials and doing some research about how to enforce this kind of law, urged the City Council to put the brakes on the proposal until they could figure out what they would need to deal with it.  “As currently staffed and configured,” they said, the [Real Property Assessment Division] is not a property management agency and does not have the expertise, staffing, nor the needed resources, to properly implement and administer Bill 9.”  That seems to be one reason why the bill seems to be on ice at the moment. 

This idea was also taken up in the state legislature, where some creative lawmakers proposed to attach the empty homes tax to the conveyance tax system.  At the time, we pointed out that there really was no conveyance of the property that was taking place.  It is a tax on usage of the property, which is what property tax is, and our state constitution says that property tax is the kuleana of the counties exclusively.

Our new legislative session will be here before long, and we might be able to see this drama unfold a bit more.