Proposed new category for ‘transient vacation’ rentals would burden residents

from Grassroot Institute of Hawaii, March 1, 2023

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Honolulu City Council on Feb, 28, 2023.
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February 28, 2023
9 a.m.
Honolulu City Council Chambers

To: Honolulu City and County Council Committee on Budget
       Councilmember Radiant Cordero, Chair
       Councilmember Matt Weyer, Vice Chair

From: Grassroot Institute of Hawaii
          Ted Kefalas, Director of Strategic Campaigns

RE: Bill 4 CD1 (2022) — RELATING TO REAL PROPERTY TAXATION

Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on Bill 4 CD1 (2022), which would create a new “transient vacation” classification and would clarify the definitions of the “bed and breakfast home,” “hotel and resort” and “residential A” classifications.

The proposed CD2 for this bill would create valuation tiers for the transient vacation and bed-and-breakfast classes. Properties valued at under $600,000 would fall into one tier and those valued above $600,000 would comprise the other.

While this bill reasonably states that timeshare units are to be taxed in the hotel and resort class, it is perplexing why transient vacation rentals should be taxed at a different rate than hotels, since they serve a similar purpose of offering short-term accommodations.

The committee would be wise to consider the economic benefits of short-term rentals before creating a new tax classification that would give rise to a discriminatory — if not “punitive” — tax rate. One 2018 study of short-term rentals on Oahu concluded they provided 12,000 jobs, an annual $129 million in tax revenue, $564 million in household income and $2 billion in spending.[1]

Should the committee move forward with this new classification, we would suggest that the valuation tiers in the CD2 bill be raised from $600,000 to at least $1 million, or removed for bed-and-breakfast homes entirely.

Very few single-family homes on Oahu are valued at under $600,000, so this low valuation tier would likely not provide any tax benefits to short-term rental or bed-and-breakfast owners.

Instead, the higher tax rate would be a severe burden to existing bed-and-breakfast and short-term rental owners.

Further, we suggest that the committee take this opportunity to amend the Residential A tier 2 class to raise the valuation from $1 million to at least $2 million — if not get rid of the threshold completely.

The Residential A classification was created for fiscal year 2015 and tiered beginning in fiscal year 2018.[2]Today, this classification creates a significant tax burden for landlords — even those renting to working class families.[3]

For properties valued less than $1 million, the current residential A rate is $4.50 per $1,000. Properties valued over $1 million face a $10.50 per $1,000 rate. Meanwhile, owner-occupied homes face a rate of $3.50 per $1,000.

For families who may own two homes and rent one and live in the other, this residential A classification can be disruptive, especially since the median home value on Oahu hovers near $1 million — the point at which the tax burden on a home in the residential A class would be more than doubled.[4]

A family in such a situation would be doubly burdened. Not only would ownership of their home and a second rental home disqualify them from obtaining the lower homeowner rate or any of the homeowner exemptions, but it could also push them into the significantly higher residential A tier 2 bracket, if those homes were valued just above $1 million.

Keep in mind that the tax rates for the upcoming fiscal year are based on assessments that are lagged about a year. In October 2022, when assessments for fiscal year 2024 were completed, the median sales price of a single-family home was $1,050,000.[5]

In effect — instead of being narrowly tailored to tax luxury second homes at a higher rate than owner-occupied homes — this classification also would impose additional costs on both landlords and renters.

This discrimination against rental properties is not found anywhere else in the state. Kauai and Maui both offer separate classifications and relatively lower rates for long-term rentals, while Hawaii county offers a lower rate for affordable rentals.[6]

If the Honolulu Council believes Residential A should be kept around at all, it should also consider creating a separate classification for long-term rentals, as well as increasing the tier 2 value to at least $2 million.

Thank you for the opportunity to testify.

Sincerely,

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] “Economic Impact of Alternative Accommodations on Oahu,” Kloninger & Sims Consulting, LLC, July 23, 2018, p. 1

[2] “Residential A,” accessed Feb. 23, 2023.

[3] Jim Howe and Linda Howe, “Blangiardi, Kiaaina Must Act On ‘Residential A’ Property Taxes,” Honolulu Civil Beat, Jan. 5, 2023.

[4] “Statewide Housing Statistics,” Title Guarantee Hawaii, Jan. 2023.

[5] “Statewide Housing Statistics,” Title Guarantee Hawaii, Oct. 2022.

[6] “Real Property Tax Rates for Tax Year July 1, 2022 to June 30, 2023,” Real Property Assessment Division, Department of Budget and Fiscal Services, City and County of Honolulu. Aug. 2022.