Raising Taxes Means Decreasing Prices?

by Tom Yamachika, President Tax Foundation Hawaii

I’ve often heard the argument that taxes on Hawaii real property are too low. Because the taxes are low, the argument goes, prices are driven sky high, leading to economic pandemonium.

But is that really true? Maybe it’s just a question of semantics.

Suppose I agree to sell you a house for $500,000. But we aren’t able to get our act together before the end of the year, and a new $2,000 tax needs to be paid.

Being reasonable people, we agree to “go halfsies” on the new tax. You agree to pay $501,000, and after the tax is taken out I am left with $499,000.

From the seller’s perspective, the price has indeed gone down. I am accepting $499,000 for a $500,000 house. But the buyer’s cost has gone up. You are now forking over $501,000 for that house.

According to conventional economic theory, the addition of the tax will cause the price net of tax either to stay the same or to drop, up to the amount of the tax. But the buyer’s cost would not go down, and it could increase up to the amount of the tax.

In a pure buyer’s market, for example, you could make me eat all the new tax, so you would still pay $500,000 and I’d have to drop my price to $498,000. By the same token, in a pure seller’s market you would need to pay $502,000 and I would still get the $500,000 I was expecting. The seller’s price might go down, but the buyer’s cost would probably go up.

From the buyer’s perspective, now that you had to part with more of your hard-earned cash, are you now more motivated to speculate, churn the market, and drive up our cost of living through the roof? Regardless of your feeling, the cold, hard fact is that you don’t have more money to play with as a result of the tax.

In addition, real property tax isn’t the only feature in the tax landscape. Once upon a time, conveyance tax was imposed at 5 basis points (0.05%) on a real estate transaction. Now the tax can go from 10 to 125 basis points for highly valued properties.

If, for example, you are selling a single-family home worth $2 million, the conveyance tax alone would be 60 basis points, or $12,000. That tax is imposed every time the property changes hands. Even if we accept the premise that the Hawaii real estate market will spin out of control unless there are heavy taxes on the real estate, why wouldn’t the conveyance tax be enough to act as the brake we need?

And if that isn’t enough, if we’re worried about foreign investors churning the market, we have HARPTA, a law that requires withholding of 5% of the purchase price of any Hawaii real property sold by a foreign person or company. Under a law passed in the 2018 legislative session, the withholding rate is going up to 7.25% on September 15th, in less than a month.

The point, of course, is that the real estate industry is already contending with lots in the way of taxes.

To recap: Taxes may drive certain prices lower but incurring taxes doesn’t decrease the overall cost of things. And if we need taxes on the real estate market to prevent foreign speculators from spinning it out of control, we already have some and should consider the effects of those taxes, not just real property taxes.