The Flippin’ Surcharge and Other Housing Solutions

by Tom Yamachika, President, Tax Foundation Hawaii

This year’s Legislature has produced some unique proposed solutions to deal with our housing crisis.

Senate Bill 2216, introduced by Sen. Stanley Chang, chair of the Senate Housing Committee, proposes an “empty homes tax.“  If you own residential  real property in Hawaii and you can’t swear that you lived in it, then you get charged a tax. The annual amount of the tax is 5% of the assessed value of the property. 

So, for example, if you owned a vacation home in Honolulu worth $1 million and you didn’t live in it, your Honolulu real property tax at the Residential A property classification would be $4,500 per year. The empty homes tax, which you would pay to the State rather than the City, would be $50,000 per year. 

Even the Department of Taxation, in its testimony on the bill, had reservations. It pointed out that there were some instances of a unit being empty that should be considered for exemption, such as where the unit is being advertised to be rented (or sold), the unit is being renovated, or the unit can’t be lived in because of damage or other conditions.

Finally, there was a more fundamental problem: the tax is triggered by a use of real property (or lack of use), it’s levied against the real property owner, and is based on the value of the real property involved. It looks, walks, and quacks like a real property tax. But under our state constitution, at least the way it reads now, only the counties have the authority to impose real property tax. Bzzzt! The State can’t do this. (But note that there are different proposals in the hopper to change the state constitution, as we wrote about last week.)

This measure was heard in the Senate Housing Committee (which happens to be chaired by the bill’s sponsor) and was passed.

Another innovative approach, which happens to be sponsored by the same Senator, is a “flipping surcharge” set forth in Senate Bill 2040. This bill imposes a tax of 25% of the net proceeds from the sale of residential property if (1) the property was sold within 5 years after it was bought, and (2) the owner isn’t eligible for a county homeowner’s exemption.

This bill was heard by the Senate Ways and Means Committee. During the hearing, senators went through some interesting examples. If a home was bought for $1 million cash and it sold for $1 million, the tax would be around $250,000 (in addition to the income tax on capital gains), assuming negligible closing costs. If a home was bought for $1 million with bank financing and it sold for $1 million, with $800,000 going to the mortgagee, the tax would be $50,000. If an owner bought a home for $1 million and spent $500,000 improving it, and it then sold at no gain for $1.5 million, the tax would be $375,000.

The Hawaii Association of Realtors also pointed out that the tax would apply if an owner invested in a dilapidated property, fixed it up so it was habitable again, and then sold it, even as an affordable unit.

We at the Foundation pointed out that there would be situations where imposing the tax might not be appropriate. Suppose a person is given a long-term job assignment (or military station) here and moves here with family in tow but does not want to give up primary residency. A few years later, the assignment ends, and the person is assigned to state B. The house here is sold to buy one in state B. Wham! The tax applies.

By the end of the hearing, some senators had reached the end of their rope. The committee chair decided to hold the bill.

What other solutions are going to be thrown at us this year? Lots of things can happen before the end of our legislative session.