Enjoying Your Maui Resort Condo? Now Pay Up!

by Tom Yamachika, President Tax Foundation Hawaii

Some taxpayers on Maui are getting a nasty surprise this year because they didn’t do anything, and their real property tax rate doubled.

What happened? The Maui County Council passed a pair of bills, known as Bills 129 and 130. They were introduced on November 20, 2020, passed the Council on December 4, 2020, and were signed into law the very next day by Mayor Michael Victorino. They became Ordinance 5159 and Ordinance 5160.

They say that if you have real property in an area in which the zoning laws permit short-term rental, and that real property isn’t your home, then it doesn’t matter if you live in it, or if no one lives in it. It will be subject to Maui real property tax as a short-term rental.

On Maui, property tax rates are very modest for people living in their own homes. There is a three-tiered system, with rates going from $2.51 to $2.61 per $1,000 of net taxable valuation (the value of the property after any applicable exemptions are subtracted). For people in second homes or renting their units, there is a classification called “Non-Owner-Occupied” in which the rates go from $5.45 to $6.90 per $1,000. But for short-term rentals, the rate is a flat $11.08 per $1,000. That rate is slightly higher than Hotel and Resort ($10.70). The only classification with a higher rate is Time Share, at $14.40.

Thus, for a unit valued at $800,000, an owner may see the real property tax bill for the year jump from $4,360 to $8,864, an increase of more than 100%.

If there is a long-term renter actually living in the unit, the owner gets a break, but only for 2021. The short-term rental rate will kick in for 2022 regardless.

The County explains, in a FAQ page, that this change is based upon “highest and best use” and uses allowed by zoning. Normally in the real property tax world, the tax classification of real property depends not on the actual use that is made of it, but on the highest and best use (generally this means the most expensive) that could be made of the property under the zoning laws. So, if I decided to build a farm in the middle of an industrial zoned area, I can expect my property to be classified as industrial, not agricultural. The County’s website goes on to give an example of Puamana, which is a community in Lahaina, a known resort area. “Starting this year,” the FAQ says, “properties in Puamana are classified as Short-Term Rental, even if they are not rented short term.” This, they say, is just another example of the highest and best use principle at work.

To explain why long-term rentals are getting a temporary break, the County explains: “In an effort to address the County’s housing shortage, the County Council has created real property tax incentives to encourage property owners to rent long term to residents. Next year, condominium classification is being rescinded altogether and will be replaced with a long-term rental exemption program.” So, it seems that more comprehensive property tax changes are in the works for next year.

We can’t help but wonder why these two ordinances were passed at warp speed. The interval between bill introduction and enactment was just over two weeks. Was adequate time allowed for public input and consideration? Was it just a knee-jerk reaction to the Transient Accommodations Tax aid to the counties being shut off in Gov. Ige’s emergency proclamations and with the prospect, in House Bill 862, of that revenue source being permanently cut off?

Look out, folks. The fiscal fallout from the pandemic and the State’s response to it is starting to bite at the county level, and this is one of several responses to that. Let’s keep our eyes peeled, for more is yet to come!