Kauai bills seek to expand property tax relief for affordable rentals

from Grassroot Institute of Hawaii, September 6, 2023

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Kauai County Council on Sept. 6, 2023.
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September 6, 2023 8:30 a.m.
Kauai County Council Chambers

To: Kaua‘i County Council
      Councilmember Mel Rapozo, Chair
      Councilmember KipuKai Kuali‘i, Vice Chair

From: Grassroot Institute of Hawaii
           Jonathan Helton, Policy Researcher

RE: Bill 2902 and Bill 2903 — RELATING TO REAL PROPERTY TAX

Comments Only

Dear Chair and Councilmembers:

The Grassroot Institute of Hawaii would like to offer its comments on Bill 2902 and Bill 2903.

The first measure, Bill 2902, would expand eligibility for tax relief for disabled veterans, change the property value and income limits for the “home preservation” program and create a $150,000 exemption for certain long-term “gap” rental properties.

The second one, Bill 2903, would also change county policy on the taxation of long-term rentals by creating a new tax classification specifically for long-term “gap” rentals.

Together, these bills constitute major reforms to the taxation of long-term rental properties.

Currently, the county code offers a tax benefit to long-term rentals that are rented out at a level deemed affordable for someone making no more than 90% of the county’s area median income.[1] For 2023, this means a landlord can rent a two-bedroom unit out for no more than $2,235.50 per month to receive the tax benefit.[2]

This benefit is made up of two things: The property is taxed at the same rate as properties in the owner-occupied tax class, and it is subject to the 3% assessment cap, which limits how much its assessed value can change year-over-year.[3]

Bill 2902 would amend this tax-benefit program to specify that the maximum monthly rents would be affordable for someone making 80% of the area median income, instead of the current 90% AMI.

In addition, Bill 2902 would create a “long-term gap housing rental” program, which would deduct $150,000 from the assessed value of any long-term rental property that is rented out at a monthly rent deemed affordable for individuals and families making the area median income or less. This program would operate similar to a homeowner exemption, in that it would reduce the taxable value of the property.

Bill 2903, meanwhile, would not change the affordability limits for the existing long-term rental benefit. Instead, it would enact a new tax classification specifically for properties rented at levels deemed affordable to those making 140% of area median income or less.

Maui County currently operates a tax system that is similar to these proposals. The county offers all long-term rentals — no matter their monthly rent — a $200,000 exemption and taxes them in a separate tax class.

As we pointed out in our policy brief “How Hawaii’s county lawmakers can provide tax relief to offset higher property assessments,” renters and landlords should also receive property tax relief.

As the report stated: “Many lower- and middle-income individuals and families are not directly responsible for paying property taxes because they do not own homes. However, they often foot the bill for property tax increases in the form of higher rent.”[4]

From our perspective, the exemption contained in Bill 2902 would be a simpler way to tax long-term affordable rentals than the separate classification in Bill 2903.

On the other hand, because some of the properties receiving the $150,000 exemption will fall into the new “Non-Owner occupied residential” tax class, the Council will need to carefully design the rates on this class. Otherwise, the benefit of the $150,000 exemption could be negated by higher rates, which would encourage landlords to raise rents above affordable levels in order to recoup the property tax increase.

Finally, the Institute generally supports the rest of the provisions contained in Bill 2902, as they target tax relief at those who are often in need. For example, it extends tax benefits to veterans who are less than fully disabled, and it expands the eligibility for the county’s “home preservation” program, which limits the tax bills of homeowners to no more than 3% of their incomes.

Thank you for this opportunity to testify. Sincerely,

Jonathan Helton
Policy Researcher
Grassroot Institute of Hawaii
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[1] Kaua‘i County Code, Sec. 5A-11A.1 Beneficial Tax Rate for Property Used for Long-Term Affordable Rental., accessed Aug. 7, 2023.
[2] “County of Kauai Rental Limits by Bedroom Count,” Kauai County Housing Agency, accessed Aug. 7, 2023.
[3] Kaua‘i County Code, Sec. 5A-11A.3 Assessment Cap for Home Exemption Property and Property Used For Long Term Affordable Rental., accessed Aug. 7, 2023.
[4] Jonathan Helton, “How Hawaii’s county lawmakers can provide tax relief to offset higher property assessments,” Grassroot Institute of Hawaii, April 2023, p. 12.