Long-term rental tax relief should include mixed-use properties

from Grassroot Institute of Hawaii, December 21, 2023

The following written testimony regarding Bill 104 was submitted by the Grassroot Institute of Hawaii for consideration by the Hawaii County Committee on Finance on Dec. 19, 2023.

It is followed by Grassroot policy researcher Jonathan Helton’s oral testimony on the same bill.
___________

Dec. 19, 2023, 1 p.m.

To: Matt Kaneali’i-Kleinfelder, Chair
Cindy Evans, Vice-Chair
Hawaii County Council, Committee on Finance

From: Jonathan Helton
Policy Researcher, Grassroot Institute of Hawaii

Comments on Bill 104

Aloha Chair Kaneali’i-Kleinfelder, Vice-Chair Evans and Committee members,

Thank you for considering Bill 104, Draft 2, which would create a new real property tax classification specifically for long-term rental properties that do not currently fall into the “Affordable rental housing” classification. These properties would presumably move out of the existing residential class into this new class.

As the Grassroot Institute of Hawaii pointed out in its April 2023 policy brief “How Hawaii’s county lawmakers can provide tax relief to offset higher property assessments,” renters and landlords also should receive property tax relief.[1]

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.”[2]

The new tax class would operate similar to Maui’s long-term rental classification, which provides long-term rentals their own classification, tax rates and a $200,000 exemption that operates similar to a home exemption.

However, the Grassroot Institute of Hawaii has two suggestions to make about this bill.

First, we believe the interests of residents in long-term rental properties would be better served if the County’s long-term rental exemption were extended to any property that is leased long-term as a residence, including portions of commercial properties.

This is an approach that has been replicated elsewhere. Maui County’s code, for example, states: “If a portion of the premises is used for commercial purposes, such portion of the premises will not be entitled to an exemption, but will be entitled to an exemption with respect to the portion thereof used exclusively as a long-term rental.”[3]

This amendment would also align Hawaii County’s long-term rental class with the County’s current language governing eligibility for a home exemption.

Hawaii County Code Sec. 19-71(a) paragraph E reads: “A person living on premises, a portion of which is used for commercial purposes, except as provided in subsection (b) or which is legally permitted as a home occupation in accordance with the zoning code, shall not be entitled to an exemption with respect to such portion, but shall be entitled to an exemption with respect to the portion thereof used exclusively as a home.”[4]

The owners of mixed-use buildings in Kailua-Kona, Hilo and elsewhere on the island might benefit from this language as they would be able to use parts of their buildings as residences while keeping the other areas of their buildings in commercial use.

As an aside, mixed-use zoning and other housing reform strategies are discussed at-length in the Grassroot Institute’s new report, “How to facilitate more homebuilding in Hawaii,” copies of which we will share with you.

Our second suggestion has to do with the bill’s provision regarding homeowners. The bill allows homeowners who have long-term rentals on-site to apply for the new class — but it would increase their tax bills if they do. This would be counterproductive to the bill’s intent.

For example, homeowners who have rental ohana units at their primary residences would pay higher tax bills if they transferred their ohana units into the long-term rental class.

That’s because the bill states that the long-term rental class would be taxed at 125% of the rate for the affordable rental class, rounded to the nearest five cents.

In fiscal 2024, both the homeowner rate and the affordable rental rate were $6.15 per $1,000.[5] This would make the long-term rental rate $7.70 per $1,000 — in essence, a tax hike for any homeowner who entered their on-site rental into the new class.

Our suggestion is that the Council amend Bill 104 to provide a tax benefit to homeowners who enter their on-site rentals into the new class. This could be accomplished by giving such owners a flat exemption of at least $50,000. This would help offset the higher taxes associated with moving their rentals into the new class. If the rental portions of the properties are worth $200,000 or less, a $50,000 exemption would save the homeowners at least something on their tax bills.

Such an exemption would be similar to Maui’s long-term rental program, which offers a bonus $100,000 exemption to homeowners who have long-term rentals at their primary residence.

The Council should further state in the bill that homeowners who apply for the long-term rental class may keep the 3% assessment cap on their entire properties. Otherwise, homeowners who enter the new class might see sharp increases in the assessed value of the portions of their properties used as rentals, which could negate the benefits of entering the class.

Overall, the Grassroot Institute believes that creating a new tax class with the goal of incentivizing long-term rentals is a good strategy to address rental affordability — presuming, of course, that the tax rates set for this class are kept at a low level.

However, any positive results from this change would be undermined if it were accompanied by tax hikes for other property classes. Therefore, we would encourage the Council to not increase tax rates on other property classes to pay for the tax break afforded by this new class.

Thank you for the opportunity to testify.

Jonathan Helton
Policy researcher
Grassroot Institute of Hawaii

  *   *   *   *   *

12-19-23 Jonathan Helton testifies in person before the Hawaii County Council’s Committee on Finance

Moderator: Chair, your next testifier is Jonathan Helton to be followed by Nancy Cabral.  Jonathan, if you unmute your mic, you’ll have three minutes.  

Jonathan Helton: Hey, can everyone hear me all right?

Moderator: Yes, we can.  

Helton: All right, thank you. I’m Jonathan Helton and I represent the Grassroot Institute of Hawaii. I’m a policy researcher there and I’m a registered lobbyist. I cover a lot of the Institute’s property tax work. 

So I’d just like to make a couple of comments on this draft of Bill 104. First, the institute is generally supportive of a voluntary new rental class for long-term rentals.

I just want to make two comments. If this bill should move forward, there are a couple of things that we believe should change.

The first relates to the bill’s provision that states that properties that are used for commercial use cannot receive this exemption. We would suggest that the bill be amended to model Maui’s code a little bit more. 

Maui’s code says something similar. But it provides that if a building is used for commercial uses, and there’s a long-term rental on the property, the portion of the building that is used as a long-term rental may receive the long-term rental class and tax rates. This would help incentivize people to build and or use mixed-use buildings, which we talk about in a recent report.  

The second thing I’d like to point out relates to this bill’s provisions for homeowners who have long-term rentals on their property.

If I’m a homeowner, I have a home exemption, and I have an ohana unit on my property, and I’m renting that long term, it would not be in my best interest, right now, to enter that ohana unit into this program. And that’s because right now the bill provides that the tax rates for the long-term rental class would be higher than the homeowner class. 

By my calculations, and I have this written in my written testimony, the current rate for homeowners is $6.15 per thousand. I think it would be $7.70 per thousand for the new long-term rental class, assuming the current rates for this year are the rates that it would be for next year. And someone can correct my math if I got that wrong, but the point is the tax rate would be higher. 

So there’s a couple of ways that this could be fixed, if your goal is to incentivize people with rentals on site to enter this new class. 

What I suggested was creating an exemption that is similar to Maui’s. Maui offers homeowners who have long-term rentals on-site an additional $100,000 exemption on top of their normal home exemption. 

And finally, I just believe that the bill should provide that anyone who has a long-term rental on-site should be able to keep all of that property, even if they enter that long-term rental into the new class under the assessment cap to prevent large spikes and assessed values, which would increase the property tax and dis-incentivize people from renting, from putting that long-term rental into the new class.

That’s all I have, happy to answer any questions. 

Moderator: Thank you so much for your testimony.

_____________

[1] Jonathan Helton, “How Hawaii’s county lawmakers can provide tax relief to offset higher property assessments,” Grassroot Institute of Hawaii, April 2023, p. 12.
[2] Ibid, p. 12.
[3] Maui County Code, 3.48.466 – Long-term rentals—standards for valuation, accessed Dec. 14, 2023.
[4] Hawaii County Code, Sec. 19-71. Homes, accessed Dec. 14, 2023.
[5] “County of Hawaii Real Property Tax Valuation for Fiscal Year 2023 – 2024,” Technical Branch, Real Property Assessment Division, Department of Budget and Fiscal Services, City and County of Honolulu, July 2023.