Tug of War

by Tom Yamachika, President, Tax Foundation Hawaii

Many of us were following the progress of the City and County of Honolulu’s proposal for an Empty Homes Tax, which we wrote about here and here, and felt relieved when the City Council deferred the matter on Wednesday, December 11.

Deferred doesn’t mean dead, however.  As pointed out often that day, the City had commissioned a $500,000 study by Ernst & Young to inform about how best to attack the problem and implement the solution, the results of that study are not due until next year, and the current deferral of the bill just means we aren’t going to immediately implement the normally ineffective strategy known as “Ready, Fire, Aim.”  (I am sure there will be plenty of opportunities for “Ready, Fire, Aim” in the not-too-distant future.)

In the meantime, recent activity at the State Capitol warns us that a huge game of tug-of-war, with taxpayers being the rope, is about to begin.

After helping pass the biggest state income tax cut in history, House Finance Chair Kyle Yamashita has told us that the tax cut was just the first piece in a larger grand plan. He believes that the real property taxes are far too low. “He contends the ultra-low property taxes encourage out-of-state investors to buy homes here, which drives up prices and squeezes locals out of the market,” Civil Beat recently reported.  The counties, rather than the State, control the property taxes, so the State can’t legislate those taxes directly.  However, Yamashita reasoned, if the State were to stop giving the counties money, for example by not extending the general excise tax surcharge that is scheduled to sunset in 2030, then the counties would have to raise taxes to pay their bills.

Or, if the counties fear reprisals from the electorate if they raise property taxes, they will be drawn toward gimmicky alternatives like the empty homes tax.

Thus, it is way too early to put down the swords and unstrap the armor in the war against those gimmicky alternatives.

Although Yamashita is a very influential voice in the state Legislature, legislation does not pass without votes in the House and Senate, and some action by the Governor.  At this point it’s too early to tell whether the Senate or the Governor are on board with Yamashita’s grand plan.

And Yamashita’s key premise — that low property taxes cause out-of-state buyers to drive up the housing market — is questionable.  To be sure, that argument was pushed very hard in the past.  You may remember that in 2018, the teachers’ union used this argument to lobby for a constitutional amendment that would give the State the power to add to the real property tax to support education.  The proposed amendment made it to the general election ballot that year, but the Hawaii Supreme Court voided the ballot measure amid concerns that the description of the measure on the ballot was not accurate or forthright.

In addition, the Grassroot Institute of Hawaii, in a 2022 study, concluded, “There is no evidence that outside buyers are the driving factor in Hawaii’s high housing costs or lack of affordable housing.  In fact, between 2010 and 2020, the vast majority of Hawaii home sales were to Hawaii residents.  Their share of home purchases steadily increased during the period, while purchases by out-of-state buyers steadily decreased — even as local home prices kept increasing.”

Should we really be letting this potential tug-of-war materialize?  Lawmakers at both the county and state levels would do well to make decisions based on the facts, not the hype.