The unintended consequences of transfer taxes

by Keli'i Akina, Ph.D., President / CEO, Grassroot Institute of Hawaii

Most of the attention this year at the state Legislature has been focused on the status of our historic income tax cuts from 2024 — whether they are going to be modified or repealed, effectively resulting in a tax hike.

But there’s another tax-hike bill still alive that has been quietly making its way through the legislative process: SB3028. 

This bill would increase the state conveyance tax on higher-value properties to funnel revenue into certain special funds. Supporters believe owners of multimillion dollar properties can be targeted without affecting the economy or the housing market as a whole. Reality says otherwise.

Studies on the effect of real estate transfer taxes in general have found they are associated with reductions in investment, income, jobs and economic activity. 

Even when a conveyance tax is limited to higher-value properties, it is likely to have unintended consequences. For example, the so-called mansion tax that went into effect in Los Angeles in 2023 not only has had the effect of reducing all housing sales, it has also impeded the sales of commercial, multifamily and industrial properties, threatening housing growth and the economic health of the region.

SB3028 seeks to target higher-value residential properties with a conveyance tax hike by switching from flat rates to marginal rates. Marginal rates alone are not concerning — but substantial rate increases are.

Currently, a buyer eligible for a county property tax home exemption who purchases a property for $3.5 million would owe a conveyance tax of $17,500. If the most recent draft of SB3028 were to become law, that same buyer would face a tax bill of $46,300.

A tax hike of that magnitude is sure to reduce local property turnover, which would affect local businesses and overall housing growth. Reduced sales could also wind up decreasing tax revenue.

Historically, the conveyance tax was never intended to be a major source of revenue for the state. In fact, it started off as a simple administrative tax. It’s unfortunate that now some lawmakers see it as a piggy bank they can break open without consequences. 

It can be tempting to fund services at the expense of wealthy property owners, but taxes do not operate in a vacuum. At its core, this proposed hike on conveyance taxes is yet another example of a seemingly well-intentioned policy that is sure to do unintended economic harm.

No matter how a conveyance tax is designed to operate, it will have a ripple effect throughout the economy, and any increase is likely to make the state’s housing crisis worse.

Hawaii needs more housing, not less.

E hana kākou! (Lets work together!)