In the state of Hawaii we feed on the nation’s most expensive groceries, power up on the priciest electricity, compete with Californians and Alaskans to consume the most expensive gasoline and pay the highest median real estate prices and rents.
But there is one big-ticket bargain in the islands: property tax. A recently released Lincoln Institute of Land study of all 50 states found that Hawaii has, by many measures, some of the lowest property taxes in the country. The data site Wallethub.com, more pointedly, found that in 2015 Hawaii has the cheapest residential property tax rates. In other words, no state carves off a smaller sliver from its real estate market.
In Honolulu, where the price of the median single-family home is hovering around $700,000, the situation is similar. The real estate company Honolulu Hi 5’s blog posted an effective sales pitch to potential mainland investors at the end of 2013. It was a sales pitch in the form of a list comparing the capital’s real property tax rates to 10 large U.S. cities. The annual property bill for most single-family owner-occupied home worth $1 million on Oahu was $3,220.
That may feel like a lot to long-time owners who bought when island homes were much cheaper, but it is a fraction of most mainland rates. In Los Angeles, San Diego, New York and San Francisco the tax bite on a million-dollar home is more than three times higher. In Phoenix, it is five times as much, according to the list, and in Chicago that same homeowner has to fork out $17,497.
Yes, some suckers in the Windy City pay well over $14,000 more than a homeowner of a similarly valued house in Honolulu per year.
Is this a sign of some good cost-of-living news for our overpriced paradise? After all, a low property tax bill could theoretically make it more affordable for residents to own the homes they live in. If Hawaii were a more self-contained real estate market, largely limited to residents’ salaries and savings, that might be the case. But residents compete for homes in the islands with people from across the country and, indeed, the world.
And our remarkably low property tax bills make it into an unfair competition in which sensible people in places like San Antonio, Chicago and New Jersey, who are looking to invest in a second home, have an enormous incentive to invest across the islands.
This is a key factor that helps to explain why 65 percent of Americans live in homes they own, but just 57 percent of Hawaii residents do.
Hawaii doesn’t place billboards around the United States and other wealthy countries inviting real estate investors to help price locals out of the residential housing market, but it might as well. Information about property tax rates in the islands, along with the rising values of most investment properties here, is easy to access from computers in real estate offices from San Francisco to Seoul, and from Texas to Tokyo.
Despite the housing crisis, Hawaii is practically begging smart investors to plunk their money down in the state’s desirable, precious and limited housing stock, especially in Honolulu county. On Oahu, homes have made for a remarkably safe investment, increasing in value by almost 5 percent per year on average for the last three decades.
The only poor- and middle-income residents in the state’s future might one day be hardcore holdouts willing to put up with ever-more extreme hardships to stay on in “paradise.”
Non-island residents who buy into the market can enjoy their additional homes in various ways. Some simply look forward to the annual increase in property value, while relishing occasional trips to their vacation home. Financially driven investors can just pay the down payment and rent the place out to cover the mortgage. And others can max out on particularly desirable homes by turning them into very profitable short-term rentals.
In all of these cases, the owners are increasing the pressure on real estate in the islands by adding their money into the competition for housing. And if they don’t rent their purchase out to residents, they further increase competition in the remaining rental market where more aspiring tenants seek the remaining homes. (Local owners can also contribute to such forces if they shift a home away from the traditional rental market and toward short-term visitors.)
One partial result of such actions is Hawaii’s rental vacancy rate, which is the fraction of homes for rent that are not occupied. It represented 8.59 percent of the housing stock in 2013; that’s nearly 25 percent higher than the U.S. average.
It can feel like there is no solution. Policymakers, at times, seem strangely ineffectual in the face of the national and international market forces that hold Hawaii in their grip. In the worst-case future, the only poor- and middle-income residents in the state’s future might one day be hardcore holdouts willing to put up with increasing hardships to stay on in “paradise.” In fact, this is arguably already the case for many residents.
But if Hawaii wants to get serious about bringing down the cost of living in the islands — and housing is its single largest component for many people — authorities need to reset parts of the property tax equation, particularly for non-resident homeowners.
There have been efforts in this direction in recent years. In 2013, Honolulu City Council set a tax rate that started at $6,000 for “Residential A” category homes valued at $1 million that didn’t have an exemption. More than 7,000 properties were classified as Residential A in the 2014-2015 tax year, which led to confusion among some local owners of reclassified homes and whether they needed an exemption.
But even at that nearly doubled property tax rate on some homes, Hawaii remained an enticing investment for potential homebuyers who live on the mainland.
Non-resident owners should pay at least as much as they would if they bought a second home in California, Texas or New Jersey.
University of Hawaii economist Lawrence Boyd suggests that the city’s emphasis was off. He argues that efforts should focus on eliminating incentives that make it easy for homeowners to squander a portion of the state’s limited housing stock, and that a sharp increase in certain property taxes is in order. How high? The rate should be increased so that such owners pay as much or more than they would if they bought a second home in California, Texas or New Jersey.
The logic is fairly simple. Hawaii and especially Oahu have limited residential housing. People who use homes here as a pure investment aimed at maximizing investments for themselves should share more of the financial fruits with Hawaii residents to compensate for helping to drive up housing prices. Or taxes should be used to dissuade some of them from making their investment in the first place.
The policy should focus on discouraging people from parking their cash in homes in Hawaii unless they are going to live in such residences — and pay income tax in the state — or rent them out on a long-term basis, which alleviates demand for housing.
People who only use such housing as vacation homes, to visit a few weeks or months a year, should pay a higher rate.
The policy should focus on discouraging people from parking their cash in homes in Hawaii unless they are going to live in such residences — and pay income tax in the state — or rent them out on a long-term basis.
Boyd suggests raising the property tax on non-occupant owners who aggravate Oahu’s housing crisis from Honolulu’s current rate on a million-dollar home to a little over $16,000. That would place the island in the top-tier on property taxes in the country, at least for housing that fits those criteria. This would make it far less appetizing for off-island investors to sit on land as a non-productive long-term investment, and this might add a substantial amount of housing to the rental market. Thousands of Oahu’s homeowners are out-of-state residents, and a substantial number of local homeowners are not renting out their extra homes to island residents.
(And higher property tax rates — or other taxes — could be vigorously applied to non-resident homeowners of short-term rentals, which can be great to tourists or other visitors but, when poorly managed, are disruptive to communities around them.)
But in all cases, the main focus of aggressively altering property taxes should be on opening more of the state’s housing to locals who need it.
And doing this means utilizing tax policy more as a tool to discourage detrimental behavior than as one aimed at filling county coffers.
Still, there is the question of what should be done with money raised from increased property taxes in the nation’s most expensive state?
There are many choices. It could go toward facilitating the creation or rehabilitation of more affordable housing, which might be the most suitable solution given the housing crisis.
But a case could be made that such a tax increase should be revenue-neutral. Any additional money could go toward responding to problems like the state’s massively underfunded pension system, although it would likely amount to little more than a tear in an ocean of debt.
Suffice to say, trying to figure out how to spend newly generated revenue is a good problem to have, especially when the way the money is gathered might help respond to a pressing problem.
A property tax that strongly discouraged wasting housing might have made eccentric Japanese businessman Genshiro Kawamoto think twice before he let dozens of multimillion-dollar homes he purchased in Kahala decline into ghostly mansions.
Kawamoto is gone from Hawaii, of course, but many of the policies that made him possible remain — meaning that smaller Kawamotos could conclude that squandering housing isn’t too costly.
None of this is to say that all property taxes should be increased. Residents of Hawaii who live in their homes would continue to pay the same property taxes they do now. Homeowners of long-term rentals should, too.
In a worst-case scenario, a tax increase on non-resident owners of underused housing might be too low and have no impact on investors’ behavior, but it would almost certainly still bring in additional revenue, including from people who don’t live in the islands.
And if such a targeted property tax increase did convince some owners to sell, it would mean more homes on the market. If it got owners to rent their places, that would increase the housing stock and put downward pressure on rental prices. And if it got out-of-state owners to move into their second homes in Hawaii, that would mean such people would pay income tax here in the state.
To drive down rental prices enough so that tenants really feel the impact, Boyd suggests, require bringing substantial housing to — or back to — the market. By his calculations, a 20-percent increase in Oahu’s housing supply would result in a 12-percent drop in rents. If true, this would mean that the median rent of $1,800 on Oahu would drop to $1,584.
For politicians, such a project could be a vote winner. After all, the out-of-staters who would pay much of the increased taxes don’t vote in Hawaii. (They do have the ability to lobby, especially when they are institutional investors, but then again, so do you.)
Finally, none of this would amount to turning off Hawaii’s welcome sign to potential residential housing investors. The sign just might not be so blindingly bright.
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