Hawaii has, by far, the lowest property tax rates in the country. This might seem like a bargain, but it can actually work against us.

First of all, Hawaii’s property tax rates aren’t just low — they’re stunningly so.

The typical homeowner in the islands pays a rate that is 50 percent lower than it is in Alabama, which is the state with the second-lowest residential taxes.

Yes, Alabama.

And in 32 states homeowners pay tax rates that are at least three times Hawaii’s typical rate, according to a recently released study by the data site Wallethub.com.

So, while we may endure the “paradise tax” across the board in the islands, it is worth remembering there are people who pay about eight times the property tax rate we do — and they live in New Jersey.

That’s great news for us, right? After all, our savings on property taxes in the islands could compensate for the state’s nation-leading cost of living.

The problem is that government makes up for our low property taxes with other levies. For starters, there is the nearly across-the-board general excise tax, which adds pressure on many middle-class and poor people who don’t own homes and who don’t benefit from rising home values.

Manoa homes real estate1
Homes, like these in Manoa, can make for a smart investment for second-home buyers from the mainland, who face far higher property tax rates in their states. Cory Lum/Civil Beat

Do the 41 percent of residents of the islands who are renters, according to a Federal Reserve Bank breakdown of Census Bureau data, enjoy peripheral benefits from lower property taxes?

It might seem logical that they would. After all, landlords often factor their costs — fees, taxes and home insurance, among other things — into rents.

But the main component of rent is usually the landlord’s mortgage. And even when it isn’t, experts note that rents usually sync up to new market mortgages, even when landlords have owned a home for a long time.

That helps to explain why, despite low property taxes, Honolulu’s median rents are the third costliest in the nation.

Part of it is that when people buy a home these days, whether consciously or not, they tend to factor the tax burden that comes with it into the purchase price — much as they do with interest rates.

So, an owner who lives in their own $1 million home in Honolulu generally pays a tax of about $3,200 annually, after a common deduction, while a home of similar value would face an annual tax of nearly $24,000 in Jersey.

Over a period of 10 years — assuming, for simplicity’s sake, the assessed property value doesn’t increase — the homeowner in Jersey is likely spending an additional $210,000 more than they would in Hawaii.

What does an aspiring home-buyer from a high-tax state do with the money they’ll save? They could do a lot of things. For one, they could use the extra cash to make sure they outbid others when buying their dream home in the islands.

They could also use the savings each year to enjoy a comfortable annual family vacation in Hawaii to check on their investment home.

Life is easier if you make sure you have proof you paid your taxes on time.

And they could turn the house into a short-term rental to cash in on Hawaii’s appeal to visitors. They can always visit when the home’s not rented out.

The short-term rental option might amount to a smart personal financial decision, even as it aggravates the affordable housing crisis in the islands, and especially on Oahu.

This is because it removes homes that can respond to local housing needs from the long-term rental market, and by helping to increase the cost of homes in a given price range.

Now a higher tax rate does exist in Hawaii. It applies to owners of homes worth more than $1 million who don’t occupy a home they own. Owners of second homes worth that much are supposed to pay $6,000 annually. (Honolulu City Council Chair Ernie Martin wants to pass legislation to decrease that rate in some cases, and there is a bill that would do so if such a home is rented to immediate family members.)

But even at Honolulu’s higher non-occupant owner rate, there is still a big incentive for second-home buyers in California, Illinois, New York, New Jersey and most other states to invest in the islands rather than where they live.

Some similar factors are at play in the only two housing markets in the nation that are more expensive than Honolulu — San Jose and San Francisco. But far more residents of those two cities earn more money than most people do here. There, larger incomes have been a key component of rising housing costs.

Here, we can’t say that.

Instead, we live at the inflation-inducing intersection of low property taxes, a limited housing stock that hasn’t grown much in recent years and Hawaii’s appeal to outsiders who often have greater savings to invest in homes.

What Can We Do?

The solution doesn’t involve jacking up property taxes across the board based on the assessed worth of homes.

But perhaps it should involve raising targeted taxes in a very big way for some homeowners, especially on Oahu, in an effort to encourage them to use their investment homes to respond to Honolulu’s major housing crisis. Non-resident owners who don’t rent their places out for substantial periods of time should probably face rates that are on par with those in states like California and New York.

For Rent signDuring a time of crisis in the affordable housing market, people who rent out investment homes in a way that satisfies local housing needs — i.e., long-term rentals — should be strongly encouraged through tax incentives.

And people who effectively remove housing from the local market, whether to let a home sit empty for long periods of time or to be rented out to short-term visitors, should pay a large tax premium. (That money could be channeled toward affordable housing projects.)

In the end, Hawaii’s low property taxes mean we end up paying extra in the form of higher state income tax rates and the remarkably regressive general excise tax, but also in a public school system that is, in many ways, substandard.

So it is worth pointing out an irony. Hawaii is one of the top states in the nation in the percentage of children who attend private schools. Many of the 15 percent of minors who attend private schools do so largely with money their parents might be spending on property taxes if they lived in places like California, New York or Illinois.

The large number of students in private schools in the islands translates into fewer resources for public schools.

In places like California, in addition to state and federal funds, there is another revenue stream for public schools.

What is it? Property taxes.

You can read personal stories about the human impact of Hawaii’s high cost of living on our Connections story page, and then click on the red pen and share your own.

And join Civil Beat’s Facebook group on the cost of living in Hawaii to continue the conversation and discuss practical and political solutions.

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