With a record influx of out-of-state buyers competing with local residents for the island’s limited housing supply, some Maui County council members are pushing to raise taxes on vacation homes and investment properties.

Maui County locator map

In 2020, the council hired a housing policy consultant for $300,000 to come up with a plan to spur the construction of 5,000 affordable homes and ease the shortage of housing within residents’ financial reach.

One key recommendation: Raise taxes on short-term rentals and properties valued at $3 million or more that aren’t used as primary residences, as a way to boost funding for affordable housing projects and desperately needed upgrades to roads, sewers and water systems. Some also hope higher taxes would make investment properties less enticing to own.

“I’m very serious about raising taxes on investment properties to ensure our local workforce are able to provide homes for their families,” Council member Gabe Johnson, the chair of the county’s affordable housing committee, said at a meeting last month.

Maui’s elected officials are in the middle of hashing out the county’s budget for the next year. They’re scheduled Wednesday to talk in detail about what the tax rates should be and will continue the discussions over the next few weeks. But for now, one thing is clear: Since the county paid the consultant to put together the affordable housing plan, the situation for local families has only become more dire.

A photo of Polo Beach on Maui.
Some council members want to raise taxes on vacation homes to boost funding for affordable housing. Marina Riker/Civil Beat/2022

Since the start of this year, the typical sales price for a home has hovered around $1.15 million — roughly $380,000 more than it was two years ago, before the Covid-19 pandemic fueled a surge of out-of-state buyers and many local families lost work.

Rents also have soared, and many people worry that families who have long lived on the island will leave simply because they can’t afford to stay, at a time when thousands of vacation homes sit empty much of the year.

“From an economics perspective, if you can own a second home in Maui, that’s not an essential good — that’s some version of a luxury good,” Kenna StormoGipson, the housing policy director for Hawaii Appleseed Center for Law and Economic Justice, told council members at a meeting last month. “We have a lot of people in Maui that don’t have the essential good of a house.”

In recent years, Maui County officials started taxing properties at different rates depending on their value — for example, more expensive houses are taxed at higher rates. That isn’t the norm across the continental U.S., where many states don’t give counties the authority to set their own property tax categories and rates.

Even among counties in Hawaii, Maui has the highest number of tax categories based on both property type and value, a policy that some housing advocates have touted as the most progressive in the state.

A screenshot of Maui County's proposed tax rates
A screenshot of the county administration’s proposed tax rates for the next budget year, which starts in July. The County Council, however, controls the purse strings and could decide to change these rates. Screenshot

But owners who don’t live full time on the property still pay lower tax rates than national averages, according to a recent analysis by StormoGipson. In Maui County, “non-owner occupied” property is a broad category that can include investment properties, second homes and long-term rentals, although long-term rental property owners can apply for a special tax exemption.

StormoGipson, who helped develop Maui County’s 264-page affordable housing plan, said raising rates on those homes could make them less desirable to investors, who’ve increasingly flocked to Maui in recent years. In 2020, about 70% of homes purchased went to people who didn’t plan on using them as a primary residence — a big jump from 50% in 2016, according to research by StormoGipson.

But some people who work in tax policy argue it’s unfair to push the tax burden to a narrow subset of Maui property owners. Katherine Loughead, a senior policy analyst at the national think tank, Tax Foundation, said she hadn’t come across a proposal quite like the one on Maui anywhere else in the country. “Good tax policy is neutral,” she said, and by taxing properties uniformly, “you avoid picking winners and losers.”

“With this proposal in Maui, you’re going to see fewer people being able to own secondary properties,” she said. “For those who might rent out their home for short-term to vacationers, that might become unaffordable.”

But Hawaii’s housing advocates say that’s the point. The discussion to raise taxes on vacation and investment homes comes at a time when an estimated 15,000 housing units — about 1 in 5 throughout all of Maui County — are vacant, according to 2020 census estimates. For context, a recent state study estimated that Maui needs 10,000 homes by 2025 to keep up with the community’s demand.

“Generally, I’d say that all housing policy has trade-offs, and I’m sure there’s something that someone could come up with (against raising tax rates), but if someone wants to have an empty house on Maui, they should have to pay a lot of money for that,” said Philip Garboden, a housing economist at the University of Hawaii.

“It doesn’t help our housing market. It doesn’t help our economy. It just takes inventory and land away from people who need it,” he continued.

Wailea in south Maui
Maui has seen a surge in out-of-state buyers in recent years who can out bid local families for homes. Nathan Eagle/Civil Beat/2022

From a policy standpoint, Garboden said it makes sense to tax expensive things more than cheap things — a practice known as “progressive taxation.” The term is often confused or weaponized to be viewed as something that has to do with the progressive movement — or worse, class warfare — but all it means is that governments tax people in a way that make burdens more equal, he said.

A family living paycheck-to-paycheck, for example, might not be able to afford spending 5% of their income on taxes each year. A billionaire like Bill Gates, on the other hand, could lose 5% of his wealth and “suffer no negative consequences on his well being,” Garboden said.

Maui isn’t the first place to look into taxing luxury vacation homes, Garboden said. Cities such as Washington D.C, Oakland, California, and Vancouver, Canada have instituted taxes on vacant properties, and Honolulu is currently mulling a similar proposal to tax empty homes.

The proposal on Maui, however, is a little bit different. Garboden said that county leaders have to be careful in their approach because the non-owner occupied category doesn’t just include vacant homes; it could also include rental properties.

Maui County recently allowed landlords who own long-term rentals to apply for an exemption to get lower tax rates, but fewer than 2,400 did so — just a fraction of thousands that are estimated to operate on Maui. Unless landlords apply for that program, they could face higher tax bills if the council opts to raise rates on non-owner occupied homes.

County leaders also passed the Aina Kupuna law last year, which aims to prevent families with generational land from being priced out by rising tax burdens. But fewer than a dozen property owners fall under its protection, according to the county.

When faced with a potential increase, however, Garboden said property owners may be more likely to seek out relief. The county could also slowly increase tax rates over time while watching out for any unintended consequences and analyze property data to figure out the price point where raising property tax rates wouldn’t hurt middle- and working-class families.

“You could say, ‘we’re going to tax houses worth $10 million or more, and we’re going to tax the heck out of them,’” Garboden said. “Yes, you’re taxing a homeowner, but you’re taxing someone who can afford it.”

Civil Beat’s coverage of Maui County is supported in part by a grant from the Nuestro Futuro Foundation.

To learn more about Maui County’s property taxes, read the county report here:

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