City Council considers measure that would create a progressive residential property tax

A proposal before the City Council would expand the tiers for property taxes on investment properties to allow for five different property tax rates to be applied as a property’s value increases.

The five tiers would apply to the “Residential A” Honolulu property tax rate, which is for owners who do not live in the home as a primary residence and the home is valued at over $1 million.

The proposed change would not affect homeowners who live in their home as their primary residence. The property tax rate for owner-­occupants is currently 0.35% regardless of the home value.

Currently, “Residential A,” has two tiers: 0.45% tax for the portion of the property valued under $1 million and then 1.05% for the rest of the value over $1 million.

Bill 20, introduced by Councilwoman Radiant Cordero, would break “Residential A” into five tiers:

>> Tier 1: up to $1.3 million

>> Tier 2: $1.3 million to $4 million

>> Tier 3: $4 million to $8 million

>> Tier 4: $8 million to $10 million

>> Tier 5: over $10 million

The change will allow the City Council and mayor to set different tax rates for each tier. The tax rate is not specified in Bill 20. Property tax rates are set by the City Council and mayor and are announced in June of each year. Bills are sent in July.

Since Bill 20 defines Tier 1 as up to $1.3 million, investments homes that have crossed the $1 million level but are under $1.3 million will be taxed at the lowest rate for investment property. Currently, the lowest rate on investment homes is limited to properties valued at $1 million or less.

Cordero said the change will allow the city to tax out-of-state investors more.

“The homes that are, like, $4 million are owned by majority out-of-state or investment properties,” Cordero said.

“It’s pretty unfair to have those be paying the same rates as $1 million (investment properties owned locally),” she said. “I really wanted to ensure that we can also offset raising the first tier of the Residential A to at least $1.3 million.”

The shift to a more progressive property tax was suggested in the Oahu Resilience Strategy, which was published in 2019 by the city’s Office of Climate Change, Sustainability and Resiliency, Cordero said.

The Resilience Strategy proposed “expanding affordable housing funding by implementing progressive property taxes.”

Tom Yamachika from The Tax Foundation said Bill 20 would make the property tax more progressive, meaning high-wealth individuals pay a higher tax rate.

“The idea behind the graduated system is that you put the tax weight more heavily on people who can afford it,” he said.

“So, income tax system, that’s kind of obvious,” Yamachika said. “The more income you make, the more you pay, in terms of tax rate. They are trying to get the real property tax to behave the same way. And I would imagine that the theory behind it is, you got these people in a Kahala mansion, they should be paying a lot more percentage-wise than everybody else because right now they’re not.”

Kenna StormoGipson at the Hawaii Budget and Policy Center said the tiers would allow the city more flexibility to adjust property tax rates.

“There’s agreement that it would be really tough and maybe counterproductive if you were to raise the property tax on current owner­-occupants, who live and work here and are in their home,” she said.

“However, increasingly, our housing market is becoming a market of investment properties, nonowner-occupied properties.”

The Hawaii Budget and Policy Center is collecting data on home sales across the state. While the data has yet to be collected for Honolulu, the trends on Kauai and Maui show an increase in nonowner-occupied homes.

For example, in 2010, 49% of homes sales on Maui were owner-occupied, and 51% were investment properties. In 2020only 30% of home sales on Maui were owner-occupied while 70% were investment properties. The trend is similar on Kauai.

StormoGipson explained that the funds that the city could collect from these new tiers could go to city services or fund affordable housing.

“What’s going to have the bigger public good?” she asked. “The public good of allowing very high income earners with second homes in Hawaii to maintain the lowest property tax rate in the country? That’s hard to argue — a public good of that versus being able to fund say, affordable housing.”

The Honolulu Board of Realtors City Affairs Committee Chairwoman Jennifer Andrews also supported the measure.

“The Honolulu Board of Realtors supports raising the minimum threshold for Residential A in light of rising home prices and that many local families own a home valued at $1 million,” she said.

“Allowing more flexibility in the tiers and adding additional ones may lessen the impact of Residential A classification for real property taxation on local families, enabling them to save money on property taxes. This is especially true for aging homeowners, those holding properties for other family members, and renters in urban areas with rising property values.”

Property tax is the only tax that the city has direct control of, Cordero said.

“The state has so much flexibility with income tax with all these other taxes and fees. But does the city? Do the counties? No,” she said.

“Right now, looking at how strapped the counties are, this is a critical move that has been needed for so long, and I think we need to do it now.”