A tax on vacant units could provide housing crisis relief, if done right

Besides funding sources, taxes can be an excellent way of shifting behaviors; but getting rates and exemptions right is key to success.

 

At night, towering luxury high-rise condos loom like shadows over the streets of Kakaʻako along Oʻahu’s southeast shoreline. A handful of lights twinkle through the blackness, but the vast majority of these newly-built apartments appear vacant. Hawaiʻi’s lowest-in-the-nation property taxes have encouraged wealthy investors from all over the world to purchase luxury apartment units, mansions and other real estate as safe places to hoard wealth.

On any given day, hundreds of Hawaiʻi residents struggling with homelessness can be found hanging on as best they can under the lengthy pall of these modern day ivory towers.

The units in these buildings often sell for a million dollars. They were never designed to be occupied by the 48 percent of Hawaiʻi families that live paycheck to paycheck, or even most of the other residents of the state that are better off.

The City and County of Honolulu alone will need more than 25,000 new housing units by 2025 in order to meet demand, more than two thirds of which are needed by residents making less than the median income.

Compounding this problem is the fact that Hawaiʻi has the least affordable housing in the country. In order to afford a one-bedroom apartment rented at the fair market rate, a Honolulu resident must earn more than $30.00 per hour. In reality, the average Honolulu renter makes about $17.00 per hour. The high cost of housing is one of the primary drivers of widespread financial hardship across our state.

In light of these sobering facts, Mayor Kirk Caldwell’s recent proposal to impose a “vacancy tax” on residential properties left empty for more than six months of the year has strong appeal. Data from the U.S. Census Bureau indicates that as much as 10 percent of Oʻahu’s housing stock—almost 35,000 dwelling units—sit empty most of the time. If anything, that estimate is conservative, since it does not take into account the thousands of luxury condo units built since the relevant data was last collected.

Municipalities across North America have begun experimenting with measures along the lines suggested by Mayor Caldwell in order to coax the wealthy into renting out their empty investment properties. The leading example comes from Vancouver, British Columbia, which implemented an “Empty Homes Tax” (EHT) in 2018. Vancouver’s EHT essentially amounts to a 1 percent property tax surcharge on unoccupied homes. Early returns show signs of progress: the number of properties designated as “vacant” fell by 15 percent in the year since the tax was implemented, and most of the formerly vacant properties were rented out by year’s end.

Vancouver’s experience also suggests what happens when the tax is implemented. While revenues raised through the EHT are committed by law to affordable housing initiatives—a commitment Mayor Caldwell has promised to duplicate in his own proposal—the City of Vancouver notes in its administrative review of the tax that “the desired outcome of the EHT was conversion to rental use, not revenue generation.” The City concludes that at 1 percent, the EHT may be too low to fully accomplish its goal: “Given the number of property owners that chose to pay the tax instead of renting their property, it is possible that the current tax rate is not enough of an incentive to rent.” This analysis supports the contention of observers in Honolulu that a steeper vacancy tax would be more effective.

Also instructive is Vancouver city officials’ frank reflection on the difficulties of administering the EHT. In the name of fairness, Vancouver provides for a number of exemptions to its vacancy tax: properties belonging to the recently deceased, recently sold properties, and properties subject to rental restrictions are all exempt from the EHT under certain circumstances. These exemptions are simultaneously necessary and complex, and the City readily admits that one year into the EHT experiment, they are far from perfect. Some exemptions are exploited in order to evade the law; others are under-inclusive and leave some residents unfairly taxed.

Crafting a clear and comprehensive set of exemptions is key to effectively implementing the tax. The City of Oakland, in which a large majority of voters recently approved a vacant-property tax, is now struggling to respond to resident concerns about ambiguities in the new law. While some confusion may have been inevitable, much of it might have been avoided by clarifying, for example, whether or not the tax would apply only to vacant homes, or to all vacant lots, regardless of whether or not they are developed.

San Francisco is now considering a vacancy tax. A similar measure has been floated in New York City. To date, the only American city to implement a vacancy tax is Washington, D.C., which has collected significant revenue from the tax but so far failed to track its effect on vacancy rates.

Vacancy taxes hold great promise for returning unused housing units to the long-term rental market, an outcome that should be a top priority for Hawaiʻi’s elected officials. At the same time, any vacancy tax must be carefully calibrated in order to achieve its intended effects. Honolulu law-makers would be wise to enact a tax geared towards expanding the pool of housing available to residents as much as possible. There is no shortage of constituents who would benefit.