Hawaiʻi needs to add 4,000–5,000 affordable rental units to its housing supply each year for the next five years to meet residents’ needs. The state’s lack of affordable housing is the number one cause of our costly houselessness and outmigration crises.

The legislature has the opportunity this session to raise revenue to pay for much needed affordable housing—as well as land conservation and infrastructure—by increasing conveyance tax rates on investment properties.

The conveyance tax is a one time tax collected on the sale of property. The revenue from this tax is currently allocated to three different state funds: the General Fund, and to two special funds: the Rental Housing Revolving Fund (RHRF), and Land Conservation Fund (LCF). 

Hawaiʻi has artificially low conveyance tax rates compared to other cities and states with similar high property values and housing markets that attract investors. Currently, an investment sale in Hawaiʻi for a $6 million home would generate $66,000 in conveyance tax revenue. In Seattle, the same sale would generate $149,075; in San Francisco, it would generate $330,000; in Los Angeles, $240,000.

Wealthy investors have buying power that most locals do not; and that means our artificially low tax rates create a tax break incentive for purchasing property in Hawaiʻi. This disproportionate buying power in the Hawaiʻi housing market not only makes it more difficult for residents to enter the for-sale market, it can also impact the ability for residents to rent property as well. 

Hawaiʻi Appleseed’s review of property sales from 2016 onward consistently found that the bulk of properties sold across the state are in the $1–2 million range, and that the share of owner occupied sales decreases above the $1.5 million and above sales point. 

House Bill 2364 proposes raising the rate of conveyances for owner occupied sales starting at 1.1 percent of the sale of $6 million dollar homes and above. Significantly, House Bill 2364 would increase rates on investment properties sold at $2 million and above price. These changes in the tax code could potentially triple the revenue collected from conveyance tax without burdening local families.

Critical Needs Funded by the Conveyance Tax

The RHRF is the only dedicated source of financing for the construction of affordable, price-restricted rental housing. Currently, allocations to the RHRF are restricted to 50 percent of conveyance tax revenue or $38 million—whichever is less. For each of the last three years Hawaiʻi Appleseed reviewed, the amount of conveyance tax revenue deposited into the RHRF ran up against its $38 million cap. That means the fund was shorted revenue we desperately need to finance affordable housing. HB2364 would simplify the statute, and deposit a flat 50 percent of revenue from the conveyance tax to the RHRF.

The LCF provides grants to community organizations and government agencies that work to preserve and protect Hawaiʻi natural, non-urbanized lands. This could include grants for preserving cultural or archaeological resources, critical habitat for threatened or endangered species, and unique productive agricultural lands. Not unlike the RHRF, allocations to the LCF are also capped by restrictive language limiting the fund to 10 percent of conveyance tax revenues or $5.1 million—whichever is less. HB2364 would also remove that cap, and dedicate a flat 10 percent of revenue to land conservation.

HB2364 also proposes to dedicate 10 percent of conveyance tax revenue to a third special fund: the Dwelling Unit Revolving Fund (DURF). DURF, is currently used by private developers that produce affordable housing to finance low-cost loans for infrastructure improvements. Infrastructure here could mean roads, water, wastewater, electricity, and other horizontal or below ground needs to support new housing development. 

A lack of adequate infrastructure directly contributes to our inability to produce housing across the state. Act 305, SLH 2022 YIMBY action group’s most recent report to the legislature, identified the lack of adequate infrastructure as a primary barrier to meeting the state’s housing demand. Without the proper infrastructure in place, Hawaiʻi won’t be able to meet the wide array of housing demands that residents have. 

HB2364 is a smart opportunity to leverage a progressive, equitable tax on investment properties to ensure that locals can continue to live, work, start a family, and grow old in Hawaiʻi by better funding affordable housing development. The bill awaits a hearing in the House Finance committee. If enacted into law, HB2364 could potentially triple the state’s revenue from the conveyance tax, and better fund some of our most pressing needs. Further analysis and projections on proposed conveyance tax changes can be found in our policy brief, “Preserving Hawaiʻi.”