BY LOWELL KALAPA – Honolulu has now had its first experience with the new homeowner category of real property taxation. Adopted reluctantly by the city council at the behest of the mayor, the argument is that by allowing the council to set a higher rate on residential property that is not owner occupied it would allow the council to set a lower rate on owners who live in the residential property they own.
The thought behind this approach is that for the vast majority of real property taxpayers (substitute “voters”), county officials can provide tax relief by adopting a lower rate while imposing a higher rate on what county officials believe to be part-time residents or visitors who have homes in Hawaii that are second homes or vacation homes. And while that may be true on the Neighbor Islands where the non-owner occupied residential property category had its genesis, that is not quite true in Honolulu where the vast majority of these real property parcels provide rental housing for Hawaii residents.
Elected officials figure that since the landlord owns the property he or she will get the real property tax bills so renters will never see the increase in the tax rate. Unfortunately, elected officials forget that the landlord eventually has to recover the costs of maintaining and operating the rental. With a higher real property tax bill, there is no doubt that the landlord will eventually pass the added cost of the higher real property tax rate on to his tenant.
So instead of blaming the local county official, the renter ends up accusing his landlord of gouging him for rent. And although county officials point to studies done by such revered institutions like Harvard University, they seem to overlook the fact that Hawaii is unique in that there is such a severe shortage of housing, period. Rents are driven by that shortage. Thus, if costs go up as a result of real property taxes, utilities or whatever, the landlord probably will be able to rent that unit at a rate of whatever the market will be willing to pay for that rental. Again, it is basically that old rule of supply and demand and in the case of Hawaii there is precious little supply of rental housing.
So why not impose a higher rate on non-owner occupied residential properties? While it may seem like an ingenious way to make second homeowners and speculators pay more while protecting their constituents who are homeowners, shifting the burden from one type of property to another merely hides the true cost of operating county government. They may believe that they are making the non-homeowner occupied properties pay for running and maintaining county services, but in the long run all residents end up paying.
In the early days of the county-run real property tax, it was popular to shift the burden to non-residential properties like commercial, industrial and even agricultural categories of property. Elected officials argued that the cost of the higher tax rates could be passed on to the customers of these property owners, that is, until someone pointed out that those customers are the very constituents the elected officials were trying to protect. And as the economy began to falter in the early 1990’s, some elected officials realized that these higher costs of real property taxes were beginning to drive the businesses using these properties right out of business.
But elected officials figured that in the case of hotels and timeshares, the added cost was being passed directly on to non-resident visitors. But little did they realize that the Hawaii market is largely a leisure market where the visitor is usually on a vacation budget that will only allow so much to be spent on that vacation. With visitors pulling back on discretionary spending like vacations, hotels and airlines have had to compete for that business by lowering their airfares and room rates.
And the only way they can make up for that loss of revenues is to cut expenditures. As a result, hours were cut for workers from the top to the bottom, restaurants were closed and services were discounted to attract visitors. In the end it was the residents who ended up paying the higher rates on commercial and hotel categories. Couple the higher real property tax rates for hotels, and in some cases timeshares, with the higher transient accommodations tax rates and it doesn’t take a rocket scientist to understand who ends up paying for those higher taxes.
So as much as local county leaders like to think that they can shift the tax burden to taxpayers who don’t vote, that shift in burden is ultimately paid by Hawaii residents either as renters, customers or workers. We as residents end up paying for it in the higher cost of groceries at the supermarket or less hours at our jobs. We all pay!
Lowell L. Kalapa is the president of the Tax Foundation of Hawaii