 of the empty homes. What does that mean? Here I'm talking tax with Tom. That's Tom Yamachika of the Hawaii Tax Foundation, Tax Foundation of Hawaii. I'm Jay Fidel. This is Think Tech and we're going to examine empty homes today. So Tom, welcome to the show and what is the empty homes tax? Well, glad to be on the show, Jay. Today we're going to be talking about the empty homes tax, which is, I think, a little bit more, has a little more steam behind it now that Honolulu, the city and county of Honolulu, has tried a tax or restrictions on transification rentals and the federal courts kind of giving some resistance to that. It's ordered an injunction against them. What's the basis for the resistance? I'm not entirely sure. I mean, an injunction could be like a balance of farms kind of thing, but I didn't read the injunction order. But when we're talking about the empty homes tax, the idea behind that is to free up more housing for people and the way it works is this. If you own a house or a condo, you don't live in it and you don't allow anyone else to live in it, then you need to pay a hefty tax. The version of the bill that is now before the Honolulu City Council, which is called Bill 9 of 2022, sets that tax at 3% of the property value per year. So a single family home worth a million dollars, which happens to be the median value of the tolls, would face a $30,000 tax in addition to the regular real property tax for each year that it's unoccupied. Proponents of the bill say it's a fair price for taking that property out of the housing supply and therefore contributing to our housing shortage here. We have a housing shortage. So that's how it works. What's the point? To alleviate the housing shortage? Yes. And to punish tourists or people who have transient homes here? Well, I mean, there are people around that have multi-million dollar houses and apartments through $30,000 wouldn't bother them, nor would $60,000 or $90,000 bother them. They're not going to allow strangers in the property. Is there anything? Probably not. There's still kind of a hefty price. The bill is supposed to be modeled after something that has been implemented in the city of Vancouver, Canada. British Columbia, Canada. According to testimony before the city council, it resulted in a 26% reduction of vacant homes and $106 million in new tax revenues since 2018. So how do you enforce a bill like this? I mean, you mentioned in your notes that it was hard to enforce and a lot of people felt it was unenforceable. But how, at least theoretically, would you enforce it? Well, what the bill provides is that all property owners would need to fill out an annual declaration form to tell tax authorities about where the property was occupied. Okay. So you fill this out and you send it in and hope that there's no enforcement action against you. But as you probably can tell, and as we've seen a lot before, not everybody tells the truth on such forms. So how do lawmakers expect the city would know when a house is occupied or not? They have a stiff penalty case. They find out that, you know, you lied. And I suppose you could have... It's a crime. Yeah. Oh, it is a crime. Oh, yeah, it's perjury. So it's misdemeanor. It might be a felony. Perjury is a serious crime. Yeah. So to enforce it, to find out whether somebody has violated it and thus arrest them or whatever, you have to have the empty homes police. You have to have a... People who either A, verify what you said in that declaration, or B, they go and they visit to Espante. They go and they visit the place, knock on the door. And if it's... I guess if there's nobody there, this is hard. If there's nobody there, then you have a problem. Maybe you have to go and knock on the door every hour for all day, maybe the second and third day thereafter, but I'm not sure that's completely dispositive either. So how can you prove a negative? That's what it amounts to. If you've seen some of these police dramas on TV, you could have somebody sneaking up and putting a little piece of paper in the door jamb, right? And then coming back a couple of days later, if that piece of paper is still there, well then you go right this up. Why do I feel it's going to be hard to get a conviction on that basis? You know what it sounds like? It sounds like when they decide your car has been parked for too long in a given location, they put a little chalk mark on the tire. And if the same chalk mark is in the same spot, X days later, then you have been found guilty. Yeah, houses don't have tires though. That's a problem. That's a problem. Yeah, so you can see that the devil is going to be in the details. We're going to have to have a property tax police. Maybe you do stakeouts in the middle of the night with people kind of peering up through their infrared goggles or telescope or maybe they can do something like as mundane as looking at the property's water bill. Well, yeah, and I was thinking, okay, so what you do is you do the assessment for the empty home presumptively. Okay, here's a $30,000 assessment and you can have the assessment removed or whatever, reversed. If you come in and show a water bill and a light bill and I don't know what, something to prove that somebody was there. And so you have this sort of reverse proof. What do you think? Well, I think that's what they're worried about. Because you may remember like when we did residential A, which is the tiered property tax here in Honolulu also on homes that don't qualify for a home exemption. So similar concept. But there you can file a home exemption form just once, continue to live in it and they'll keep the exemption going. Right. This is a form you got to file every year. But even with the home exemption form in residential A, some homeowners never bothered to file this. And what happened? They don't care about the extra tax? When the tax bill came, they cared. They went, ah, what's going on here? And they quickly leaped down to their council members and to their the authorities and made a big fuss. And a lot of those assessments were reversed, of course. Because people were like, oh, we just forgot to file the form. We really do live there. Well, that's not unreasonable. I mean, the question is what sort of administrative burden does it impose? Well, let me finish this scenario, though. That is for a form that you file once. Okay. If you got to file the form every year, that's orders of magnitude more. Sure, sure. What I'm thinking is that the machine spits out the $30,000, you know, a super assessment, called the empty homes assessment. And it says, you know, you don't have to pay this. We're not going to, it's an assessment, but we're not going to collect this tax, you know, if you can show that somebody was living there. And if you do, you know, it'll be reversed. And you have 60, 90 days, whatever is a reasonable period of time, they'll come in with that evidence. Yeah, 100,000 homeowners come in because they got this bill. And so they take them more than 60 or 90 days to look at all those 100,000 forms and make a decision on each one of them. I mean, look at how the, you know, what the backlog is now in permitting, right? And don't you think, you know, the same or similar folks are going to be looking at it? Maybe. Well, let's, by the way, it sounds like you would oppose this bill. We're not taking a position. We're just kind of trying to explore the consequences. Okay. Before we get to the consequences, can we get to what it's really intended to do? It's intended to what? Force landlords, owners, to make premises available. And some of them will, some of them won't. And this is because we don't have enough housing. This can't be the most efficient way to do that. There's got to be so many other ways to incentivize housing, support housing. I mean, if you look across the country, not Vancouver, but across the whole country, I'm sure there are many ways that municipalities and states have figured out how to incentivize housing. Isn't it true? I mean, this seems like a baseball bat. And as you say, it's hard to enforce it. Are there other ways? You're going to tell people, you know, build more housing and clog up our permitting system even more? I mean, even today it takes, what is it, a year? Oh, I saw in the article, the paper, I guess it was Civil Beatants that if you don't pay a bribe, it takes three years to get a permit now. That's for commercial. Yeah. Yeah. Three years for commercial, I think one year for residential. Yeah. That's without the bribe. With the bribe, it's much faster. Yeah, exactly. So, but you know, I'm thinking, for example, you know, we are concerned mostly, I mean, there's a certain anger in this kind of bills. Dammit, you know, we have all these people coming and buying three million dollar condos and the like that the local people cannot afford. I get that for sure. We all get that. And we don't want you to do that. The worst thing is you, they build this three million dollar condo and somebody from far away buys it and they never come here, you know, but once a year for a few days. And it's a corporate retreat and it is taking housing off the market. But if there's some other way to stop that phenomenon, I mean, I know that the commerce clause stands in the way. That's why I asked you before about, you know, federal courts, they would be quick to, you know, use the commerce clause to stop any measure that would discriminate against people from out of state. But is there a way logically, Tom, to stop that scenario? And that's what that's what these guys are looking to do. I think they're trying to stop the scenario. We have rich people from far away, offshore, buying expensive condominiums and leaving them empty. That really is offensive. It's offensive on a number of levels. Can't we do something about that? Well, well, the problem is that's that's kind of how the economics turn out. Because there are, you know, people in other places or even here, for example, who like the idea of a vacation home or a home in a tourist destination like ours, there will be demand for it. And when there's demand for it, some people want to build, you know, these humongous homes or these super expensive condos, as opposed to, you know, 10 or 20 smaller units for affordable housing. Okay. Because the supplies there, I mean, the supplies, what they want to give them, the demand is there. And to equalize the demand, you would have to pay a whole lot more for these affordable units than is currently happening. So let me go back to something that seemed to be interesting a few years ago, which actually never took place. But suppose you change the state capital gains tax vis-à-vis these properties, applies to everybody, you know, from offshore or not. And you said, you know, if you try to spend this thing in a year or two, whatever the spinning period would be, whatever, and you can adjust it, you can tune it up later if it didn't work. If you try to spend this thing inside of a year, you have a really confiscatory capital gains tax. I use that term only rhetorically. We wouldn't use that legally. We wouldn't use that legally. A really high capital gains tax, you know, like a 75% capital gains tax. And so what you're really saying is, you can't make money spinning this thing. That's one example. Now, I realize it doesn't solve the whole problem. And it's only going to, you know, affect the certain percentage of the homes that are in the scenario. But wouldn't that kind of thing... If you flip and renovate and then flip, you know, you're going to be out of the tax anyway because it's going to take so damn long to get the permits. That's a really cute answer. Okay, I'm changing my period. I'm changing my period and my spin period from day one year to three years. So if you flip this thing within three years, you're going to get dinged. We have very high capital gains tax, okay? And that should give you enough time to renovate if that's what you want to do. But wouldn't that be a start, you know, to cut back on the scenario in which people come and buy expensive properties and spin them and try to make a big buck, which of course, when they try to make the big buck in the right market, what they're doing is raising the tax base for everybody. Oh, yeah. I mean, again, not even three years will work because really this is the developer's problem about rain. So it's going to take three years for the, you know, for their permits to get through because it's going to be commercial and we're assuming no graft. So it's going to take three years. I'll change my, you know, change my, okay, whatever, five years or and or. It's not a question of some, you know, units within a certain limited period of time. It's a question of all units all the time. So for example, you buy a condo, you're not going to make any capital gain on that. The tax will be so high that for as long as you hold it, you're not going to be able to resell it and thus increase, you know, the values all around you by the appraisal method and so forth. Now, on the one hand, that hurts the state because they're not going to get the big bucks in the in the assessments. But on the other hand, it helps the people because it means that people are not going to go in and try to make a big buck on the appreciation. So I'm saying is take my 75% and say it's permanent. You want to, you want to do a sale of real property, take residential real property. You're going to pay 75% capital gain whenever. What do you think about that? That might slow the problem down a little bit maybe. I'm really worried about the scenario we're talking about, which is what city council and potentially the legislature are trying to fix. I don't know if they're, I think they're fixing is not nuanced. But you know, I think we have to do something because there are, think about it, there are an increasing number of units, especially condos, but maybe more, that are beyond the reach of the ordinary citizen. And we're not just talking about homeless here. We're not talking about people who are disadvantaged. We're talking about middle class where the husband and the wife and all the children work, but they still can't afford housing. That's right. That's the terrible reality that we have here. I mean, our housing market is kind of really out of whack partially because we're on an island, partially because we're, we're at least have been an attractive travel destination. Well, you know, first you get travel that's step one and step two is they like it, so they want a piece of the rock. It's the old piece of the rock problem. And so they're, you know, vulnerable to sales attempts by all these developers. And indeed, you know, you think of all the land that could have gone for something else, but the developer, the owner held on to it, land banked it. Why? To build condos. You know, Neighbor Islands are an interesting example of that. You know, it used to be plantation land. They could have sold it for diversified agriculture. No, they hold on to it. Why? Because, you know, at the end of the day, they want to build condos. Condos turn the biggest profit. Look at these developers from offshore. They make huge profits on these expensive condos. Sometimes somehow we got to, we got to fix that or we're going to lose the possibilities for affordable housing for the middle class. In this, we are losing. We have lost. And, you know, we haven't figured out how to stop that yet. I mean, maybe a really high capital gain fact would be one solution where it's essentially contained within guardrails of value. But there's other things too. I mean, for example, oh, I don't know, we could do something about fee versus leasehold. We could do something about the, I don't know, something about the way the condos are managed. We could do something about DPP. I remember one of the big local developers said, you know, we had a housing project that took us 40 years, 40 years to build this project because of all the red tape we ran into. And most of that was DPP. Somebody talked the other day about a, I guess it was an energy project. And they had 300 concrete pads. And DPP required a different permit application on every one of 300 identical pads. What? You couldn't batch that? You had to make them go through it 300 times, really? I mean, it's a fantastic irrationality there. So you start with, you take everything is under examination point of view. Anything that could affect the price of a home point of view, and you start shipping away at it, you may not have any dramatic change like these bills would have. But at least you make housing cheaper for the middle class. We're losing the middle class. What kid gets out of UH and could afford a house in this town or anywhere in the island? Not a- Yeah, I mean, one thing that may have to be considered is, you know, you want a piece of the rock, you can get a small piece of the rock. Okay. I mean, allow smaller condos or smaller dwelling units that I think is what they had in Singapore or the UK. So, yeah, the price per acre is still astronomical, but if the acreage is small, it still might be affordable. Who knows? I know you love when I digress. I can always tell. But let me digress. You know, you have to look at it from the ground up. It all starts with the price of a foot of land, and it goes sideways from there. But before we get to DPP and building permits and 40 years of struggle, and kind of a terrible result of people leaving town, before we get to that, we should look at the fact that there's limited land here in these islands. And it's like any other market. If you have limited supply and increasing demand, you're going to have high prices. That's economics 101. And so we are living, I'm sure you've seen this in your career, we are living in a community where everybody benefits by higher prices of a foot of land. So the appraiser, he benefits, and he has on Intel want to see it valued as high as possible, because they're the seller, the owner. They want him to find a high value. We have escrow companies and tidal companies, they want to see a higher value. And trust me, the real estate sales industry wants to see a higher value. Both sides, seller and buyer, want to see a higher value. We are living in a pre-statehood world of everybody in a huge industry. Real estate is a huge industry in the state, who wants to see a higher value. I'm aware of an organization in Puna Puna that wanted to limit the terms by which an appraiser could value certain aspects of appraisal. Only for this exact purpose to hold down the value that the appraiser found. Because traditionally appraisers work for the big money, and traditionally appraisers find the highest value they possibly can. Sometimes it's really, really high. And so this was an attempt in the legislature to correct that by changing the system, the valuation standards by which an appraiser in the state would value property. It was attacked by a big landowner who removed it to the federal court. And in the federal court, it was struck as unconstitutional, as special legislation, which was really a stretch in my opinion. But, and that wouldn't have helped, at least in my Puna Puna. I suggest to you, Tom, there are other things we can and should do in every level of the food chain, every level of the real estate transactional change, to hold down these values. Some people say it's too late. We're already over the Rubicon here, and those kids are leaving or will leave. But I suggest that it's not too late. We just have to find points along that chain and fix them. What do you think? Yeah, for example, DPP is one big point. The fact that both buyer and sellers of real estate even get compensated at 3% of the sales price, which of course makes them motivated to find a higher price on all sides. That needs to go. Another compensation system should be set up for it. I mean, I think we have the occasional realtor who tries to book the system, but most of the system is still in place. Escro, I think is a fixed price, so that may be not as big an issue. But yeah, there are several points in the system where the economics just provide an unwelcome push toward higher prices. Yeah, so when you shake it and bake it, it seems to me there's not a lot of expertise working, although there should be in the city council, a lot of the legislature to attack these various things. Or there isn't a lot of political will because the same interests that would like to see higher prices don't want to see any reform on any of the points we're talking about. They want prices to be high. The state is built on high property valuation. And then of course, you still have the supply-demand problem. The largest landowner in the state is ready. Are you sitting down, Tom? The largest landowner in the state is the state. And the state has this concept built in for many, many years that it holds its land in trust for another day. Maybe a day of sovereignty? Who knows what. And it doesn't like to let go of its land. It doesn't like to lease its land, and it doesn't like to sell its land. So the result is a huge amount of land is locked up. And of course, that also goes for the large crusts. I remember one great comment from Harry Weinberg when one of our clients wanted to buy a one foot sliver of land from him. And he said, in answering that question, no, he said, quote, are you ready? Are you sitting down? I buy land. I hold land. I don't sell land. So the bigger you are, the more likely it is that you will hold on to land, which limits the supply. And when you have a lot of organizations, including the state itself, holding on to land and not letting it go, that's the result you get, limited supply and thus higher price. With more development or possible development of more people wanting to have their own homes, this creates a big squeeze. It has created a big squeeze for years. And it's time that we look at this. So I commend the guys who put this bill in for at least recognizing the problem. I'm not sure I commend the quality of this bill, but I think it's good that we addressed this, not only in the city council, but in the legislature. It's very important issue to debate and look at because it is going to impact all the lives of many everyday people. Yes. Yeah, but in terms of projecting what is going to happen to this bill, I would guess the answer is it will not pass. What do you think? Yeah, I mean, because of the concerns about enforcement that we were talking about, and even the real property assessment division said, look, as currently staffed and configured, we're not a property management agency. We don't have the expertise staffing more than needed resources to properly implement and administer the line. So the, I think it was the budget committee said, okay, let's hold on to this and maybe consider it sometime in the distant future, if anything. Reality is it can't work because if I visit your place with my empty homes, please, on day one and find that it's empty. I haven't covered day two or three or four. So you have a who shot John kind of, you know, question of fact on every single assessment. So it'll never work, even if it's enforceable on day one. Ah, she was. Well, it deserves more. I agree. It deserves more thought. And certainly the mission is important. And I wish, you know, there were, I hope some legislators and city council members are watching this one thinking about it, because it deserves some thought getting a room and figure out a way to do it. At the end of the day, it's mission critical. Don't you agree? Absolutely. Okay, Tom, it's a balance, isn't it? You know, we want to make it fair, but we also want to survive the public fisk because we also need money to operate the government. So what a combination of demands. Okay, say goodbye to the people, Tom. Give them some advice. Tell them you want to, what you want to think about going forward. Well, I mean, we do need to address this problem. It's a really big problem. I think we should be really concentrating on some of the root causes like DPP that has, I think, much broader impact than, you know, a measure like this would have. And hopefully, the housing crisis will be, you know, more manageable when some broader reforms are enacted. And so we don't have to resort to gimmicks like this. Well put, a gimmick. Thank you so much, Tom. Tom Yamachika, president of the Tax Foundation of Hawaii. Thank you so much for this discussion. See you next time. And thanks for having me on the show. Aloha.