 We're back, we're live, we're talking to Machica and talking tax, and we are going to talk about something you probably have not heard about yet, the vacant home tax. This is a really interesting approach, creative if you will, not completely unpreferenced, I mean unprecedented, but creative nevertheless, and the question is whether it can work, whether it can be enforced, and Tom, President Tax Foundation of Hawaii is going to tell us about it. Good morning, Tom. Morning, Dick. Glad to be on the show. So what we're talking about today is an idea that doesn't originate with the city government, but it's in a city bill. It's called Bill 76. It started off last year, was referred to the Council Budget Committee, and was postponed by the committee in November after a couple of public hearings with lukewarm, if any, public support. That's what it does. The basic idea is this. You walk around Kakaako at night, or somewhere where there's a lot of concentration of foreign ownership, by foreign I mean people who don't live here. You see all these condo units, they're dark, and the conclusion that you get from it is, well, geez, a lot of these are vacant. They're owned by people who don't live here. Maybe they come once in a while or something like that, as a vacation home or wherever it is, but a lot of the year, the unit is just vacant. As a social policy matter, it's kind of appealing to say, well, look, we have a housing crisis here in Honolulu or in Hawaii or wherever you want to look. Why are we letting these people keep their units vacant if we need those units so desperately? At least let them pay something for it. The idea actually was in a bill in the 2020 legislative session introduced by our great housing, Senate housing chair Stanley Chang. He's very interested in housing. This is his primary subject, isn't it? And his idea was to impose a conveyance tax at 5% of the assessed value of the unit per year. Okay, so to give you an idea of what that is in comparison to the regular tax rate. The regular tax rate is $3.50 per 1,000. Okay, that's your house, my house. Any residential house in the city in Honolulu is at $3.50 per 1,000. A 5% tax is $50 per 1,000, so it's expensive from the get-go. That's 16 times the regular rate. That's right. And what he wanted to do was say on or before the 20th day of each calendar month, every person shall finally sworn return with the director of taxation together with the remittance if you don't live in the house. So every month you have to send in a return saying either you lived in the house or you didn't, and if you didn't, you pay up. And we said, that's not a conveyance tax. And while the social policy may be attractive, the the manner of execution just was just terrible. Who's who's gonna so that that failed? It failed. It passed the Senate. It didn't get a hearing in the house. Now Bill 76 in the city council or as was we didn't get to the end of the legislative history here, but Bill 76 is different than what Stanley Chang proposed. What does Bill 76 say about taxing a vacant housing unit? Well, Bill 76 is basically adding another property classification for vacant homes. Okay, so you have residential, you have residential for people who don't qualify for the home exemption. There would be another real property classification with a rate to be determined, because that happens in the budget ordinance every year, for vacant homes. So it's not specified how much? Right. It's not specified, but when the KHON2 asked the city officials, like Tommy Waters, for example, what they had in mind, there was there was there was some hesitation. Well, we're not really sure, but it's probably going to be like between 1% and 70%. Okay, it's a pretty widespread time. It is. Now 70%, I mean, I'm sorry, 7% would be $70 per thousand, 7-0, okay, which is 20 times the current real property tax rate. So that is going to be an eye-opener number one. And then you get to the next interesting question about how you ever enforce this. Now, let's kind of go back for a second to transient homes, the Airbnb's. Okay, it's been a situation that's plagued the city and the counties and the state for a very long time. Okay, the Department of Planning and Permitting has gone to the legislature and testified more than once that, you know, Jesus, it's really hard to prove that you have a transient rental in there. I mean, what are you going to do? You have to, you know, stake out the property and see who comes and goes. And, you know, does it match the physical description of the person who owns the property on their driver's license or whatever? I mean, I think that's what they do now. So a lot of times, they can get around that and catch the guys if they see the ad. Well, let me just digress for a moment. You know, a year ago, I went and had my license renewed. And of course, they over bureaucrat ties it in the license division there. But what they said was we have to establish that you live at the address you say you live at. And we have to establish, you know, that for your license so they can put the right license down. We need to confirm your residence. So you have to bring with you utility bills, tax bills, some kind of other bills indicating that you live at this address. And I did. And they were satisfied. They do that for everybody. Everybody wants a renewer's license. Everybody has to show that. So, you know, that was that's pretty reliable proof, I would say, that I live there. They asked for more than one source, man. The other thing I'm thinking of and I'd like you to comment on is back in the day I remember that. But does that really prove you live there? Okay, no, no, I could be it really doesn't. No, but but it is a certain percentage of credibility you have. I mean, it's not perfect, certainly. But because one of the points that that that that I'm, you know, was thinking of when I suggested this topic for our show is, well, okay, if it's that tough to prove that a transient rentals in the place, how do you prove that somebody lives there? And by the same token, if you are assessed a vacant home tax, how do you prove that you in fact live there? You know, I mean, there's there's there's like privacy concerns for one thing. And you can't you can't. I mean, how do you prove that you live in your home? Okay, all right. So I present an insurance card with the address on it. So what? I mean, I could have lived in lived in that house, you know, two years ago or four years ago or 10 years ago. Or you could you could have your utility bill delivered there in your name and pay it. But you're not there. I just his ways to fraud it. There's certainly ways to fraud it. But I submit that not everybody's going to be into fraud. I think the percentage of fraud grows. When you go from 1% to 7%. You know, it'd be a correlation there at 7%. A lot more people are going to try to escape that tax at 1% maybe not so many. The other thing I'm remembering, I don't know if you remember, but maybe it's not even a memory. Maybe it's still happening is you have a different rate, say in a condo, which you it's a resident rate versus a non resident rate. Or am I thinking rather of a bank mortgage loan? Maybe I'm thinking of a bank mortgage loan. No, I mean, we have that. We have that right now. I mean, if you if you own and occupy your home, right, you fill in this form called a home exemption. And if you don't have a home exemption and you're a residence and your residence is over a million dollars, you get kicked over into residential A, which is a different rate class and it's much higher. Yeah. Okay. So how do they show that they're resident and non resident? How is the government satisfied? How do you limit fraud? Well, in that case, basically, you, you know, you file the home exemption application and then they just take it. That's what they've been doing for the last 60 years or so that I'm remembering. Yeah. And it stays that way stays that way until it changes. I don't know. You have to repeat the filing. I don't I don't think so. You may have to repeat it after a certain number of years, but not usually. I mean, I've I've I guess whenever the property is sold, you would have to do it again. So doesn't that work though? Couldn't you do the same thing here? Possibly. But that's but that's not again, that's not conclusive proof. I mean, some some people none of this is I mean, all of this is subject to fraud. And I guess the question is whether the tax officer or the city is ever going to go after anybody and do they have the resources to investigate? Do they have the data? You know, it's a cross check data. I'll never forget one guy who was on our neighborhood board was not living in the district and somebody took him to task on it. And he said, no, no, I'm living in the district and come to find he really wasn't but his boss verified or authenticated that he was living in the district and the city left it right there. And they accepted that. So, you know, I think there's ways that you can raise the issue, but it's not clear how it's going to be resolved. And the question is whether you have the whether the government has the resources to investigate, whether it has the data to investigate, and whether it has the prosecutors to prosecute. And if the penalty of fraud is low, you're going to have more fraud. Yeah. I mean, some of the things that they were talking about include, okay, let's look at the utility bill. We know how much water this this person's consuming because what a water supply is part of the city. So let's look for, you know, low, low water bills, or you can have, you know, like something you see on TV, you can have an inspector come and insert little slivers of paper in the front door, you know, every little front door, and then come back in a few days and see if the paper is still there. If it is, you write them up. Sure, like the chalk mark on the tire, like the chalk mark on the tire, exactly. Well, you know, I mean, I think ultimately it's a question of resources and the part of the enforcing governmental entity. And in the city and county, I don't think we have the resources. So it's really a paper tiger. And the question I put to you, regardless of the ultimate, you know, outcome for Bill 76 is how do we avoid huge condo buildings where you can see no lights, where you know that although we have this critical housing shortage, but there are people who buy these condos sometimes for millions, multiple millions, they don't rent them out. And so this is this kind of disparity between housing that exists and people on the street. This is a serious problem. And I think it's getting worse, you know, people from overseas and the mainland, they invest in these valuable condos. They don't want strangers living there. They don't want anybody living there. Because the likelihood is that tenants are going to be the tenant from hell and will mess up their condo. And I think that's the natural human reaction. I spent a lot of money for this thing. I don't want to have a stranger in there. I prefer to leave it vacant while I'm not here. I'm sorry. How do you discourage that or rather encourage renting because we have a critical housing shortage? What do you do? There's got to be a way to do something on it. Right. Now, I don't think, you know, attacking it with the property tax system is the way to go because, you know, of the resources and stuff. So here's what you do. If you really want to go after it, enact a mandate on the associations. So you tell the association that you have to enact a bylaw or a house rule that says vacant condo is a violation of your declaration and, you know, provide appropriate penalties. Like, I live in an association house where we have a prohibition against transient vacant rentals. And that gives anything less or rather less than 60 days or 30 days. Is that what it is? Something like that. And that that incentivizes the resident manager to go and like scar the the TAT as to see if there's anything in our building. And if there is, you know, up before the board, it goes. Well, the incentive to the association is that it can keep the penalty, right? That's right. So they impose fines and they can keep them. And of course, the the state imposes GT on the fines. So they get that part of it. Yeah. Well, but is that is that doable? I mean, can the legislature or even more of a reach the city council force the condominium association to change its bylaws? Or could it enact a bill to simply create that provision external to the bylaws and just make it happen? In other words, if somebody has a vacant apartment, then then that person has to pay a fine to the condo association. Now, I guess it has to be it has to it has to be within the the articles and bylaws of the condo association. Well, you know, if the if the association already exists, it's kind of hard because you have settled property rights. But if it's if it's an association that doesn't exist yet, then then you can certainly provide for what that what the bylaws have to contain in order to get approved. Yeah, but you're right. I mean, if the bylaws exist and all that. And then the homeowner says, wait a minute, I bought into a unit under these articles and bylaws, you're changing the government is changing my legal entitlement here. And that that's a kind of taking it's a taking. Yeah, I would fight with you on that, you know, take it to court kind of thing. Yeah, that's interesting. But you know, there are lots of condos that that say in the articles, we have the right to change these anytime. Well, but that's that's true. But it requires a vote of the members. Yeah. And sometimes it's almost impossible to get. And the other the other is two other issues that hit me is that one, you're you're saying to the condo association, well, you got to go check. You got to, you know, knock on his door. I don't know what you do. Go see who's living in the unit. And make a determination, the operative term, as to whether this provision of bylaws is being violated. Well, a, do they have the resources or the will to do that, especially when they didn't think of the provision in the first place. And B, this goes to the Texas Roe v Wade statutes. It's you're deputizing, you're deputizing the condo association to make a legal determination of the rights of a citizen. And I don't know what the Supreme Court is going to do when it hits that one substantively. But, but there is the there is the case involving the bar. Did you read about this? The bar in Cambridge, which wanted to get a license and there was a church next door. And the city of Cambridge had a an ordinance allowing the church all by itself to stop the liquor license. And the Supreme Court back 30, 40 years ago, found that that was a violation of the constitutional rights of the bar, because a private citizen, in this case, a church was being delegated and legal control, legal determination, power is delegated to it as a vigilante. And this is Lawrence tribes answer. Well, I mean, we have we have something like that now. We have something like that now. I mean, when you when you apply for or renew a liquor license, they do inquire as to your, you know, your neighbors and their, your neighbor's input is considered in the determination of whether they continue or deny liquor license. The difference there in this in the case of this bar was that all the church had to say was no, and that was it. It was not a matter of considering with the church thought that the church's rule was final. Anyway, I mean, there are issues about enforcing, aren't there, no matter which way you go. It's a factual determination of legal determination and enforceability determination and a resort determination. And I'm still asking you, is there a way to do this to achieve more housing in the marketplace and to avoid this dilemma of a shortage in housing? Well, I mean, it looks like you really have no choice but to alter the marketplace, which is, you know, when one way you do with is with taxes, another way you do is with regulation. That may not sit well with some people, but that's that's kind of what government is sometimes, and that is, you know, to what extent do we want social policy to override individual rights? That's the tension. It's always the tension, isn't it? Always the tensions and different ideologies have different, you know, different places where the line is set. So, so that that kind of factors in as well. I mean, if I gave you a city in county where the number of homeless, the number of people looking for housing, you know, the working poor, if you will, doubled or tripled or quadrupled, and then I gave you a city where the number of vacant, you know, units and condos doubled or tripled or quadrupled, I think we could conclude that we have a real problem. And I mean, we may have a real problem right now, but then it would be more exacerbated. And the question is what you do about it, because, you know, we're Yeah, we, like in any, like in any society, you got to make trade-offs. The reason why you have your, you know, your aldermen or your city council people or your legislators or whatever is to attempt to strike that balance. The courts are there so that, you know, people don't get into extremes that are protected by the constitution. But, you know, if it's not something so extreme as to violate the constitution, then government should be able to, you know, make that kind of decision. Yeah. So I'm thinking, the other thing I'm thinking about looking at it from the other end, you were talking about the marketplace and looking at the marketplace triggers the thought that, and people talk about this from time to time, that we ought to have a much steeper capital gain or call it sale of real estate tax, because some people have made extraordinary amounts of money just sitting waiting for their property to appreciate. And Hawaii is a series of appreciations, you know, I mean, from state to and on, everybody sits and watches property, get to be a multimillion dollar property, they sell out of the move to Las Vegas and lead the sweet life. I don't know how many people I know did exactly that. So the question is, why do we let the, essentially the free market govern on appreciation and let people make so much money on the sale of these not only condo units, but single family homes. Why don't we tax them heavier, steeper, with a state capital gain tax on the sale of real property, and thereby trying to avoid some of this spin we have seen since state to it? Well, I mean, what you're talking about kind of reflects the debate that's gone with the conveyance tax. It doesn't have to be capital gains. It can just be like the gross value of the property, which is what the conveyance tax hits. And, you know, between then and now, the conveyance tax has gone from like five cents per thousand dollars of actual value to, you know, $1.50, which is a huge increase in both absolutely and in percentage terms. Now, the problem is that if you raise the conveyance tax way high, you're not taking into account what the owner paid. You know, it's not a net out. He just pays on value. He doesn't get a credit for what it costs him or anything like the capital gain calculation. And you think that's better? Well, where I would get into it is you can't make a million billion on a residence here, because that what that does is it raises appreciation all over town. It raises values all over town. And the average if you're well, if you're if you're complaint is with the value, then it's not with the gain. So so if you're complaining with the value tax, the value, that's what the conveyance tax does. Okay. And that it doesn't you don't have to do you have to sell it to be subject to the conveyance tax, right? I would look for I would look for a way to, you know, avoid this appreciation scenario, appreciation and and leave town scenario. And I would have I would look for a way to avoid, you know, praise values getting so high that the average working staff can never afford a house. Just you know, how many people leave town because they can't afford a house. And no, any students, you know, leave and never come back because they can't afford a house. Well, I mean, that's that's that's partially a market problem. It doesn't it doesn't really necessarily have to do with whether a given person is making or losing money. It's just it's just a function of supply and demand sometimes. Yeah. So the government doesn't really step in on that. The government's not doing anything to avoid the spin problem. Yeah. So I guess what you would want to do is, you know, focus more heavily on, you know, what what is the evil that you want to to dissuade and, you know, try to discriminate that from, you know, other, you know, free market outcomes that you that that you don't want the government to get involved Well, I think there's two things they are becoming more pronounced. One, as you properly identified is the notion that there are vacant vacancies and and the problem of lots of homeless, lots of vacancies. And the second houseless, whatever. And the second one, which I identified is the notion that property values are praised values. It's all the entire real estate community is looking to push values up. I mean, it's in their interest to do that. And meanwhile, the average person can't afford a house. Anyway, I mean, I think we're going to solve those right away, because from a political point of view, the people who, you know, could speak on those subjects are interested in maintaining this status quo. But let's let's look at the bill 76. You said in your write up that it may be coming back. It didn't do very well in the city council, but it may be now still under consideration. What's the status of it? That's that's what it is. It was previously deferred by the the city council budget committee, but there's been a push to to bring it back, you know, center stage. So it may get unpostponed. And and the city council may be taking it up again. So that's that's what the KHON2 write up was all about. And that's, we're probably going to be taking a look at this issue again, you know, probably not only in the city council, but also in the state legislature, because I don't think I don't think our legislators are through with the concept of a vacant home's tax yet. No, but your point is well taken to say that the practical problem of enforcing it, however you structure it, could be a showstop and create problems for government. And you want whatever the bill is, you want it to work. It's nothing so discouraging as a bill that doesn't work. Right. So one thing just so I can get my head clear on this. So the bill comes up in the city council or a similar in the state legislature, who's going to be testifying? What I mean is what are the interest groups that would want to speak to this bill? How strong are they? What would they say? Can you can you imagine a hearing room? Who would be there? What would they be saying? Well, if you if you have people interested in the social policy, you know, people advocating that that particular social policy would be there. The realtors would probably want to weigh in because their livelihood is going to be impacted by this. Of course, the government agency would weigh in in terms of what they can implement and what they can't. Those I think are your primary participants in this type of hearing. Yeah. What position has the governor taken? What position has the mayor taken? In the hearings on the bill so far, there really hasn't been a whole lot of testimony. And I think the department of planning and permitting when on record is saying that it would be tough to enforce. But, you know, what they say and what gets enacted mean, you know, may not be the same thing. One last question, Tom. And I'll tell you, this is not my world, but suppose I owned a condo and it was empty right now. Whatever the tax was, I would be concerned that if I rented it to a stranger, I could easily easily get a tenant who would bust the place up. Right. What comfort can we, the community or anyone, a private organization, I don't know, maybe an insurance company, somebody give to me to assure me, make me comfortable that if that happens, my place will be repaired. Either it will not be busted up or it will be repaired. There are several property management organizations that claim to do just that. So use the services of one of them. They'll take a cut of your rent, but I think they are there to at least help with the cleanup if something goes wrong. Yeah. I think you're right. The better the property management company, the better the coverage. And of course, the better the property management company, the more expensive the property management fees. And that's all appropriate in the marketplace. I think one interesting point is that the property manager would want some comfort from the tenant. And there's two ways to get that comfort. One is he could vet the tenant very carefully and say, I'm going to look at your background. If I find that you busted any other place up here or anywhere in the world, you're not getting it. Or be theoretically, he could say, I want a great big security deposit to cover any damage. But I think both of those devices are employed now. That's limited. The amount of security deposit you can get is limited by law. And that's a weakness in the law. It means that you can't get the comfort from the tenant, except by investigating the tenant's background. And there's a limit on that. But if you ask for more than I think it's a month or two, you're violating the law. So what happens where the burden, the economic burden would fall is it's on the owner. And he could soften that by getting a property manager who would be really careful. And maybe he could write a contract with the property manager that would make the manager indemnify or cover him in the case of a wayward tenant and get insurance to cover claims against the property manager for that. But that's pretty complicated. And that may not give you the kind of comfort you want. So in the marketplace, if the owner of the property wants to feel comfortable, his best bet really is to leave the place vacant. And pay the tax. And pay the tax. There you have it. All an economic decision. In the end of the day. Well, thank you very much. Tom Yamachika, president and tax foundation of Hawaii. Really appreciate this discussion as always. We'll see you next time. See you in two weeks.