Growth in out-of-state investment in Hawaii real estate is prompting the state to take a closer look at property tax rates. ADVERTISING Growth in out-of-state investment in Hawaii real estate is prompting the state to take a closer look at
Growth in out-of-state investment in Hawaii real estate is prompting the state to take a closer look at property tax rates.
A report prepared by the Department of Business, Economic Development and Tourism presents the current state of property tax — specifically, how much is contributed to revenues and how much comes from residents versus owners out of state.
The report also notes potential impact to revenues if taxes were to change based on residency status.
Hawaii is one of 14 states in the country that does not levy property tax at the state level. Instead, individual counties are responsible for setting rates and collecting taxes.
“I’ve been working for the state for 25 years, and this is the first time we’ve done this,” Eugene Tian, DBEDT chief economist, told the Tribune-Herald.
Tian said the state Legislature requested the report because “in recent years, out-of-state investment is booming.”
“There’s a pretty big proportion of out-of-state investment in residential areas, so I think that triggers the legislators to see what happened,” he said. “Why are they investing in Hawaii? Is it because of the low real estate property tax?”
Answering that question will be the goal of follow-up studies, Tian said. “This report is just the facts. The next step is seeing if there’s any correlation.”
Hawaii County differs from other counties because it has the highest effective property tax rate in the state: 0.9 percent as compared with the state average of 0.38 percent.
For out-of-state investors, who are not eligible for certain homeowner tax exemptions, the Hawaii County effective property tax rate was 2.22 percent, as compared with 0.83 percent statewide.
Even with the higher tax rate, however, more people from out of state were buying residential properties on the Big Island than on Oahu, Tian said.
“In the Kona area, half of the properties were purchased from out of state over the last nine years,” he said.
The county’s higher property tax rate also does not seem to have deterred investment from in-state buyers: The report shows in Hawaii County rates of home ownership for residents are higher in every income class.
The report found that 50.3 percent of all residential property taxes in Hawaii County were paid by out-of-state mailing addresses, despite more than three-fourths of properties being owned by locals. Out-of-state buyers tend to purchase higher-valued properties, increasing the revenue that can be generated from taxes.
At the same time, the report notes, out-of-state investment “presents a housing affordability challenge for Hawaii residents” because it drives up property value across the board.
To that end, the report presents various scenarios for increasing revenues while offsetting the tax burden on residents. This could be done by increasing tax rates on out-of-state residents or increasing the homeowner tax exemption for in-state owners.
Decisions to change rates ultimately will be made at the county level.
Future study also will explore what out-of-state buyers are doing with the properties they own, Tian said.
“Are they using it for vacation themselves, once a year, or renting out to local residents, or renting as an Airbnb?”
Email Ivy Ashe at iashe@hawaiitribune-herald.com.
