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Paying Even More for Affordable Housing as a Result of Ignorance

posted in: Weekly Commentary 0
By Lowell L. Kalapa

It is quite remarkable that ignorance about the state economy and the state’s tax system can lead to costly results for taxpayers.
Such is the case with efforts to increase the state’s conveyance tax for the noble purpose of easing the crunch on affordable housing. After all, it is a mere few cents that in lawmakers’ minds most taxpayers will pay only once or twice in their life time.
Lawmakers seem to believe that they have hit upon a gold mine with the state conveyance tax. Until the early 1990’s, the conveyance tax was a tool that allowed real property tax assessors to gather information about property that was sold or “conveyed” by imposing a nominal nickel per hundred dollars of value conveyed which then indicated the value of property sold in a particular area. This allowed assessors to compare properties and set values for similar types of properties in the same geographic area.
As revenues began to stagnate in the early 1990’s, advocates of affordable housing and the state parks struck upon the conveyance tax as somehow having a relationship to the cost of housing and the lands under preservation as part of the state park system. So the rate of the tax was doubled and the amount of the increase was then earmarked equally between the affordable rental housing trust fund and the natural area reserve system of the state parks.
While 10 cents per hundred dollars of value (that’s $1 per thousand dollars of value) transferred doesn’t seem like much, with Hawaii’s pricey real estate that can amount to something that just may make it that much more difficult for the new home buyer or the small business owner to purchase or lease that property. Indeed, advocates of increasing the conveyance tax note that Hawaii’s transfer tax is amongst the lowest in the nation. What they fail to note is that the median price home in Hawaii hovers in the $400,000 to $500,000 plateau while $144,000 can buy you a three-bedroom home on a quarter acre lot in the state of Vermont where the transfer tax is equal to 1.25% of the value transferred.
Lawmakers are once more being asked to raise the conveyance tax to fund the drive for affordable housing. But advocates are assuring that the average Joe won’t be affected because sales to purchasers who can qualify for the county home exemption whose purchase is less that $600,000 will enjoy the current rate. But those with purchases larger than $600,000 will pay ten or twenty cents more as long as they will qualify for the county home exemption. And if the purchaser cannot qualify for the county home exemption, then the rate will immediately double rising to four times the current rate if the transfer is more than a million dollars in value.
What lawmakers seem to overlook is that conveyances which don’t qualify for a home exemption include transfers of commercial, industrial, agricultural, or resort property. It includes raw land purchased by a developer of affordable housing from a fee owner. It will also apply to leases of real property for commercial use where the amount of the lease is capitalized for the period of the lease which could then run into millions of dollars.
Thus, while lawmakers are safe politically because the increased conveyance tax rate will only apply to prospective homeowners who can afford the million dollar mansions, the increase will apply to all transfers of nonresidential property with an immediate doubling of the rate for lesser value properties and quadrupling of any transfer of property where the value is in excess of a million dollars, even if that value is the capitalized value of rent over the period of a lease.
Thanks to the ignorance of how the conveyance tax applies to transfers, the added cost of the tax increase will be passed on to all consumers in the form of higher prices. And ironically, to future developments of affordable housing as the raw land is developed into new tracts of affordable housing.
What is unfortunate is that lawmakers believe that raising new resources or earmarking a portion of the general excise tax are the appropriate responses to putting more affordable housing units into the inventory of housing. What they fail to realize is that the hidden cost of regulatory requirements exacts a heavy price adding to the cost of housing in Hawaii.
So instead of raising taxes, lawmakers should look carefully at the costly regulatory maze they have created and start by streamlining the system that prevents truly affordable housing from being created.

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