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U.S. Cities Look to Vancouver’s Novel Empty Homes Tax

July 24, 2019, 8:46 AM

Three years after Vancouver became the first North American municipality to levy a tax on empty homes, several cities in the U.S. are looking to follow the Canadian trailblazer.

City representatives in Honolulu, and San Diego, Los Angeles, and San Francisco all want to emulate Vancouver’s 1% tax on vacant homes, which funnels revenue into “affordable housing initiatives.

The furthest along is San Diego, where officials are planning to conduct a study on the vacancy issue. Scott Marshall, vice president of communications at the San Diego Housing Commission, said the agency will seek to hire a consultant “to conduct the study to identify the number of housing units in the city of San Diego that are vacant for six months or longer.”

The suggestion of a Honolulu empty homes tax, which first surfaced last year, was resurrected by Honolulu Mayor Kirk Caldwell in May. But it hasn’t gained any traction, and some officials seem wary.

“I just think anything new is met with some degree of trepidation. How is it going to work? How is it going to be enforced?” Tom Yamachika, president of the Tax Foundation of Hawaii, said about a proposed vacant homes tax in Honolulu. “Maybe that’s why we don’t have a bill yet.”

One reason U.S. cities like Honolulu may be going slow: some have slammed the empty homes tax as discriminatory, while others are concerned about overtaxing in general. Plus, the case study up north may give some pause.

Is It Working?

The goal of Vancouver’s vacant home tax is to encourage property owners to put empty properties on the rental market, but it’s generated some dissent and four lawsuits. Each case involves someone who challenged a tax bill and lost.

In one lawsuit, the wife of a Chinese millionaire sued the city over a $200,000 tax bill for an empty mansion. The law includes exemptions for homes undergoing development, and that case features a disagreement on what kind of development is sufficient, according to a source familiar with the case.

The city says the vacancy tax bylaw brought in an annual revenue of C$38 million ($29 million) for housing projects in its first year, but a report released late last year found that there was only a 0.1% increase in the city’s primary market vacancy rate in 2017.

“Isolating the effect of a single policy like the EHT in a rental market as dynamic as the City of Vancouver is challenging,” Melanie Kerr, Director of Financial Services for Vancouver, said in an email.“Staff will continue to monitor the impact of the tax on housing supply and affordability, as part of the City’s broader set of actions in its 10-year Housing Vancouver strategy.”

Kerr also noted that initial data from the second year of the program shows some improvement.

“We are pleased with how the City of Vancouver’s Empty Homes Tax, the first of its kind in North America, is working,” Kerr said. “The number of Vancouver properties declared vacant in 2018 under the Empty Homes Tax program has gone down 15 per cent from 2017, with the majority of previously empty homes having been returned to the rental market.”

A city report showed 922 properties were declared vacant in 2018 as of a Feb. 4 reporting deadline. That’s down from 1,085 the year before.

‘Dismal Failure’

Andrey Pavlov, a professor of finance at Simon Fraser University’s Beedie School of Business in Vancouver, was one of the architects of a similar proposal. He said he sees the value in the idea in some cases but has a problem with how it was implemented in Vancouver.

The city’s preliminary report showing a 15% change “highlights what a dismal failure the empty home tax has been,” Pavlov said in an email.

“The vacancy tax has put 163 properties on the market. Yet, the city is sitting on 6000 units stuck in the development permitting process,” he said. “How is this not a reason to admit that the vacancy tax has been a failure?”

Setting a Precedent

Vancouver’s model for a new type of tax law has drawn attention from other cities with similar rental and second-home dynamics. In Honolulu, the mayor said he hoped to enact a similar law that would tax homes left vacant for a long period of time.

Specifically, Mayor Kirk Caldwell said he would push for a “vacancy fee” along the lines of the one in Vancouver. That money would be used for affordable housing, he said May 30. But so far there hasn’t been any movement on the issue at the city council level.

“At this point, the idea of taxing vacant homes is still in its conceptual form in Honolulu,” said Honolulu City Councilman Tommy Waters. “I am always reluctant to raise taxes, but I would consider the merits if taxing vacant properties resulted in more long-term housing for residents.”

“There is always a dire need to generate new revenue to support existing city operations and new initiatives and projects. However, Hawaii is already one of the most heavily taxed states in the union. Our people are struggling to make a living and provide for their families,” Honolulu Councilmember Kymberly Pine, chair of the City Council Committee on Business, Economic Development & Tourism, said in an email. “The Council needs to thoroughly evaluate every proposal to raise new revenue from our residents, visitors and outside investors.”

Similar proposals have also been floated in Los Angeles, where city councilmembers are looking for a way to tax empty homes, and San Francisco, where a recent study showed there are more than 100,000 vacant households in the metro area. The city of Oakland, Calif., enacted a tax on vacant lots of land.

For these jurisdictions, an empty homes tax should only be considered if they’ve done everything possible to facilitate the increase in housing supply, according to Pavlov. He said that many of these cities have substantial obstacles to supply increase, including accessing new land and densification.

“Until those obstacles are removed, I see no room for a vacancy tax, except only as a temporary measure while supply can be increased,” he said in an email.

To contact the reporter on this story: David McAfee in Los Angeles at dmcAfee@bloomberglaw.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergtax.com