BLOG POSTS ARE PRELIMINARY MATERIALS CIRCULATED TO STIMULATE DISCUSSION AND CRITICAL COMMENT. THE VIEWS EXPRESSED ARE THOSE OF THE INDIVIDUAL AUTHORS. WHILE BLOG POSTS BENEFIT FROM ACTIVE UHERO DISCUSSION, THEY HAVE NOT UNDERGONE FORMAL ACADEMIC PEER REVIEW.
By Dylan Moore
Maui is at a crossroads, grappling with a severe housing crisis exacerbated by last year’s wildfires. In response, Mayor Richard Bissen has proposed a ban on short-term rentals (STRs) in the hopes of converting the approximately 6172 homes on Maui that are currently used as STRs into long-term housing. While this plan aims to address the housing shortage, its potential economic impacts have sparked intense debate. A recent UHERO blog post by Justin Tyndall and Emi Kim notes that an STR ban could increase the residential housing supply in Maui by as much as 13%, but comes with significant risks.
A ban on short-term rentals could lead to fewer tourists, resulting in job losses and reduced revenue for both the county and state. This includes lost income from transient accommodation tax (TAT), general excise tax (GET),[1] income taxes from tourism jobs,[2] and property taxes.[3] Yet, with locals increasingly priced out of their community, maintaining the status quo seems untenable.
There is a middle ground between these extremes: a tax hike. Maui already levies higher property taxes on STRs (1.25-1.5% vs 0.3-0.8% for long-term rentals).[4] Further increases to the STR rate would push the least profitable short-term rentals out of the market, freeing up housing. Meanwhile, the most profitable rentals would persist, and continue paying county taxes. This revenue could support affordable housing initiatives, infrastructure, or other public projects, ensuring the short-term rental market better serves residents’ needs.
This approach parallels a policy solution that a growing number of cities have used to try address housing shortages: levying higher taxes on vacant housing units.[5] The available evidence shows that such taxes succeeded in reducing the number of vacant housing units in France and Vancouver, while also generating additional revenue from the remaining vacancies.[6]
Increasing Maui’s property tax rate on STRs would likely achieve similar results: some STR properties would be turned to other uses, but the market would not be eliminated entirely. This offers an intermediate option between the status quo and an outright ban. Unless the rate is absurdly high, a tax hike will never free up as many housing units as a ban but, consequently, it will also have a smaller negative impact on tourism. The higher the rate, the more STRs will be eliminated, and the larger the tourism impact. County revenues would certainly be higher than under a ban, and perhaps even higher than at present.[7]
Maui could fine-tune this policy to achieve the desired balance of housing availability, county revenue, and tourism needs. While the effects of a given tax hike aren’t precisely predictable, comparisons with other jurisdictions are enlightening. Maui’s current 1.185% tax on short-term rentals is relatively low; 13 U.S. states have higher property tax rates on the median owner-occupied housing unit.[8] Commercial property tax rates are generally significantly higher.[9] And much higher tax rates on vacant properties in Vancouver (3.3%)[10] and Washington D.C. (5%) never fully eliminated vacancies in those cities.[11]
No matter what rate is chosen—or even if the county pursues a ban—county officials should also be warned that not every housing unit that is removed from the STR market will become long-term residential housing. In some cases, former STRs will likely end up being held as vacation homes, or simply as an empty investment property. Thus, county officials should consider implementing a property tax hike on these uses as well if they want to ensure that either a ban or a tax hike on STRs will achieve their desired goals.
To evaluate a tax increase as a solution, consider two questions. First, are all short-term rentals on Maui, even the least profitable ones, really benefiting the county enough to justify the resulting housing market impacts? Second, is every single short-term rental in the county causing so much harm that no amount of tax revenue could compensate for it? If the answer to both questions is no, then a tax increase is the balanced solution this problem demands.
[1] While some prospective tourists may substitute hotel rooms for STR bookings, it is unlikely that all of them, or even a majority of them, would do so. It is also likely that hotel room prices would rise due to the reduction in competition that a ban would generate, resulting in slightly higher TAT/GET revenues. Again, it is highly unlikely that this effect would be large enough to offset the revenue losses caused by the policy.
[2] Many workers displaced from tourism-related jobs would likely find employment elsewhere eventually, but it is reasonable to assume that, on average, they will spend more time unemployed than they would otherwise, and that the salaries for their new jobs will be lower than for their current jobs. These effects would lower income tax revenues.
[3] While property taxes would still be paid on properties that are no longer used as short-term rentals, the rates on other uses of residential property are lower, especially in the case of owner-occupied housing. The reduction in property values that would likely result from a ban would cause a further decline in revenues.
[4] mauicounty.gov/DocumentCenter/View/147115/2024-Tax-Rates
[5] The definition of a vacant housing unit varies widely across jurisdictions, but generally includes houses or apartments that sit empty for most of the year, including vacation homes or secondary residences. In some jurisdictions, “vacant” units would include short-term rentals (as in Vancouver) whereas in other cases (Washington DC) it would not.
[6] Vancouver collected $32 million from the Empty Homes Tax in 2023. Washington DC raised about $58 million from taxing vacant properties in 2022.
[7] For a sufficiently small tax, revenues would be higher than at present, because most STRs would continue operating and simply pay the tax. However, for a sufficiently high tax rate, one that gets closer to achieving the same effects as a full ban, the revenue would be lower. Note however, revenue does not necessarily need to be higher for the tax to be a good policy. If STRs are harmful, it may be beneficial to deter them even if it results in raising less revenue than under the status quo.
[8] According to an analysis by the Lincoln Institute of Land Policy.
[9] The Lincoln Institute of Land Policy found that, in 2023, the average commercial rate for a property worth $1 million in large US cities was around 1.8% and around 1.6% in a sample of rural municipalities. By contrast, average rates for owner-occupied primary residences are generally closer to 1.2%.
[10] A 3% “Empty Homes Tax” is levied on top of normal property taxes. The normal residential rate is about 0.297% in 2024.
[11] DC levies a rate of 5% on most vacant properties and a rate of 10% on so-called “blighted” properties: https://cfo.dc.gov/node/287822.
