There are many aspects to the housing crisis on Kaua‘i, but here are two of them: First, we need more affordable housing. Not many would dispute that affordable housing must be a priority for Kaua‘i.
However, there is a second and intertwined aspect to the housing crisis, and it is rising housing prices on this island in the general housing market. Real estate speculation fuels rising housing prices and feeds on the huge profits that can be made by speculating in land or housing.
In addition, it increases short-term rentals and hurts the long-term rental market. We see all these things happening on Kaua‘i. My argument is as follows: Raising the capital gains tax rate on real estate investment profits has been linked to lowering the demand for housing and to lower housing prices. This is partially because it discourages real estate speculation (see “Fuel on the fire: Negative gearing, capital gains tax and housing affordability” Australian Council of Social Service, 2015).
Here is the goal. If you love being on Kaua‘i, come buy a first or second home here, but any capital gain you realize over time will be taxed very heavily if you sell it. Or if you (or a real estate hui) are buying a home or property here for speculation, any capital gain you realize will be heavily taxed. So, if you want to make big money on real estate speculation, you can choose one of the other 50 states.
In addition to this, we need to protect the housing investment of Kaua‘i residents who already own homes and live in them, and that can be done in many ways, such as adjusting property tax rates for residents, or through adjustments to inheritance policy and taxes.
But if nothing is done to curb real estate speculation on Kaua‘i, rising housing prices and the increased property tax rates that follow will continue to force resident families out of their homes at an increasing rate, and make it impossible for young families to afford a home here, whether to rent or to purchase.
There are many complex forces at work in Kaua‘i’s housing market that will need different solutions, but I see no value in letting real estate speculation continue to drive Kaua‘i land and housing into the hands of the most wealthy and out of reach for too many of our residents. We need to consider the capital gains tax rate on real estate investment an important lever to use.
House Bill 232 would increase the capital gains tax rate on O‘ahu from 7.5 percent to 11 percent. Some are concerned that even this increase will reduce investment and speculation. But that is the goal. A far greater increase in the capital gains tax rate on real estate speculation is necessary as one strategy to help improve the affordability and accessibility of land and housing on Kaua‘i.
Those benefiting from real estate speculation will scream this is capitalist heresy and an assault on the free market, but real estate speculation on Kaua‘i is an ongoing assault on our quality of life. We need solutions, and sharply raising the capital gains tax should be on the table.
