The Honolulu City Council Budget Committee has given initial approval to a measure that would adjust the property tax rate for legal short-term rentals, which in its current form could mean relief for some owners and a hike for others.

Under the current tax structure, there is no enforced classification for legal short-term rentals, which are allowed to rent for less than 30 days at a time. Some pay the resort rate and others pay the residential rate, which is much lower, depending on their zoning.

However, Bill 4 looks to address that issue.

Decades ago a number of properties were granted a “nonconforming use certificate,” or NUC, to allow their short-term rental operations to continue even though they did not meet the legal requirements for short-term rentals. Once a property is granted an NUC, it can be passed down from owner to owner.

Those with an NUC in residential areas have been paying the residential property tax rate even if they are operating a short-term rental on the property. Meanwhile, those operating transient vacation units, TVUs, in resort areas have been paying the same resort property tax rate that hotels pay, which is nearly four times the residential rate.

The residential property tax rate set in 2021 is $3.50 per $1,000 in property valuation, while the resort property tax rate is $13.90 per $1,000.

Bill 4 would put TVUs and NUC properties into a new TVU tax classification.

“I’ve heard a lot from owners of transient vacation units,” said Council member Esther Kia‘aina during a Budget Committee meeting Wednesday. “That is making sure that you are not taxed at the hotel and resort rate, and given a fair assessment.”

The issue arose as the Council passed controversial Bill 41, which would change the rules for short-term rental units. Notably, the new rules increase the minimum stay at short-term rentals without a special permit to three months from 30 days. It also limits short-term rentals mostly to resort-zoned areas in Ko Olina, Kuilima, Makaha and parts of Waikiki — with the exception of those in residential areas with an NUC.

However, many TVU owners oppose the bill because it also imposes registration fees for legal short-term rentals. Testifiers complained they already are paying the higher resort tax rate and would be charged an additional fee that hotels and resorts do not have to pay.

While Bill 4 would create the tax classification for TVUs, it doesn’t set the rate, which would be done in a separate resolution as the Council works on the city budget.

However, Property Tax Administration Chief Steven Takara laid out a possible methodology for the Council to use when determining the rates that set the TVU rate at about 75% of the hotel and resort rate.

Currently, there is a rate for bed-and-breakfast operations that is slightly less than 50% of the hotel and resort rate. That is due to restrictions on B&Bs that require the owner to live on-site and limit the number of rooms that can be rented out to two.

The B&B home rate is $6.50 per $1,000 in property valuation.

“Take … the TVU, where you can have an entire property to your disposal or your use, you don’t have the owner or an agent living there,” Takara said, answering Council members’ questions about the measure.

“But the testifiers also said they don’t deserve, or they feel it’s not right for them to be paying, the hotel rate. So if you look at the tiering, it’s the logic of 50% (for B&B), 75% (for TVU) and then hotel at the 100%. … The logic was based off of the hotel rate.”

The city Department of Planning and Permitting currently does not enforce the B&B rate, but would do so upon implementation of Bill 41, which still needs Mayor Rick Blangiardi’s signature. He has committed to signing the measure.

The Budget Committee unanimously passed Bill 4 on to second reading, with Council member Andria Tupola voting with reservations.