The Honolulu City Council is scheduled to hold its final reading Wednesday on a proposed empty-homes tax.

The controversial Bill 46 seeks to create a tax meant to penalize real-­property owners who leave their Oahu residences vacant for extended periods of time.

As proposed, Bill 46 would tax vacant real property by as much as 3%. That means a home valued at $1 million could receive a $30,000 tax bill each year it remains empty.

But critics of the measure refer to still swirling legal issues — namely in the City and County of San Francisco — where a similar “vacancy tax” ended up as part of a lawsuit in state court, with property-owning opponents contending that such taxes violated their federal civil rights.

And, in that case, a group of San Francisco plaintiffs won a judicial victory.

But this week, Council staff said Bill 46 will introduce a new “Residential E” tax classification in Honolulu. They noted the measure also offers at least a dozen exemptions meant to protect property owners from unwarranted taxation.

“The Residential E classification simplifies the original (EHT) proposal by integrating it into the city’s property tax system,” Council staff stated in a news release. “It targets vacant or underused residential properties, creating a clear and consistent way to support the underlying purpose of residential zoning.”

In a statement, Council Chair Tommy Waters, who co-introduced the measure, said “this updated approach reflects our commitment to listening to feedback from our community and finding innovative, fair solutions to Honolulu’s housing challenges,”

“By rethinking the original proposal, we have created a system that balances economic practicality with social equity, ensuring everyone in our community benefits,” Waters added.

Bill 46, as drafted, offers exemptions for properties not meant to be classified under the proposed Residential E category. Those include:

>> Properties with a homeowners exemption are unaffected. Those owners will also be eligible for an additional exemption to the EHT for a second property;

>> Accessory dwelling or ohana units;

>> State-licensed property used as a residential home for senior citizens, persons with medical or mental disabilities, or is a state- licensed halfway house;

>> Property owned jointly by members of two or more local families;

>> Non-profit property used to provide temporary housing for individuals as part of the organization’s mission, such as a group living facility for victims of domestic abuse, homeless persons, mentally ill persons, or disabled persons;

>> Property occupied by a person undergoing medical treatment that prevented the occupant from occupying the property for six months or more;

>> Property owned by active military members who are away on orders or deployment;

>> Dilapidated properties with a pending building application permit;

>> Property whose owner occupant passed away during that year;

>> Property that is subject to a probate court proceeding or subject of pending litigation;

>> Properties with an open building permit;

>> And properties that are actively being sold.

As proposed, at least 20% of the revenues from the Residential E classification will be directed to affordable housing programs overseen by the city’s Office of Housing.

The remaining funds will support various housing- related issues, including homelessness, cost of living increases, rental stability, existing city services, and cover the tax administration costs, Council staff stated.

The effective date for Residential E classification is set for tax years beginning July 1, 2027.

That date, according to Council staff, will allow “sufficient rollout, systems updates, stakeholder engagement, and educational programs to ensure that all impacted property owners are notified ahead of any rate changes.”

Since its introduction in August, Bill 46 has received both praise and criticism within the community.

During the Council’s Budget Committee meeting Nov. 21, city Budget and Fiscal Services Director Andy Kawano asked the Council to proceed slowly on Bill 46.

Kawano noted that Ernst &Young LLP, the city’s consultant in this matter, is being paid nearly $500,000 to study the implications of Bill 46. He added that the consultant’s work involved two phases.

Saying the first phase would be completed by the end of January, Kawano asked that the Council “slow down and not go to third reading until we have a report back from the consultants on the feasibility of the bill.”

But on a split vote the Council’s Budget Committee pushed Bill 46 toward a final vote.

The public spoke for and against Bill 46 at the same meeting.

Among them, Suzanne Young, CEO of the Honolulu Board of Realtors, opposed the measure.

“We know firsthand that we have an affordable housing issue, and if we thought the empty-homes tax bill was going to help, we would support it,” Young said at the meeting.

She noted legal challenges over a similar EHT in San Francisco prevented her group’s support.

That lawsuit involves San Francisco’s Proposition M — a November 2022 initiative presented to voters in that city over a vacant homes tax.

San Francisco voters passed the proposition — by 54.51% of the vote — that’s set to take effect in 2025.

As a new law, Proposition M means property owners would be charged an escalating amount for each “residential unit” that is “vacant” during the preceding calendar year.

However, in 2023, several plaintiffs — including the San Francisco Apartment Association, the Small Property Owners of San Francisco Institute, and the San Francisco Association of Realtors — filed suit in the Superior Court of California over the pending city tax.

Last week a final judgment in the case was rendered.

California Superior Court Judge Ronald E. Quidachay on Nov. 26 ruled in favor of the plaintiffs, finding San Francisco’s vacant homes tax violated the “Takings Clause,” also known as the Just Compensation Clause, of the Fifth Amendment to the U.S. Constitution.

“The Supreme Court has held that the government can’t make you rent out your property,” Christopher Skinnell, the plaintiff’s lawyer, told the Honolulu Star-Advertiser by phone. “And more broadly, they can’t make you allow other people onto your property.”

He said under the Fifth Amendment “the government can’t take your property without paying for it.”

“And so if the City of San Francisco had said ‘you shall rent these vacant units out’ that would be an unconstitutional ‘takings’ of private property,” Skinnell said. “That applies to not just taking it themselves, but also making you share it with other people.”

“So, like during the pandemic, for example, they couldn’t say ‘hey, you’ve got an empty hotel there, you have to house these people’ … they could do that, but then they’d have to pay you for it,” he said.

As it stands, the vacancy tax has been enjoined. “So the city can’t enforce or collect it,” he explained.

But San Francisco, he added, will likely appeal the state court’s decision.

“At the moment, they’ve not done so,” said Skinnell. “We’re just kind of waiting to see.”