The County Council is expected to initiate public testimony on the subject of real property tax reform. It is vital that our citizens understand the issues and participate. This column is intended to offer information that can be considered and evaluated on this important matter.
Taxes are the price we pay for government. In recent years our county government has become much more costly. The county budget has doubled since the beginning of this century. The real property tax is the principal source of the county’s revenue to meet its budget.
In 2004 the Real Property Tax Task Force, a citizen group that had studied our property taxes for most of a year, offered some proposed reforms. The most important of the proposals were to:
1) Stabilize land assessments permanently by using their average amount in the years 1999 to 2003;
2) Adjust improvement assessments annually by change in construction costs;
3) Fix tax rates for improvements at three times the rate for land; and
4) Eliminate the circuit breaker and permanent home use credit.
These recommendations will be prominent features in the tax reform agenda. Other likely issues for consideration will be increasing the exemption for resident homeowners and the impact of the ‘Ohana Kaua‘i Charter Amendment.
Let us consider the present structure of our property tax system and how it would be changed under reforms that will be sought.
There are about 30,000 parcels of taxable property, of which properties owned and occupied by residents constitute about one-third. However, because of a variety of factors including exemptions allowed, differential rates and valuations, our resident homeowners pay only about a range of 11 percent to 14 percent of the total tax collected. Most of the remaining 86-plus percent of tax revenues are obtained from properties used for commercial purposes. Tax rates for these business properties are now roughly twice those for residential properties.
In the case of taxes imposed on residential properties, the impact of the tax is typically borne by the owner. However, business properties — whenever they can — shift the tax burden to those who patronize the business in the form of higher prices, rents or fees. It is thus important to examine the characteristics of the customer to see who bears the ultimate burden of the tax. Customers of most of the county’s retail establishments such as grocery stores are typically county residents who will pay in their prices for goods and services indirectly for taxes imposed by the county. However, in the case of properties serving our visitors like hotels, time shares and vacation rentals, when the burden of the tax is shifted by the owner it comes to rest on their non-resident customers.
It is to be observed that if the task force recommendations are enacted the provision requiring the tax rate for improvements to be triple that of the rate for land will cause a major tax realignment. Among the properties with most of their assessment comprised by buildings are the hotels, time shares and vacation rentals, which will entail a higher percentage being imposed indirectly on our visitors. Correspondingly, taxes for those properties having all or most of their assessed value in land will enjoy tax relief under the task force proposal. These properties will include those in agricultural use and other properties with large land holdings.
Another point to ponder about the task force’s proposal to use the average of the years 1999 to 2003 assessments as the assessment base for land is that the typical average for a property is now only about half of its current assessment, so that when the tripled tax rate is applied to buildings, its effect will be more like six to one. This will have a major adverse impact on properties having most of their assessed value in buildings.
Taxpayers should expect that the council may have pressure to increase the homeowner exemption. It is now $48,000 rising to $120,000 for older owners. But Maui has enacted a $300,000 exemption. Such an exemption eliminates taxes on properties within affordable guidelines and should reduce them for properties with greater values.
Resident homeowners should be aware of the relationship of the ‘Ohana Kaua‘i Charter Amendment to the tax reform potentials. The amendment was adopted by a nearly two-to-one vote in 2004 but its implementation has been blocked by a lawsuit filed by the county challenging the measure. A Supreme Court decision resolving its status is expected in the first half of this year. If the amendment is upheld, resident homeowners in the great majority of cases should obtain lower taxes than those computed under county ordinances. If, however, the decision invalidates the amendment and the permanent home use cap is repealed as proposed by the task force, resident homeowner taxes could very likely soar.
All of our taxpayers should make the necessary effort to understand how we will be affected by the various alternatives. It is highly probable that our council will make important changes in the law. If you are not heard you will lose your chance to guide the action that will be taken.
• Walter Lewis is a resident of Princeville and writes a bi-weekly column for The Garden Island.
