Editor’s note: The Garden Island welcomes guest columns from any elected official who wants to share their thoughts on a pertinent issue facing Kaua‘i and encourages readers to share their feedback.
In 2004, a time when property values were escalating, Kaua‘i was debating a proposed charter amendment related to property tax rates called the ‘Ohana Amendment. That year, the Homestead Class (owner-occupied homes) contributed $4.5 million in revenue. The ‘Ohana Amendment passed, but in 2007 was subsequently overturned by the Hawai‘i State Supreme Court. By 2010, when home values were falling after several years of escalation, the homestead class contributed $8.1 million in revenue.
In response to the run up in property values, in 2006 the County Council, rather than taking the traditional path of lowering tax rates proportionally to avoid large increases in property tax bills, took a different course. They passed a bill that established a cap on tax bills for resident homeowners that limited the tax bill increase to 2 percent per year. Tax rates in other categories like Apartment, Commercial, Industrial, etc. stayed the same, leading to increased revenues and larger surpluses for the County as their assessed values increased.
The 2 percent cap was popular with homeowners; it provided predictability and a sense of control over their annual property taxes. It also relieved the pressure to lower tax rates in the homestead class; the base tax rate in this category has stayed the same. In a time of rapid escalation of assessed values, the cap effectively shielded homeowners from large tax increases. The problem is that not everyone is capped. When a home changes ownership, the tax bill resets and the new owner is taxed on the full-assessed value at a rate that has not been adjusted downward.
Over time this has lead to a situation where two identical homes with the same value can be taxed at very different rates, even though they are paying for the same set of County services. Sometimes the new homeowners are young upwardly mobile families who end up paying unfairly high rates. Other times the higher rates are being paid by seniors who are downsizing their home after their adult children leave the nest.
As a result, the 2 percent cap also has effectively created different classes of homestead taxpayers with inequities or unfairness in tax collection. Over time it has led to an increased percentage of the tax burden being paid homeowners (from 7.38 percent of total revenue in 2007 up to 11.29 percent of total revenue in 2010). In the current market of falling home values, the 2 percent cap is protecting County revenues, not homeowners. (Hey, my assessment went down but my tax bill still went up?)
In 2005, then Mayor Bryan Baptiste foresaw that the 2 percent cap would eventually outlive its usefulness and convened a task force to craft a comprehensive tax reform plan. The task force met for over a year and Council members were consulted throughout. I attended a number of the meetings and was briefed regularly. The plan was presented to Council in 2006 and was hotly debated until just before the election in 2006. I had hoped for passage, but eventually the bill was deferred indefinitely and remains in that status to this day.
The plan, in my opinion, would have brought much-needed fairness to the tax system. It was “revenue neutral,” meaning it did not increase or decrease overall tax collections but it would have changed the mix of who paid what share of the tax burden. Specifically, it would have lowered the tax bill for the vast majority of all resident homeowners (except those with very large expensive homes) and put $2.5 million back in the pockets of the people who actually live on Kaua‘i by fairly taxing time-shares, vacation rentals and second homes, while slightly increasing the tax rate for the Hotel/Resort class. (Still, Kaua‘i’s hotel tax rates would have remained the lowest in the State, even as they are today.)
As it stands today, homeowners have not received the proposed tax relief and are in fact paying an increasing share of the tax burden, with some residents paying much higher rates than their neighbors. Now the State has capped the County’s share of the Transient Accommodations Tax (TAT), significantly reducing the contribution visitors make for their use of County services. Time-shares are paying well below their fair share and vacation rentals are taxed at the same rate as single family residential.
There does not seem to be the political will to tackle comprehensive tax reform at this time. However, I propose that the following initiatives be taken as soon as possible to move us in the right direction.
1. This year increase the current $48,000. homeowner exemption by at least $20,000. This would provide immediate tax relief for all 12,294 owner-occupied properties (capped and uncapped), totaling about $1.2 million.
2. Repeal the law that provides preferential tax rates for time-share properties.
3. Create a tax category for transient vacation rental properties (TVRs) and set a rate appropriate for that use.
4. A modest increase in the Hotel and Resort class to recapture some of the tax decrease they have experienced in the last three years.
To pay for County services, our County relies on the property tax as the biggest contributor to revenue. It is extremely important that tax collections are done fairly. The fact is local residents are paying more while other tax classes are paying less. Unfortunately, our current system, which has been changed incrementally over the years, has winners and losers and we should not continue to wait to address some of the biggest inequities.
• Tim Bynum is a member of the Kaua‘i County Council. He can be reached at tbynum@kauai.gov.
