Series: Part 2

Residential tax rates would fall, but proposed repeal concerns public

by Nathan Eagle – THE GARDEN ISLAND

• Editor’s note: This is the second part in a series on the proposed property tax system reform. Part 1 appeared Aug. 15.

Dogged by an anxious public and a ticking clock, the Kaua‘i County Council tomorrow will plunge into its work on a bill to drastically reform the real property tax system.

The revenue neutral Bill 2274, which was submitted to the seven-member legislative body on May 30 by late Mayor Bryan Baptiste’s administration, would provide significant tax relief to residential property owners through a couple key maneuvers, county officials said.

The reduction on average to an owner/occupants’ net tax bill would be more than 30 percent, according to the administration.

“The bill strives to find equitability,” said Eric Knutzen, who served as facilitator of the county’s eight-member Real Property Tax Committee.

The proposed property tax system, which reduces the overall number of tax rate classes from eight to four with a focus on use as opposed to zoning, would significantly boost certain homeowner exemptions.

While repealing the 2 percent annual limit on tax increases for properties owned and occupied by residents, the bill would raise the current $48,000 exemption for a primary residence on Kaua‘i to $300,000.

Similarly, the current $96,000 exemption for residents age 60 and older would jump to $325,000. The $120,000 exemption for residents age 70 and older would leap to $350,000.

Council Chair Jay Furfaro said the size of the exemptions may be too aggressive in a time of such economic uncertainty.

He plans to introduce an amendment to mandate periodic reviews of the exemptions. This way, he said, they can better coincide with the ebb and flow of the economy and any spikes in property valuations.

The proposed exemptions will be among the highest in the state, Knutzen said.

He exhibited a chart showing a side-by-side comparison of the exemptions and credits by county for fiscal year 2009. It shows Kaua‘i’s proposed $300,000 exemption for the first rung of primary residences to be on par with Maui, $260,000 more than the Big Island and $220,000 more than O‘ahu.

As the proposal steps up the exemption level for the older age brackets, it becomes the highest in the state.

Council members said they put the 2 percent tax cap and similar relief measures in place in 2005 as temporary solutions. The legislation provided some $13 million in tax relief for the past three years, Furfaro said.

Knutzen illustrated the need to eliminate the caps with a hypothetical example using a 5 percent annual inflation rate for the county. He said if the property taxes for the residential category are capped at a 2 percent increase, the other categories must encumber the extra 3 percent.

Councilwoman JoAnn Yukimura on Wednesday said the longer the county keeps this cap, the greater the burden on these other categories.

Still, many of the community members who have provided public input on the proposed tax reform package have stressed their concern over the cap’s elimination.

Although an average homeowner’s property taxes will likely fall under the proposal, residents said they want the caps to remain in place for protection and predictability.

“It gives people a peace of mind,” Kilauea resident Scott Mijares said at the public hearing on the bill last Wednesday at the Historic County Building. “Our incomes have not gone up at the same pace as the assessed values of our homes. Keep that in mind.”

Councilman Daryl Kaneshiro, who introduced the 2 percent cap with Furfaro, indicated it may be time to repeal the measure.

The cap offers no benefit to the new homebuyer, he said.

“It only benefits those who already have a home and are in the household,” he said. “If someone new comes in, like my son, and wants to purchase a new residence, they would have to pay taxes based on the purchase price, the fair market value. So he wouldn’t get a tax break. … He has to start at a higher value, then the 2 percent kicks in.”

Princeville resident Walter Lewis yesterday rejected the contention that equal value should result in equal tax.

By his calculations, he said a new homebuyer buying an average priced home around $700,000 would pay no more than an established owner living in a similar house. He figured this by assuming the homeowner would have bought the property a few years ago when the property cost roughly $400,000.

“There are over 11,000 owners who rely on the cap. Annual turnover to new buyers is now running about 5 percent,” Lewis said in his written testimony. “Where is the justification for destabilizing 11,000 owners to provide a benefit to a small number?”

If the cap is to go, he suggested amending it to reflect the consumer price index.

Kaneshiro said the council must look at the whole picture.

“We need to weigh all of that out,” he said, adding that the goal is to produce a “fair and equitable” system.

Another key component of the bill as it relates to the residential category centers around the proposed three-to-one ratio of taxation on buildings versus land.

Furfaro said Wednesday that the intent is to focus on local families who have land and may have a modest dwelling, but was unsure if this ratio would be carried through all four categories.

Although the council carries the sole power to annually set the property tax rates for the island, the administration offered rates for comparison purposes in a PowerPoint presentation.

For the fiscal year running from July 1, 2007, to June 30, 2008, Kaua‘i’s real property tax rates for a single family residence were $4.25 per $1,000 of property valuation for building and $3.95 per $1,000 for land.

The administration’s presentation shows Kaua‘i’s proposed tax rates for the same class to be $10.50 for building and $3.50 for land.

Kilauea resident Mike Dyer said he liked the proposed three-to-one ratio.

“This could potentially be a good bill,” he said.

There are 31,840 total parcels on Kaua‘i, according to county documents. Some 11,125 would fall under the residential category.

Under the proposal, the amount of revenue the county receives from the residential category would decrease some $4.08 million, or 31 percent. The category currently pulls in 16 percent of total revenue, projected to fall to 11 percent under the proposal.

The resort category, which maintains 3,595 parcels, would pick up most of the tab. The county would increase its revenue from this category some $3.75 million, or 24 percent.

The resort category currently constitutes 19 percent of the total revenue and would rise to 23 percent under the proposal.

Dyer said his primary concern, along with some others who testified on Wednesday, was the appeals process.

The vast number of parcels presents a “major problem” to the county assessor, Dyer said.

“He doesn’t have enough time to actually assess each property individually,” he said. “He uses a ‘mass appraisal methodology’ which means that he looks at any sales that have occurred in a given area, determines an average homesite value and an average value for any extra land area in the property. He then applies these averages to all the other properties in the area.”

When the appeals from aggrieved taxpayers start rolling in he looks for the first time at the specific properties and then tries to come up with a rationale for his assessed valuation, Dyer said.

Because his initial assessed value was based on a rough average it is often wrong. It is then up to the appeal board to bail him out.

“For a taxpayer aggrieved by an assessment he believes to be excessive his path is an unduly arduous one,” Lewis said. “Many taxpayers with legitimate grievances do not appeal because of the virtual certainty of being unsuccessful.”

The committee has recommended the council amend the bill to drop the discrepancy level for which a taxpayer can appeal an assessment from 20 percent to 10 percent regarding the difference between what the taxpayer believes his assessment should be and what the county says it should be.

“We need to improve the ability for the appellant to appeal,” Knutzen said. “This puts more accuracy and responsibility on the county. It’s much fairer.”

The bill recommends the council step up the appeal fee in $25 increments to reach $100 in three years. It is $10 currently.

There is a push to pass the bill at the council’s Aug. 27 regular meeting so the reformed system can affect the next tax year.

“There’s a time crunch here,” Yukimura said. “I think a lot of us want to pass out a good bill.”

The councilwoman said the council could choose to defer the legislation, but then “the problems and inconsistencies would be perpetuated another year.”

But Councilman Mel Rapozo said Wednesday that “some of us are willing to take our time and do the right thing.”

For residents interested in a ballpark figure of what their taxes would look like under the proposal, Knutzen recommended they take the assessed value from their assessment card, subtract $300,000 from the building value, then apply $6 of tax rate for every $1,000 dollars of building value and $2 dollars for every $1,000 dollars of land value.

If residents do not have their assessment card, visit kauairealpropertytax.com and plug in the tax map key number and input the assessed values.

The public will have another opportunity to provide input on the bill tomorrow at the Historic County Building. The meeting starts at 9 a.m.

See the next article in The Garden Island series on Bill 2274 to learn how the proposal would impact the resort category.

• Nathan Eagle, staff writer, can be reached at 245-3681 (ext. 224) or neagle@kauaipubco.com