Series: Part 3

Resorts would bear brunt as residents see relief

by Nathan Eagle – THE GARDEN ISLAND

• Editor’s note: This is the third part in a series on the proposed property tax system reform. Part 2 appeared Aug. 19.

Timeshare owners and resort operators who would see higher property taxes under a bill pending before the Kaua‘i County Council say the proposed legislation victimizes them at the expense of providing relief for residents.

“Over the years we have spent as much time and money as we can on the island and love and respect it as if we lived there year-round,” said Jack Gunther, a La Canada Flintridge, Calif., resident who owns a timeshare unit at Pono Kai in Kapa‘a. “To be targeted for an unequal tax increase that specifically benefits only a segment of the community is local politics at its worst.”

The 147-page revenue-neutral Bill 2274, submitted to the council in May by late-Mayor Bryan Baptiste’s administration, would drop the current eight tax rate categories to four and tax buildings at a rate three times higher than land.

The administration had set tomorrow as the deadline for the seven-member council to pass the legislation to affect next year’s tax roll, but it was extended last week until at least Sept. 10. The Committee of the Whole, chaired by Councilman Ron Kouchi, will consider amendments to the bill at its next meeting, Sept. 3, at the Historic County Building.

Critics of the bill call it an unfair shift in the tax burden while supporters say it asks the visitor industry to pay a fairer share after having enjoyed a great deal for years.

“They’ve had a pretty light ride,” Councilwoman JoAnn Yukimura said, noting the challenge now in recapturing a tax break from an industry that has grown accustomed to relatively low rates.

The proposed hotel and resort category would see a 24 percent increase in taxes while the residential category falls 31 percent. The change would amount to an increase of $3.75 million in property tax revenue from the 3,595 parcels in the resort category and a $4.08 million decrease on the 11,125 parcels in the residential category, county documents show.

Councilman Tim Bynum said the bill strives to bring the two categories to parity.

“Timeshares and resort owners have been getting a great deal on the backs of

homeowners,” he said.

Because the proposal calls for taxing based on use rather than zoning, vacation rentals and properties used for similar purposes that are transient accommodation tax-obligated — regardless of where they are located — would fall under the resort category and be taxed accordingly.

The administration has proposed this rate to be $11.25 for building and $3.75 for land per $1,000 of property valuation, but the council has the sole power to set the tax rates. The current tax rates for the hotel and resort land use class are $7.90 for building and $6.90 for land.

The weighted average of the proposed rates remains lower than Kaua‘i’s sister islands, said Eric Knutzen, who facilitated the county’s eight-member Real Property Tax Committee.

For instance, Maui taxes its hotel and resort land use class at $8.20 and its timeshares at $14 per $1,000 of property valuation, county documents show.

Hawai‘i Hotel and Lodging Association Kaua‘i Chapter Chair George Costa testified in support of the proposal taxing based on use, but against the three-to-one ratio.

“All types of transient accommodations should be paying their fair share of taxes,” he said. “Businesses that are not paying their taxes and not complying with government regulations are receiving an unfair competitive advantage over businesses that do comply with the law.

“We are less comfortable with the taxation of improvements at three times the rate of land,” he said, noting the association represents 28 properties and 4,670 rooms on Kaua‘i. “We believe the unintended consequence of this provision will be to create a disincentive to reinvest in a property. … this will ultimately have a negative effect on the overall quality of the visitor product.”

Yukimura, in an interview last week, said this is an issue she and other council members are studying and searching for solutions.

She said the bill’s intent with the ratio is to keep lands open, but this overall county goal does not seem to work when applied to the resort category.

A thriving resort industry depends on keeping the units upgraded, Yukimura said, adding that incentives for renewable energy improvements must be included in the legislation.

The Real Property Tax Committee — which includes representatives from the county Finance Department, an appraiser, a tax collection supervisor, a tax administrator, an ag land use inspector and council services — broke down the impact of the proposal on some timeshares on Kaua‘i.

The interval tax increase per week to a timeshare unit at Pono Kai would be $23.67, according to the committee’s calculations. This reflects a 15 percent in values and represents a 52 percent increase in taxes when compared to 2008 data.

Lawai Beach Resort on the South Shore would be hit harder. The committee determined the taxes on a unit there would increase $102.98 per week, representing a 163 percent increase in values and 266 percent increase in taxes.

On the North Shore, Hanalei Bay Resort’s taxes would increase $59.37 per unit weekly, according to the committee. This represents a 36 percent increase in values and 81 percent increase in taxes.

Although much of the testimony to the council has been critical of the tax proposal’s impact on the resort industry, some community members felt otherwise.

“I’m tired of hearing the crybabies coming and saying give us this — give us, give us, give us,” Kaua‘i resident Barbara Elmore said. “I’m just shocked at all this selfishness.”

Kouchi said at the July 9 council meeting that he is tired of the “hypocrisy” of people wanting to take advantage of both worlds — those seeking to have permits to operate as a resort but pay residential tax rates.

The administration based the need to levy more taxes against the resort category on a report by economist Kenneth Stokes of The Kauaian Institute, county officials said.

His Aug. 9, 2007, report, available at www.kauaian.net, states the visitor industry is not paying its fair share and residents are having to absorb the costs to the added infrastructure load.

Stokes found on Kaua‘i that visitors use about one-third of the water, sewer and solid waste, and nearly one-half the electricity.

Some council members have also pointed at the unproportional amount of emergency rescue services that visitors use along with county roads and parks.

But others, such as Councilwoman Shaylene Iseri-Carvalho, said these conclusions remain unconfirmed.

“I know that many resort accommodations aggressively engage in recycling efforts, water-saving methods and also provide many of their own infrastructure needs internally to run their accommodations,” she said, noting that she is still in the fact-finding stage.

Costa said the county last year received $15 million in TAT revenue from the state to help offset the cost of county services generated by visitors.

“We have not seen an analysis of county services that indicate the resorts are not already paying their ‘fair share’ of taxes and believe it is unfair to add an additional burden on these uses,” he said.

Many residents and council members, including Council Chair Jay Furfaro, said the unintended consequences of the bill must be studied.

“I have been told from the visitor industry, who have provided information that they are also hurting from the decline in the economy, that if the tax burden is shifted to them, they may have to lay off workers just to keep afloat,” Iseri-Carvalho said. “A lot of our local kama‘aina families, who are barely able to make ends meet, are employed in the visitor industry. Many of these families do not own homes and therefore would not get any benefit from the tax proposal reducing real property taxes but because of the increase in taxes on their employers they may lose their jobs.”

Shep Altshuler, publisher of TimeSharing Today, said readers have written letters expressing their concerns over the proposed tax reform package.

“I believe that timeshare owners are especially frustrated since our property taxes are controlled by a local government in which we have no voice,” said Houston, Texas, resident Belinda Breen, who owns a Kaua‘i timeshare. “It is unpleasant to learn that taxes on our timeshare properties on Kaua‘i will increase in order to provide a tax cut for residents, who are already paying only 10 percent of the taxes we pay at home.”

When looking at the overall impact of the proposal, the percent of total revenue the county receives from the residential category would fall from 16 percent to 11 percent while the resort category would increase from 19 percent to 23 percent, county documents show.

Potential relief in sight

The impact to the resort category could be offset if the county registers nearly 1,000 transient vacation rentals that have been identified through online research, Knutzen said.

The committee broke the $3.7 million increase to the resort category into three parts.

The 1,629 hotel and condo units the county has identified would see a total increase in $1.63 million, representing a $1,001 increase per unit annually or $19.63 per unit weekly.

The 1,841 timeshares would see a $2.1 million increase, representing a $1,142 increase per unit annually or $22.40 per unit weekly.

Transient vacation rentals — a sub-category for which only 125 units have been identified — would see a $13,321 total increase, representing a $107 increase per unit annually or $2.08 per week.

Based on the results of an Internet search that turned up 1,050 vacation rentals advertised on Kaua‘i, the Real Property Tax Committee estimates if the county could capture these additional units that the potential revenue increase would be $3.03 million.

If the council would choose to put this potential additional tax revenue back into the resort category, Knutzen said, it would significantly reduce the burden on the hotels, condos and timeshares.

Mayor Bill “Kaipo” Asing, who has been vaguely critical of some aspects of the bill when speaking at public forums, did not respond to requests seeking comment.

“This is a very delicate and sensitive item for our island’s well-being,” Furfaro said, noting the taxes will be going to the island’s infrastructure, roads, emergency services and parks.

For more information, visit www.kauai.gov

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