Market down, homeowner taxes up

LIHU‘E — Some six years ago the Kaua‘i County Council capped property taxes for “homesteaders,” trying to shield residents from increasing bills that would inevitably follow the hot housing market.

But the consumer-protection measure turned into a revenue-protection measure for the county when the housing bubble burst and property values plummeted, according to some officials.

“The 2 percent cap, when the market was escalating, protected homeowners,” Councilman Tim Bynum said Friday. “But with the market de-escalating, it’s not protecting homeowners.”

The third-term councilman is working to reform property taxes to improve equitability. Mayor Bernard Carvalho Jr.’s administration on Aug. 4 sent the council the final two ordinances regarding the changes to Chapter 5A of the county code. The proposed bills — more than 60 pages of comprehensive legislation — are not on the agenda for Wednesday’s council meeting but that’s not to say preparation work isn’t being done.

The bills would perform some much-needed “housekeeping,” said Bynum, but none of them address the 2 percent cap.

The cap gave homesteaders some protection and financial predictability, but it may have outlived its purpose, Bynum said. As the market in 2008 started to deflate, homesteaders — the only tax class capped — kept paying a 2 percent increase annually while hotels and resorts were paying less each year.

“People who live and work here should be paying less,” Bynum said at an Aug. 8 Cost Control Commission meeting.

On May 18, Bynum proposed increasing Kaua‘i’s property tax rates for hotels and resorts by 60 cents, which would keep those tax rates the lowest in the state while bringing county coffers an extra $1.19 million.

“Other counties adjusted their rates, Kaua‘i didn’t,” he said.

Bynum’s amendment failed on 2-4 vote, with only he and Councilwoman JoAnn Yukimura supporting it. Council members KipuKai Kuali‘i, Nadine Nakamura, Dickie Chang and Chair Jay Furfaro opposed it; Councilman Mel Rapozo was on O‘ahu on official business.

History

In May 2005, taxes for homesteaders — single families who qualify for a tax exemption — were capped at a 2 percent increase each year, regardless of market values. The cap ordinance was a consequence of a charter amendment voters approved in November 2004.

The council could have chosen a different path to keep homesteaders’ bills affordable, Bynum said.

“The typical way that we deal with if the assessment goes up, is we lower the rate so the bill stays about the same,” he said Friday.

Other classes of taxpayers — conservation, agriculture, single-family residential (non-qualified for a tax exemption), apartment, hotels and resorts, commercial and industrial — were not included in the cap ordinance. All of them — with the exception of the industrial-zoned properties — saw their tax bills balloon during the real estate bubble, but now are paying increasingly less since 2008, according to Bynum’s calculations.

The county’s tax revenue collected from industrial-zoned properties increased 5.87 percent since 2008, according to Bynum. But homesteaders contributed a lot more, he said; the county’s tax collection from homesteaders went up 20.65 percent during the same period.

By comparison, using the same time frame, tax rates decreased 5.7 percent for commercial properties, 13.09 percent for hotels and resorts, 16.54 percent for apartment owners, 16.7 percent for single-family residential properties, 22.32 percent for agricultural lands and 24.81 percent for conservation districts.

Bynum, in an attempt to address the discrepancy, introduced legislation a few months ago to remove the cap. That bill is still pending.

Unless property values drop to levels bellow 2004 values, homesteaders will be locked into a 2 percent increase each year, he said.

But the gradual tax increase in a spiraling property-value decrease is not the only problem associated with the cap ordinance, he said. If homesteaders failed to apply promptly with the county for the cap, their taxes kept increasing throughout the market bubble.

Homesteaders who were asleep at the wheel and applied at the market’s peak now are locked into higher tax bills, which would also increase 2 percent a year if it wasn’t for one reason: Their property values have gone down since they locked their tax bill. Those sleepy homesteaders may have seen their taxes go down since 2008, but they are still paying a lot more than their neighbors who took advantage of the bill in a timely manner — in some cases twice as much, even though they may have a similarly assessed property.

Furthermore, when a property is sold, the real property tax rate is reset to its full value, minus a $48,000 exemption that homesteaders currently have.

“I don’t think the general public understands what’s happening,” Bynum told the Cost Control Commission. “You can’t count on RPT listed on the MLS; once you buy it, it will be reset.”

As a result, new homeowners pay taxes based on the actual value of the property, which could easily double from the former owner’s rates, according to Bynum. Neighbors with similar-valued homes are paying different rates because of this, he said.

“What should this citizen pay $1,260 a year in taxes and then a new person buys the house and pays $800 more?” he said.

Tax exemption:

Maui vs. Kaua‘i

Bynum is also trying to add another $20,000 to the tax exemption. If the council would adopt this proposal, a homesteader, for example, who owns a $400,000 home would pay taxes on $332,000.

While it seems like a relief, Kaua‘i’s exemption pales in comparison to Maui, where homesteaders benefit from a $300,000 exemption. After that amount, Maui homesteaders pay $2.50 per $1,000 of assessed property. On Kaua‘i, the rate is $3.85 per $1,000 of assessed property, after the $48,000 exemption.

When property taxes go down, the county’s revenue usually follows suit. The administration’s main source of revenue comes from property tax collection. Accordingly, the county has seen decreasing revenues in the last few yeas — until now. Bynum said the county collected more this fiscal year than the roughly $2.7 million increase over last year that was projected.

Homesteaders contributed to 11.29 percent of the overall property tax revenues collected, an increase of almost 4 percent since 2007, when the revenue from homesteaders was 7.38 percent. Revenues from homesteaders has increased every year since 2007: 8.18 percent in 2008, 9.14 percent in 2009, and 9.98 percent in 2010.

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