Property tax relief bill falls short of intent

The purpose and findings section of Bill 2425 pending in the County Council states that resident homeowners are entitled to relief from current real property taxes and that one method to provide such relief is to increase their exemptions, which the bill proposes.

The purpose is worthy, but this statement is deficient and misleading because the bill fails to disclose responsibly the intended scope of and justification for relief, the intended means of achieving such relief, the other methods to provide relief or the intent to shift the tax burden to middle- and upper-value property owners. Nowhere does the bill address the vital factor that tax rates have as to tax amount and durability of the relief. Without the uncertain and future rate setting by the council, the promised relief will not occur.

A little history would be helpful. In the first years of this century, property values were rising sharply and property taxes rose correspondingly. Some taxpayers at this time were seeing 100 percent or more increases in taxes per year. In 2004, under pressure from a citizen-proposed charter amendment that would limit tax amount increases for resident homeowners to 2 percent per year, the council adopted an identical 2 percent annual limit. The cap affects the basic reality that a property owner’s tax is normally the net assessed property value multiplied by the tax rate.

For several years, the limit served its intended purpose and saved homeowners substantial sums as real estate values continued to climb and tax rates were maintained. (Rates for homestead class taxpayers have remained constant since 2004 — $3.44 per $1,000 for buildings and $4 per $1,000 for land.) However, beginning in 2008 and 2009, real estate prices began to decline and are now off sharply from their highs. This change resulted in the phenomenon that taxes for resident homeowners still rose  because of the cap, while taxes for other properties were declining with constant rates. In 2012, owners of other properties had enjoyed reduction of over $20 million in the aggregate due to the decline in values while resident homeowners had paid over $3 million more in taxes because of the cap.

Resident owners constitute about one-third of all county property tax payers but because of lower rates than other classes and exemptions, had paid historically between 7 and 10 percent of county property taxes. By last year, the percentage share of total taxes paid by homeowners had risen to over 12 percent. Clearly, a justifiable case can be made for relief.

Although the council is sensitive about limitations on its rate-setting powers, in my view the only responsible way to stabilize the proportion of property taxes payable by resident owners is to adopt a provision stating that the tax rate for such taxpayers shall not be set at an amount that would cause all such taxpayers to be liable for more than a fixed percentage, say 9 percent, of total  property taxes payable by all taxpayers. Failing to amend the bill to include such a provision would be a result inconsistent with the stated purpose and demonstrative of the council’s disregard for citizens’ rights to protect its prerogatives.

Currently, exemptions for owners under 60 are $48,000 per year; for those 60 to 70, $96,000 per year; and for those over 70, $120,000 per year. Bill 2425 would increase the exemption for those 60 and younger 375 percent to $225,000; for ages 60 to 70, 160 percent to $250,000; and for those over 70, 110 percent to $275,000.

The purpose section of the bill is also deceptive because to reduce significantly the amount of tax paid by taxpayers having homestead exemptions, a rate reduction is necessary. Assuming constant revenue from the class, changing exemptions simply redistributes the tax burden among members of the class. The realities in play are that if the county wants to avoid getting a lowered amount in total from the resident homeowners, the increased exemptions favor the owners of lower-value homes and would likely cause tax increases for middle- and upper-value homeowners. In common with ad valorem taxes elsewhere, Kaua‘i property taxes for most taxpayers are proportionate to value. To illustrate, in the usual case a taxpayer with a property valued at $250,000 would pay one quarter the tax that a taxpayer with a property valued at $1 million. But exemptions change this. If a taxpayers has a $48,000 exemption, the $1 million value property owner would pay 4.7 times the tax paid that a $250,000 owner would. And for a $225,000 exemption, the $1 million property owner would pay 31 times the taxes paid by the $250,000 owner.

The existing exemptions for homestead class taxpayers have been in place for many years. Whether it would be beneficial to restructure them to eliminate property taxes for some owners of lower-value homes and add the share of the cost of such elimination to middle- and upper-value owners is a policy question. In my view, increased exemptions in the amounts proposed in Bill 2425 is much too excessive.

As noted, the purpose of Bill 2425 — to provide relief to resident homeowners — is a worthy one, but the bill disturbingly omits basic elements by failing to express that the way to provide such relief is not only by increased exemptions but also by reduced rates and that over time, the burden of the tax will be shared more by middle- and upper-value property owners. Taxpayers should receive an honest presentation of all the factors that affect the tax liabilities they will have. It is to be hoped that our council will recognize these truths and make appropriate amendments in Bill 2425 so that its justified purpose may be properly carried out.

• Walter Lewis is a resident of Princeville and pens a biweekly column for The Garden Island.

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