Understanding the real property tax cap

Over the years as a County of Kauai council member, Councilman Tim Bynum has given thoughtful attention to the county’s real property tax program. Recently, he introduced Bill 2495 for amendments to the tax laws.

Principally, this bill proposes to repeal the limitation on tax amounts for taxpayers in the homestead class and to soften this change with increased exemptions for them.

The tax limitation arose out of the substantial rise in island real property values in the early 2000s. Historically, on Kauai and elsewhere, property tax amounts were computed as the product of the assessed value of the property times the applicable tax rate.

During these years, the revenues from the property tax comprised about 60 to 65 percent of county income. Although property values and the related assessments were soaring, the council was stoically and unimaginatively maintaining earlier rates, with the consequence that resident homeowners were being billed in many instances several hundred percent higher than before.

Residents who had become accustomed to relatively low property taxes were becoming alarmed at the skyrocketing taxes incurred. In these circumstances a citizens group, Ohana Kauai, formed and sought a charter amendment that would roll back tax amounts to 1999 levels and impose a 2 percent cap on the annual tax increase that would be allowable.

The county government officials vigorously opposed this program, but when it was supported by a wide margin by the voters and the proposed amendment was adopted, the council concluded that some action was required.

It sought to block the implementation of the Ohana Kauai charter amendment by litigation, but it adopted by ordinance one element of the Ohana program and enacted a 2 percent annual limit on tax amount increases after 2004 or the property purchase date for those taxpayers in the homestead class.

For the first few years after its enactment, the ordinance served its intended purpose shielding resident homeowners from the continuing escalation of taxes from the ongoing rise in real estate prices. After the implosion of property values that began in 2009, however, the 2 percent cap began to have effects that made Bynum uncomfortable.

He noted that the cap served owners who had acquired their property in 2004 or earlier, but in some instances owners of property later acquired were not as well treated.

For example, for two residences of comparable value, the owner of one acquired by 2005 would pay lower taxes than the owner of one acquired in say 2008.

For purists like Bynum, that is a troubling inequity, but many others accept it as a normal incidence of differentials in time of acquisition of the property.

Under Kauai real property law there are eight classifications of property types based on ownership and use. The homestead class, which is composed of properties owned and occupied by residents, has historically enjoyed the lowest rates.

The council has under the Kauai Charter absolute power to set and change rates. An ongoing apprehension of our resident taxpayers is that the council might use its rate-setting power to adversely affect the shelter they have enjoyed.

Removal of the 2 percent cap exposes resident taxpayers to the risk against which they have been protected for nearly 10 years.

Traditionally real property tax burdens have been proportional to the value of the property owned (Assessed value times rate = tax). But pressured legislators have made modifications.

On Kauai, our council has established a system of property classifications that favors residents, has enacted various programs to aid lower income taxpayers, and has adopted exemptions for those in the favored homestead class that tilt toward helping taxpayers having lower value properties.

Bill 2495 includes a provision that doubles the existing exemption for under 60 age taxpayers and makes more modest increases for those older (The increase in exemption proposed for those owners under 60 is $52,000, $24,000 for those between 60 and 70, and $20,000 for those over 70). For those who prefer a more classic structure, a largely comparable result to exemptions could be made by simply lowering rates.

As noted above, the repeal of the 2 percent cap removes a safeguard that homestead class taxpayers have enjoyed for many years. There is no feasible way to provide protection for individual taxpayers, but shelter for the class could be given by adopting a limit that taxpayers in the homestead class would be obligated for as a percentage of the total tax revenue could readily be enacted.

Historically, homestead taxpayers have paid 9 to 10 percent of total property tax revenues and such a limit could be adopted. It is expected that the attitude toward this idea by the council might well be “we have treated the homestead class taxpayers well — trust us to continue.”

The answer to that should be that if the council has no intent to mistreat its residents, then there is no reason why the suggested protection should not be enacted.

As there is no real way to have a dialogue with our council, it is likely that it will act in its usual structured manner. Citizens can only hope that that council deliberations should conclude that deletion of the cap should not be made unless a meaningful protection for residents against undue tax increases is enacted.

• Walter Lewis writes a bi-weekly column for The Garden Island.

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