Editor’s note: This is the first of a two-part commentary. The second will be published Saturday.
The well-attended Aug. 28, County Council workshop on property taxes was a strange amalgam of the county tax authorities saying that they are administering a rational tax program and testimony from a stream of resident taxpayers saying that the tax laws are abusive and unfair.
Much of the testimony given presented gross inequities arising from the changes made by the Council last year.
The Kauai County property tax laws are a piece of work. Over the years, the council has tinkered with the tax regime they inherited from the state to be the county’s principal revenue source until it has become a complex, disorganized legislation replete with anomalies.
Let us review some of the more questionable provisions it contains.
All property under the law is to be assessed annually at 100 percent of its fair value. Taxpayers are placed in classes which are determined by the nature and use of their property.
For example, there is a commercial class essentially for stores and a Homestead class for residents who own and occupy their property as a residence.
In most cases, the assessed value of a property is multiplied by the rate determined by the County Council for its class to fix the applicable tax. In general, this framework is a classic ad valorem tax.
But the council has failed to act in some instances when it should have and it has enacted terms in some cases when it should not have.
Until recently, the council largely ignored its power to change tax rates and, in effect, allowed changes in the actual tax to be determined by the annual assessed valuation changes. This inaction inevitably led to distortions.
The bulk of the council’s fiddling with the law has occurred regarding the Homestead class. In numbers, this class comprises the majority of Kauai’s property taxpayers.
But because the class enjoys the lowest rates, is given exemptions and other benefits, taxation of the class only generates about 10 percent of the total property tax revenues.
One of the manipulations made by the council has been to append, in effect, properties owned by taxpayers and leased to residents on long term leases at rates determined by the council to be “affordable” to the Homestead class.
The capability of our tax officials to ascertain what rentals are “affordable” may well be questioned, but their findings affect the Kauai property rental market.
The likelihood of ascertaining “affordable” rentals can be related to the likelihood of Obamacare being an “Affordable Care Act.” Compliance requires adherence to a detailed schedule which makes no allowance for quality or location.
In 2004, a Charter amendment placing a 2 percent annual limit on increases in tax for a Homestead property was adopted by about two-thirds of the county voters. The county contested the legality of this amendment, but in 2005 it adopted a virtually identical 2 percent limit as an ordinance.
This action made irrelevant the property’s annual assessment and the applicable rate. In 2013, the council repealed the limit and enlarged the exemptions saying the cap had “outlived its usefulness.” The result of these changes can be illustrated by the following example.
A taxpayer owning a $1,000,000 store will pay four times the amount of tax paid by the owner of a $250,000 store. But the owner of a Homestead property having a $1,000,000 value will pay at least 15 times the tax paid by the owner of a $250,000 value Homestead property.
The council tried to mitigate this distortion with an incredibly poorly conceived law intended to help some of the taxpayers receiving large tax increases because of the cap repeal by measuring the tax to be paid to the taxpayer’s “gross income.”
Why the council chose to set a property tax based on taxpayer’s income and why it chose to think “gross” income was the proper measurement are unsolved mysteries.
The aberrations in our real property tax laws are not limited to the taxpayers in the Homestead class.
For many years, the law has taxed some business use property at different rates than other taxpayers. The taxation of timeshare properties has never been rationally resolved. I could go on.
I intend to review in my next article to be published tomorrow the remedial legislation that has been proposed to rectify the disastrous consequences of last year’s precipitate action and to offer my suggestions as to the course the council should take to ameliorate the tax structure for those taxpayers in the Homestead class.
Walter Lewis is a retired attorney who lives on Kauai and writes a regular column for The Garden Island.