There’s a class for this

LIHUE — The Kauai County Council will now have another proposal to consider as they move forward with efforts to bring immediate and future relief for property taxpayers.

A proposal, outlined in Bill 2560, that is being given to the seven-member board by Mayor Bernard Carvalho Jr. and his administration on Wednesday calls for the creation of a tenth tax class called “commercialized home use,” which would apply to those properties with multiple uses that are used as a taxpayer’s main residence and have a proper home use exemption.

Some of these property owners, County Finance Director Steve Hunt said, were hit with increases on their real property tax bills this year after the Kauai County Council increased real property tax rates during this year’s budget session; repealed the permanent home use tax credit, which capped future property tax increases on owner-occupied homes, with the proper exemptions, at 2 percent; and approved changes in county tax laws that allows all properties to be taxed at its highest and best use.

“In reviewing the increased taxes that occurred from the removal of the PHU (permanent home use) cap combined with new, higher tax rates, it appears that those owner-occupied properties that were outside the homestead class got the greatest increases,” Hunt wrote in an email. “Bill 2560 would bring the market taxes down for these taxpayers without incurring additional administrative or programming costs.”

Councilman Gary Hooser, who has already put forth his own proposal to address properties with multiple uses, said he supports the proposal from Carvalho’s administration.

“The county tax policy needs to be based on a system that is fair and equitable and does not penalize people who have a small office or rental on their property,” Hooser wrote in an email. “We should be helping more people to earn more money through their home business rather than penalizing them for doing so.”

His proposal, outlined in Bill 2559, would “allow for properties with multiple uses to be classified under each applicable tax classification based on the percentage of property dedicated to each use.” The owners of those properties, Hooser said, would be required to sign an affidavit declaring the percentage of each use.

A property, for example, that uses one-third of its square footage for commercial use and two-thirds for a primary residence that qualifies for a home use exemption would be taxed under the homestead and commercial tax rates based on use.

Implementing it, however, would require at least three additional staff in the county’s Real Property Tax Assessment division to calculate the taxes for those properties, input all of the information into the department’s system and verify property data annually, Hunt said.

“Each year would require a review of property uses as well as the percentages for each use,” Hunt explained. “Bill 2559 would require separation of values based on square footage of each use, which in turn, would mandate an artificial condominiumization of each multi-use property. Needless to say, this could lead to confusion on multiple assessments for a singular property.”

Hooser, however, disagreed and said his proposal “will require minimum staffing.” He suggested that his proposal and the one proposed by Carvalho’s administration could be blended together.

“I think we need to have a (tax) classification like that — something that covers home businesses that’s neither commercial nor a vacation rental— but I still believe that the properties should be taxed proportionately, so if there’s a 10 percent use, then that 10 percent should get the new rate,” Hooser said. “At the end of the day, we need to lower our tax burden on our residents and encourage people to start small businesses and not discourage them.”

If the Kauai County Council decides to create the new commercialized home use tax class, Hunt said county officials intend “to propose a rate lower than the current residential rate and higher than the homestead rate, although it would ultimately be up to the County Council to adopt the tax rate for this proposed new class.”

“We are not aware of any other Hawaii county that has a similar tax class, but no other Hawaii county had a tax cap for their residents, either,” Hunt said.

The County Council will take up Bill 2560 on first reading during their meeting on Wednesday, beginning at 8:30 a.m. in the Historic County Building Council Chambers.

Written comments on the proposal can be sent to: counciltestimony@kauai.gov.

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