Counties must prioritize property tax relief

by Keli'i Akina, Ph.D.President / CEO, Grassroot Institute of Hawaii

No one likes the idea of our county governments profiting from Hawaii’s high cost of living. 

But that’s what is going to happen soon unless we engineer some property tax relief.

Thanks to higher property assessments statewide, Hawaii homeowners and others are facing massive increases in their property taxes. That’s because the taxes are tied to property valuations, so if property values go up, so do property taxes.  

We could just adjust the property tax rates to offset the increased valuations, but for some reason, politicians seem to think that’s just too simple. 

More reasonably, they say that rate cuts might put them in financial jeopardy if property valuations go down in future years. But if that unlikely event should ever occur, they could just move the rates back up again.

One reason it has been difficult to make any progress on this issue is that many people tend to get distracted by why Hawaii housing prices are so high to begin with.

Two week ago, I was on PBS Hawai‘i’s “Insights” program, the theme of which was supposed be about whether there might be any relief for “rising property taxes on Oahu.” 

Unfortunately, it seems there was more talk about whom we should blame for Hawaii’s high property valuations — whether out-of-state investors, empty homes or other convenient scapegoats — than any focused discussion about how to provide meaningful taxpayer relief. 

Just to be clear, the main reason for Hawaii’s high home prices is that we do not have enough homes. Further, the scholarly evidence is virtually unanimous that the state’s acute housing shortage is the result of too many regulations on homebuilding. 

Then there were the often-heard claims that our property tax rates in Hawaii are the lowest in the nation, so why all the complaining? 

Well, yes, as I’ve explained before, Hawaii does have low property tax rates, but that’s only half of the story. The other half is that because of high property values, the amount Hawaii residents pay in property taxes is closer to the middle of the pack on a state-by-state basis.

But to the point about the low rates: Why are they so low in Hawaii?

Mainly, it’s because Hawaii is the only state in the nation that funds its public schools through the state general fund. Everywhere else, they are funded through local property taxes. 

In other words, Hawaii’s four counties do not have to spend their property tax revenues on schooling for Dick and Jane. They have to worry about only the usual county functions, such as police, firefighters, infrastructure and a few other things. The fewer things they do, the lower the property tax rates can be. 

Finally, there is the belief that property tax increases can be structured to affect only the wealthy. However, that’s not how an economy works. When you make something more expensive, whether it’s a house or a bottle of soda, everyone experiences the impact. 

Consider Oahu’s “Residential A” property tax classification. Enacted in 2013, this category applies to non-owner-occupied homes valued at $1 million or more. 

A popular sentiment back then was that anyone who owns such a home should have to pay a higher tax. But if that second home is being rented out, guess who is going to end up paying the higher tax bill? 

And now, too, of course, thanks to inflation and the housing shortage that keeps pushing up home prices, even the average Oahu home is worth about $1 million. 

So the Residential A tier doesn’t apply anymore to just wealthy investors with second homes. It also covers longtime Hawaii residents who might be renting out their late parents’ homes to local families on a long-term basis. 

And since the property assessments for Residential A just went up by 39.9%, the Hawaii residents — just like the more wealthy investors — probably will have little choice but to pass along that new cost to their tenants who already are struggling to make ends meet. 

And we wonder why so many Hawaii residents have been leaving for the mainland.

Amazingly, there are some good ideas floating around at the various county councils right now. My colleagues at the Grassroot Institute of Hawaii have testified before all of them in favor of property tax rebates, exemptions, credits, budgetary restraint and, yes, even lower tax rates. Many of those proposals look like they are going to go through.

Despite talk that the counties can’t afford to cut taxes right now, the truth is that they can. The key is to hold tight on the spending — just as most Hawaii residents have had to pull their belts tighter as well. 

Our counties certainly should not be looking to spend more because of anticipated revenue triggered by the higher property assessments. A housing crisis and soaring property values should not be an excuse for a spending spree. 

E hana kākou! (Let’s work together!)