Helton outlines ways to counter property tax increases in Hawaii

from Grassroot Institute, May 3, 2023

Housing prices in Hawaii have skyrocketed in recent years. And because county property taxes are linked to property assessments, so have property tax bills.

But county lawmakers do have it in their power to prevent or at least mitigate property tax increases, through numerous means such as those outlined in a new report issued by the Grassroot Institute of Hawaii, “How Hawaii’s county lawmakers can provide tax relief to offset higher property assessments.”

Written by Grassroot Institute policy researcher Jonathan Helton, the report was the topic of discussion on the April 25 episode of “Hawaii Together” on ThinkTech Hawaii, hosted by Keli‘i Akina, Grassroot Institute president and CEO.

Helton said, “The single simplest thing county lawmakers can do is lower the tax rate on the various property classes.” 

Other options, he said, include increasing or expanding homeowner exemptions, “circuit breakers” and programs to help small businesses.

Helton also discussed what county lawmakers across the state have been doing to provide tax relief, the idea of adding new property tax classifications or tiers, the pros and cons of assessment caps, and California’s Proposition 13, whereby the taxable value of a specific house is based on its purchase price, not on recent comparable sales.

TRANSCRIPT

4-25-23 Keli‘i Akina hosts Jonathan Helton on “Hawaii Together”

Keli’i Akina: Aloha and welcome to “Hawaii Together” on ThinkTech Hawaii. I’m your host, Keli’i Akina, president of the Grassroot Institute. 

You know, it looks like Hawaii’s property taxes are going up this year and many, many people are very concerned — whether they’re homeowners or renters. 

Homeowners on fixed income are threatened with higher tax bills that might actually break their budgets. Renters could face higher rents as [the] taxes of their landlords go up. And businesses might have to increase their prices, reduce spending on salaries, repairs, new equipment and other expenses. That’s going to affect everyone.

Well, the good news is that county lawmakers have been looking at ways to provide tax relief. And the Grassroot Institute of Hawaii last week issued a new property tax toolkit to help them. Well, what are some of the tools that could help? That’s the topic of today’s show.

Joining me to talk about this is Jonathan Helton. He’s a policy researcher at the Grassroot Institute, and he’s the author of our latest report, “How Hawaii’s county lawmakers can provide tax relief to offset higher property assessments.” Well, that’s a big title, but we’ve got a big man for the job. Jonathan, thank you for joining me today.

Jonathan Helton: Thank you for having me here. I appreciate it.

Akina: Well, you play a very important role at the Grassroot Institute, although people may not see you very often because you’re behind a desk in front of a computer and have your head buried in mounds of research. 

What do you like about working at Grassroot, and what does it enable you to do as a citizen who cares about Hawaii?

Heilton: The No. 1 thing I like is the staff. Under your leadership and everyone else, it’s a very encouraging culture and it causes me to try to think innovatively about a lot of the problems Hawaii faces.

Akina: Well, thank you. My first question to you is about the property tax crisis that seems to have been created recently here in Hawaii. The latest county property tax assessments skyrocketed and many homeowners, businesses and others are worried about their tax bills because they’re linked to those assessments. 

What exactly is the relationship here in Hawaii between property tax assessment and the taxes that we pay?

Helton: I think that’s a great place to get us started off. And quick explainer as to how that would work. 

So you have the assessment on one hand, which is how much the county government estimates that your property is worth, and then you have the tax rate, which the County Councils pass every year. And tax rate multiplied by the assessment, it calculates your tax bill. 

And so you have a lot of things going into assessments. But one thing I think that’s worth mentioning right off the bat, is the reason assessments have increased so much is because Hawaii has a very high demand for housing. But with that high demand, there’s not a lot of supply. And thus we have the housing shortage that everyone knows a lot about, that the Legislature is certainly looking at different measures to try to make that less of a crisis. 

But as housing prices go up, so do property assessments, and usually so do property tax bills. And that’s why I wrote that new report.

Akina: Well, in your report, you argue that there are things that county lawmakers can do in order to prevent or mitigate any possible property tax increases and the damage that that would cause people. 

But before we go into that, can you explain how our property tax situation in Hawaii is unique from anywhere else in the United States, or at least most other places? 

One of the most commonly held understandings across the United States is that property taxes are connected directly to paying for services such as education, and, most dominantly, education. 

But that and other factors are different in Hawaii. Can you explain the uniqueness of Hawaii’s property tax situation?

Helton: Yes, that’s correct, and I’ll start there. In Hawaii, the education system is solely funded by the state government. And so in a lot of counties across the United States on the mainland, your property taxes would primarily be going to fund your local education. But that’s not the case here. 

And then secondly, the other big thing is that in the state Constitution, Hawaii’s property tax is solely reserved to the counties. So the state can’t create a property tax, they can’t tax your property. And I know that’s actually something that was about measure a couple of years ago for the state to create some sort of property tax.

That failed, and so that is still the exclusive domain of the counties. 

So one thing that we’ve heard — as we’ve discussed with lawmakers Hawaii’s property tax system — is that, well, Hawaii’s property taxes are the lowest in the nation. And when you look at rates, that’s generally true. Hawaii has some of the lowest property tax rates in the country. 

But when you look at obviously the high home prices, which then reflect themselves in higher assessments, the average homeowner can expect to pay, you know, close to the national average as far as the property tax bill.

I did some quick research before this interview to just kind of get a comparison, at Nashville, Tennessee, which is where I’m at right now. You know, a homeowner can expect to pay maybe $1,500, close to $2,000 a year in property tax.

In Hawaii, if you own a $1 million home, and you know, the average immediate home price you could expect to pay, you know, somewhere in the realm of $3,000 in your property tax bill. So in just that one comparison, Hawaii’s property taxes don’t seem that low.

Akina: Well, that’s interesting. To the point you were making about the difference between property tax rates and actual property tax, what are Nashville’s property tax rates with respect to Hawaii? Does Hawaii have a higher or lower property tax rate than Nashville?

Helton: Hawaii has a lower property tax rate overall, but part of the reason is Nashville will only … Well, part of the big reason, right? Tennessee’s property tax system, the state government has a lot of control, the very opposite of Hawaii. So in Tennessee, if you have a property, it’s only taxed at a certain portion of its assessed value, which drives the rate a little bit higher. 

So in Hawaii where your home is usually taxed at pretty much its full assessed value, that rate is lower.

Akina: So your example is very telling. Although Hawaii has lower tax rates, the reality is the average million-dollar home in Hawaii costs the owner $3,500 in property tax, whereas the Tennessee owner in Nashville pays only $2,000.

Helton: Yeah. So something like that. Yes. Yes.

Akina: Now, well, in that case, since we’re talking about valuation of property, how do counties value the property? How do they make that assessment? It’s a little bit confusing because anybody involved in purchasing or selling real estate, it’s a different kind of assessment from a professional assessor at the time of purchase. So how do counties determine the assessment?

Helton: Each county has a different timeline for when they look at the value of your home. Here on Oahu, that timeline is in the fall. I believe it’s on September 30th or October 1st, around there. 

The county assessors will look at your home and then they will look at other homes that they deem to be similar, whether that’s in terms of square footage or number of different rooms, or bill year or renovations, any of those factors. They’ll look at those and then they’ll try to find similar homes that have recently sold in the area. 

And so they’ll take two or three, four different homes and they’ll look at those prices, and then based on those prices, they will assign a price to your home. 

And so with home prices being so high, all of the sales being at such a high level, obviously, that’s going to reflect even onto people who didn’t sell their homes, and their assessments are going to go up.

Akina: Well, Jonathan, here in Hawaii, a great number of people simply are not able to afford homes, so they’re renters. Why should they be concerned about this issue? They’ve got enough to be concerned about themselves, but some of them may be thinking this is an issue that really is pertinent only to homeowners. What are your thoughts on that?

Helton: My thoughts would be, if your landlord is getting a massive increase in his property tax bill, that’s probably going to trickle down into your rent. So, you know, obviously, lease agreements can last a year, sometimes they last longer than a year. 

So it might take a while for higher property tax bills to work themselves into higher rents, but if a landlord is faced with higher tax bills, he’s going to have to make up that money somehow.

And for a lot of businesses, for a lot of renters, people who don’t own their property, if the landlords are faced with higher bills, that’s going to translate to some kind of economic harm, and it could very well translate into higher rents. 

And with so many people struggling to even afford rent, let alone buy a home, that’s really the last thing a lot of lawmakers, well, I think, just everyone wants.

Akina: Well, so to get back to your contribution in the recent report as to how lawmakers can help relieve some of the property tax impact, what are some suggestions you have been making?

Helton: In the report, what I wanted to do is, I wanted to look across Hawaii’s four counties and see kind of what the best practices were. 

So as far as the different relief mechanisms — which is what the report focused on —  the single simplest thing county lawmakers can do is lower the tax rate on the various property classes. And we’ll talk about it a little bit later. I’m sure that’s what some county lawmakers are proposing to do, but other than adjusting the tax rate, there’s a couple of more targeted things. 

For example, homeowner’s exemptions. Each county has a homeowner exemption. How that works is that there’s a set dollar figure — on Oahu; right now, it’s $100,000. So if you own and occupy your home and you file for this exemption, the county government will take $100,000 off the assessed value of your home. 

So if your home was assessed at $1.1 million, it would end up taxed at only $1 million. So that’s a benefit that exists for homeowners, but beyond that, there’s things that are even more targeted.

A couple of the counties offer things that are called circuit breakers, which is just a fancy term for a property tax credit that is available usually to people who have lower incomes. So talking about those individuals who might be on fixed incomes and are looking at potentially higher tax bills, circuit breakers can help them by limiting how much the higher assessment is actually going to reflect their tax bill. 

And we can go on and on, but there’s several other relief mechanisms available as well.

Akina: What about California’s Proposition 13? I know some people have suggested that counties should adopt something like that, where the taxable value of a house is based on its purchase price. What are your thoughts on that, Jonathan?

Helton: The way Proposition 13 worked is it limited the growth of assessed value year-over-year. SoI believe it was passed in 1978 and it limited the assessed value to … it could grow by no more than 2% each year, and it also limited the tax rate to a maximum of 1%. 

Now that’s the basics. There’s obviously a little bit more complexity involved. But an assessment cap, like Proposition 13, there’s actually a couple of counties that already have that.

So, right now, Kauai has an assessment cap for owner-occupied properties and for certain rentals. And Hawaii Island also has the same. As far as assessment caps go, they can provide tax relief. They do limit the assessed value of your home. 

However, if you have an assessment cap and you do not have any sort of limitation on the tax rate, since tax bills are a function of assessments and tax rates, what can happen is, counties can simply raise the tax rate.

So your overall tax bill may not change even if there is an assessment cap in place. And beyond that, one of the major concerns with Proposition 13 has been that it’s hamstrung local governments in a lot of ways. These local governments do depend on property tax revenue. 

So what’s happened to California is a lot of the revenues the local governments get is now coming from the state government. And, you know, we can debate the merits of whether or not it’s good for local governments to be reliant on the state. That is one of the criticisms that it has received.

Akina: Hawaii is consistently ranked as one of the worst states in the nation to do business, and this year many businesses are being hit with higher unemployment taxes. And on top of that, the minimum-wage increase goes into effect, and other cost increases with inflation. 

Is there anything counties can do to give businesses a property tax break?

Helton: Yes. And as I said earlier, the simplest thing to do is to lower your rate on, in this case, commercial or industrial properties. That would be the easiest thing to do. 

Now, some counties have some concern about that. This is something that Kauai actually discussed, and there was some concern that large businesses that weren’t based in Hawaii would be receiving a lot of the tax benefit from a lower rate. 

So Kauai chose not to go forward with changing their commercial tax rate at this time. But beyond changing just the rates, something I talked about in my report is the District of Columbia’s tax-credit program.

The District of Columbia has a program in place where small retail businesses that have a certain level of sales — it can’t be too high or they don’t qualify — are able to apply for a tax credit. And this tax credit can be used to offset their property tax bills, or if they don’t own the building that they’re in, the tax credit can be used to offset a certain percentage of their rent. 

So there’s very targeted programs out there across the United States that can be used to benefit small businesses specifically, if that’s what county lawmakers desire to do.

Akina: Jonathan, what are some of the ways county lawmakers have proposed to give tax relief, and let’s go county by county starting here on Oahu. [Honolulu] Mayor [Rick] Blangiardi has proposed a one-time tax credit for homeowners. Let’s start with that. What’s your reaction to that?

Helton: As a short-term relief mechanism, the one-time tax credit is a good idea. It would be able to go into effect for this upcoming tax year. And so it would immediately reduce the tax bill for people who own and live in their homes. 

So that’s a good starting point. I believe they estimate it’s about $45 million in tax relief. 

But the real critical thing is that’s only a one-time tax-relief mechanism. And looking forward, it’s very likely that assessments will, you know, either plateau at this very high level or they could possibly even grow higher. 

And so looking toward these upcoming tax years, the County Council is already looking at a couple of different things.

They’re looking at a bill that would increase the homeowner exemption. So right now it’s $100,000. They’re looking at a bill that would increase that to $120,000. 

And they’ve also looked at expanding the eligibility for that lower-income tax credit. I know if someone is retired, they’ve received a cost-of-living adjustment. Now, it would really be a shame if that cost-of-living adjustment pushed them out of being able to be eligible for this tax credit. So they’re looking at expanding eligibility for that. 

And beyond that, they’re looking at creating a number of different new tax classes that they might be able to tailor relief towards specific people like renters.

Akina: While we’re talking about Oahu, one big issue has been the Residential A property class. Jonathan, can you explain what the definition of Residential A is, and what are some of the challenges that have been created for owners with Residential A property?

Hilton: Yes. The Residential A property classification has been the real sticking point when it comes to a lot of the debate about how we should help renters. 

So the County Council created this classification back in 2014, and then they created a tier back in 2018, and that tier was set at $1 million. So the way the tier worked is, for the portion of the property that is valued under $1 million, there’s a certain tax rate. And for the portion of the property that’s valued above $1 million is a different tax rate.

So, I think, initially, the idea for Residential A was maybe to tax some vacation rentals and some second homes at a higher tax rate than maybe your owner-occupied homes fell into.

And at the time when they created the tier that said for properties to be Residential A, they have to, you know, be valued at $1 million or more. They did that back in 2018.

In 2018, the median home price wasn’t a million dollars. But here we are five years later and the median home price is $1 million.

And so for a lot of people who might have a second home that they rent out to a local family, and that second home is now valued over a million dollars, the people don’t have a homeowner exemption, so they get stuck in the Residential A class, and that can mean exponentially higher tax bills. 

And so one of the things the City Council’s been having to grapple with is, how do you provide relief to renters? So we’ve testified before the City Council. I know there’s been discussion of, do we provide a tax credit to people who have long-term rentals? That’s something they’re looking at right now. Do we simply lower the rate on Residential A properties for this year in order to give them a benefit? 

Going forward after this year, I know the County Council is looking at a couple of different bills that would increase that Residential A tier, so it’s no longer $1 million. Maybe it’s 1.3 million, 1.5 million. So at least something that’s higher or maybe even substantially higher than the current median home price, because you certainly don’t want to be taxing all of these rental properties at a significantly higher tax rate than you’re taxing the homes that people live in.

Akina: Jonathan, let’s continue with the other neighbor islands. How about Kauai?

Helton: As I said, Kauai did consider some tax cuts specifically in regards to cutting the tax rate in the mayor’s proposed budget, which I believe was submitted back in March. 

The mayor suggested a 10% tax rate cut for the homeowner tax class and for the residential tax class. And then the County Council debated some additional rate cuts and they settled on increasing the value of the homeowner tax cut from 10% to 15%. 

So Kauai’s looking at the simplest thing, which is changing the tax rate.

Akina: How about Maui?

Hilton: Maui’s a very similar situation. Again, in the mayor’s proposed budget, he included a rate cut for certain owner-occupied properties. He did suggest a rate increase for higher-value owner-occupied properties. 

And the other thing that’s cool about Maui is, for this next fiscal year, so this next tax year, homeowners should see a pretty big tax benefit, because Maui’s homeowner exemption is slated to increase from $200,000 — which is already pretty generous — and it’s going to increase to $300,000. 

So if you own a $1 million home on Maui, it’s only going to be taxed as if it were worth $700,000.

Akina: And finally, the Big Island.

Helton: Finishing up the Big Island, there’s not a lot I can say. There haven’t been any tax rates proposed for the upcoming year, so we don’t know what the tax rates are likely to look like. The assessments did go up a little bit over the last year. So it’s very possible that some homeowners, property owners, will be paying a higher tax bill if the rates don’t change. 

I do know that the Council is considering some bills related to the agriculture tax benefits that it offers. And so, you know, they haven’t passed those bills yet, but we will have to wait and see what the future holds for the Big Island.

Akina: Some are proposing adding new classifications or tiers to the property tax system. What do you think about that, Jon?

Helton: Adding new tax classes is somewhat of a murky issue. This happened this year already. It happened in Honolulu where the City Council decided to create a new tax classification for short-term rentals. A lot of the counties already have a tax classification specifically for short-term rentals. 

The benefits of creating a new tax class are that the councils can have a little bit more specificity when creating tax rates. So, for example, Maui did this just a couple of years ago where they created a tax class specifically for long-term rentals. 

And they did this. And in this tax class, they now tax long-term rentals at a relatively low rate. And that’s intentional. They don’t want to punish people who are renting out to local families by having them slapped with a massive tax bill. 

So that’s the benefit of a new tax classification. Some of the disadvantage is it does add complexity. If an owner thinks he should have been classed in one tax class, but he ends up in another, he may have to file an appeal. So there are certainly trade-offs. 

I think, on the whole, creating a new tax class can allow county councils to more easily tinker with the property tax system to achieve whatever outcome they are looking for.

Akina: Well, I appreciate that. Council Chair Mel Rapozo from the County Council of Kauai sent me a note recently complimenting your representation of Grassroot Institute as you presented testimony on our behalf. And apparently, he has now begun to advocate one of the measures that you put before him. Do you want to share a little bit about that in closing?

Helton: Yes. Just to close, when I discussed earlier how the Kauai County Council was considering reducing some of the tax rates, that was a proposal that Chair Rapozo put forth. He suggested changing the reserve policy for the county. 

And ultimately, they discussed that with the mayor, and that was shelved. But, as I said, what they did do is they did increase the tax cut for owner-occupied homes from 10% to 15%. So if you live in your home, you own your home on Kauai, your tax bill might not be much lower than last year. And, again, depending on the assessments, it might not be that much lower at all. 

But one thing I can confidently say is the Grassroot Institute has helped offset what could be even higher tax bills. And in a lot of cases, stopping a tax increase is just as important as fighting for lower taxes.

Akina: Well, Jonathan, thank you so much for being with us today and I just really appreciate the work that you are doing to defend the local residents of Hawaii, especially in the area of property taxes. Much mahalo. Glad you were with us today.

Helton: Yes, thank you very much. I’m glad to share what I’ve learned.

Akina: Well, my guest has been Jonathan Helton, a policy research advisor at the Grassroot Institute. Thank you so much, everyone, for being with us. You’re watching “Hawaii Together” on ThinkTech Hawaii. I’m Keli’i Akina and we’ll see you next time. Until then, aloha.