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Sunday, June 23, 2013
Needed Services Should be Paid by Users of the Service
By Lowell L Kalapa @ 6:00 AM :: 4737 Views :: Tax Credits, Taxes

Needed Services Should be Paid by Users of the Service

by Lowell L. Kalapa, Tax Foundation of Hawaii

The reaction to last week’s commentary could only be described as shrill.

Readers could not believe that one would question the sacrosanct exemptions for nonprofits, like charities and schools, provided under the real property tax. Many of these exemptions were adopted by the legislature when the real property tax was administered by first the Territory of Hawaii and later the State of Hawaii. No doubt, many of these exemptions emulated treatment extended under the net income tax law which recognizes the nonprofit nature of these organizations.

While the income tax exemption for such organizations recognizes that income received by the organization is used to further its exempt activity or cause, such is not the case for the real property tax. Some may argue that an exemption from the real property tax allows a nonprofit organization to avoid the cost of the tax and, therefore, be able to redirect what resources they have toward the organization’s exempt activities. But one has to remember that the net income tax, as well as the state’s general excise tax, is collected so that the state can provide services that are not necessarily of benefit to a charity or a nonprofit organization.

However, real property tax collections pay for some very basic services, like police and fire protection, sanitation and recreation. All of these services are critical to the health and safety of our community. Thus, unlike education and schools, social services and prisons, all citizens utilize the services provided by the real property tax at one time or another including nonprofit organizations. If there is a grease fire in the school cafeteria, the local fire department is called. If someone breaks into the parish hall and steals the offering box, the local police department is called. A child falls out of a tree at a local scout camp and the emergency medical services team is called to transport the injured child to the local clinic or hospital.

The same can be said of those on Hawaiian Homes’ lands or who are residents of Kuleana lands that are exempt from the real property tax. In the case of credit unions, it should be noted that while the federal law which established federally chartered credit unions exempt those financial institutions from the net income and sales taxes on their purchases, the federal law is silent on exempting credit unions from the real property tax. Hawaii is one of the few jurisdictions which grants credit unions an exemption from the real property tax. This is because the various county councils were lobbied to adopt such an exemption.

So, should all of these entities be subject to the real property tax like other land owners? While there may be some substance to the fact that many of these organizations do provide services that would otherwise have to be delivered by state or county governments, they are still beneficiaries of the critical services that county governments provide. So perhaps they should be given a break of some kind in recognition of the services that they provide. On the other hand, as we all know often when something is offered for free, the beneficiaries take those services for granted and demand even more. Thus, placing a price on these services insures accountability as opposed to entitlement.

One alternative already exists. That is the exemption for nonresidential or commercial historic structures. Commercial historic properties that are dedicated for historic preservation are granted an exemption equal to 50% of assessment and, therefore, results in a reduction in what their tax bill would have been. A similar discount might be considered for all nonprofit property which is currently exempt. So, for example, the assessment ratio for all nonprofit institutions could be set at 10% or 20% of the fair market value times the appropriate rate for the category of property. For those nonprofit organizations that have relatively little real property, they will probably see little change from the minimum tax that they now pay while those organizations that utilize large areas of real property will see an increase over and above the minimum tax. So the offices of a small nonprofit will see little increase in their real property tax burden while a school sitting on acres of prime property will see a larger increase; however, they all will pay a property tax bill that is substantially less than what a for-profit business would pay.

As for residential exemptions such as for those who are elderly and disabled, or in the case of Kuleana lands, some counties already have the “circuit breaker” approach to tax relief which recognizes the homeowner’s ability or inability to pay. As we noted last week, age and disability are not valid indicators of an inability to pay.

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