by Lowell L. Kalapa, Tax Foundation of Hawaii

The recently submitted report on the City & County of Honolulu’s real property tax system is garnering a lot of attention because of its rather controversial recommendation to basically get rid of the numerous exemptions that have been added over the years.

Perhaps the most controversial is the recommendation to scrap the homeowners’ exemption in favor of providing tax relief to homeowners who can demonstrate that they do not have the financial resources to pay their share of the real property tax burden. The report points out that many of these exemptions have no basis in the need for tax relief but are merely granted because a taxpayer or organization somehow has “special” significance, such as being a nonprofit organization or a homeowner who happens to be disabled or elderly. None of the characteristics can be associated with a lack of resources to pay the real property tax.

The result - as the report points out - is that those so favored with an exemption benefit from county- provided services without having to pay for them. Those services are critical to the health and safety of the community from police and fire protection to sanitation. Since those favored with an exemption benefit from county-provided services without having to pay for them, that means that someone else is paying for those services.

Thus, the exemptions are a mechanism of shifting the burden of paying for county services from exempt entities to those who are required to pay the property tax because they are not so favored. While this strategy is not new, it is certainly not apparent to most taxpayers, especially to those who are afforded an exemption and someone else is paying for the services they enjoy.

For years all counties shifted the tax burden away from their voting constituents, the homeowner and residential property owners, to nonresidential property owners or businesses - commercial, industrial, agricultural and resort or hotel properties - arguing that these property owners can pass the higher cost of the property tax on to their customers. Perhaps county officials had visions that the pass on of the added burden would be to those who don’t vote for them, mainly tourists as in the case of hotel and resort properties. However, they seem to forget that these categories of properties include the stores and supermarkets where residents buy their groceries, clothes, and other needs. Thus, the added costs of the higher real property tax rates are “hidden” in the cost of everything that is consumed in the state as well as in all of the goods and services that are sold to those outside the state.

Similarly, by providing broad exemptions to certain types of real property, the real property rates imposed on others who don’t enjoy an exemption have to be higher than they could have been had those exemptions not been granted.

Further, because those favored with an exemption don’t see or experience the pain of paying the real property tax, they tend to be the very ones who want the county to provide more and more services. After all, it is not costing those favored individuals and institutions anything.

Given that it is an election year, council members may not want to deal with the recommendations of the commission, as repealing or reducing exemptions that have been enjoyed for years will, no doubt, upset those constituents who enjoy those exemptions. On the other hand, those real property taxpayers who must continue to pay the heavy burden of the tax should be just as upset when they understand that they are subsidizing those who are capable of paying their fair share of the cost of county services.

So while real property taxpayers may protest the possibility that real property tax rates may be raised to cover county spending shortfalls, will they be content with the reality that they are paying for the services that are being enjoyed by those who don’t have to pay for those services?

So while council members will have to endure the parade of those who currently enjoy blanket exemptions from the real property tax, those elected officials should also remember that their real property tax paying constituents are paying more than they have to as they are paying for not only the county services they enjoy but for those same services used by those who do not pay for those services.

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