On-Going Need to Examine Who Pays for County Government

by Lowell L. Kalapa, Tax Foundation of Hawaii

A local reporter attempted to pin the Foundation down on whether or not it supported the handful of measures that had been thrown into the Honolulu City Council hopper over the past few weeks.

While many of those measures would implement recommendations made by a Council-initiated study nearly two years ago that focused on exemptions from the real property tax, at least two measures mimic other strategies implemented by other counties or at the state level. These proposals were not a part of the recommendations of the study made by the Council-appointed study group.

One proposal would establish a new class of residential property to supposedly impose a different and probably higher rate. This new class would have a value of more than $1 million, not be owner occupied, have no more than two single-family dwelling units, and basically be zoned for residential use. This approach to separating the “luxury” residential property that is not occupied by the owner of the property mimics the state’s approach to the conveyance tax which is levied whenever real property changes hands. Under the current conveyance tax statute, residential real property that is sold at a value greater than $10 million that will not qualify for the homeowners’ exemption is taxed at the highest rate of $1.25 per hundred dollars of valuation.

No doubt the conveyance tax structure, like the real property tax proposal currently before the Honolulu City Council, is aimed at investors in luxury properties. Perhaps from a political point of view this might be the “right” thing to do as it targets those who obviously have the money to invest in such “high-end” real property and so, therefore, can afford the additional hit when buying such property or under the real property tax proposal be able to afford the added burden of a higher tax rate or pass that cost on to the person to whom the owner might rent the real property.

The problem is that this approach to raising money off so-called “high-end” properties ignores the economics of the real estate market. These actions help to skew the market and eventually lead to attempts to circumvent the law by finding legal means to side step the additional tax. It ignores the fact that the marketplace dictates the demand for such properties and if someone is willing to pay such a handsome price for a piece of property, it will happen. However, by imposing such discriminatory rates of tax solely because the value may seem “obscene” to some, elected officials believe that they can get away with the scheme. However, as we have seen with the conveyance tax, buyers of those targeted properties find ways of getting around paying the higher tax rates.

Another proposal that was not a part of the recommendations of the real property tax study commission would place any property that provides transient accommodations into the hotel/resort classification. This would put “bed and breakfast” operations in the same category or class in which hotels are placed. While “bed and breakfast” operations have been an irritant to their neighbors and council members for years, categorizing these “mom and pop” operations as competitors to a facility with far more amenities seems a little unfair especially when one weighs the argument that many real property owners have resorted to this activity to help them meet their property tax obligations. Perhaps there is a better way to carve it up. Perhaps if the property is not owner-occupied and, therefore, is purely a commercial operation or if the real property has a value greater than a couple of million dollars, than these properties might be in the hotel/resort classification. In any case, just because the property is being rented for periods shorter than six months does not warrant it being placed in the same category as a full-on hotel property.

Overall the package of proposals that is before the Honolulu City Council deserves much open debate. While some will see the on-going debate over these proposals as nothing more than another opportunity to raise additional funds to pay the City’s obligations, a much broader view must be taken and that is the question of just who pays for City services. Many of the proposals would either reduce or eliminate numerous exemptions which have made their way into the City tax code over the years. While many of these exemptions were adopted at a time when the City was not faced with financial challenges, the situation is very different this year as costs rise, new negotiated labor contracts come in higher than expected, and the large unfunded liabilities for City pension and health benefits overshadow the City’s pocketbook.

What lawmakers and taxpayers must realize is that everyone has to pay their fair share for those City services.

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