Secret Tax Relief on Maui?

by Tom Yamachika, President, Tax Foundation Hawaii

In a recent article, we spoke of a decision by the government of Maui to broaden the class of properties classified as short-term rental (which happens to be the class of properties with the second highest property tax rate, even edging out hotels and resorts, beaten only by timeshares). We noted that the decision happened at light speed, and we wondered why.

An alert reader brought a clue to our attention.

In 2020, the Maui County auditor issued a report on the fiscal sustainability and financial condition of the county. It’s listed on the County’s website as a self-initiated project.

One paragraph, almost at the end of the report, says that “the coronavirus pandemic has challenged the County to make many unprecedented decisions. One such decision was to reduce the Assessed Values of Hotel and Resort properties due to the catastrophic drops in occupancy experienced by that industry.”

What does this mean? Apparently, while the pandemic was still raging some of the hotels came to the Maui administration and said, “We can’t do this! We can’t pay your property taxes because people aren’t coming any more!“ The administration couldn’t change property tax rates, because those are set by ordinance, but they could do something about the assessed valuations of the hotel properties. And they dropped the valuations.

It seems that this step was done very quietly. It didn’t make big news. But it bothered the Auditor enough so that he wrote about it.

To be sure, down valuing the hotels may have been perfectly legitimate because one of the traditional indicators of real property value is the amount of income that it generates.  But the pandemic and the resulting government-mandated closures, which caused hotel occupancy to fall through the floor, are (we hope) temporary conditions and therefore shouldn’t carry much weight in determining the value of a property through consideration of how much income it will generate over a long time span. 

The county auditor was also concerned about a bigger problem.  Was anyone else given the opportunity to come to the Real Property Tax Division and have their property values adjusted immediately because of the pandemic?  Our supreme court in 1996, in Maui County v. KM Hawaii Inc., 81 Haw. 248, 915 P.2d 1349 (1996), faulted Maui County for using assessment methods that were not uniform and equal, thus violating the equal protection clauses of the federal and Hawaii constitutions.  Giving some hotels the chance to revalue their properties on a snap basis might not only be unfair to other hotels or other property taxpayers in general, but also might be unconstitutional.

Nevertheless, with the valuation adjustments that did happen, the property tax collections undoubtedly went down in a big way – and with the Governor shutting off the spigot of Transient Accommodations Tax money that had been shared with the counties, the county needed to raise some cash pronto.  We don’t know for sure, but that fiscal pressure may have motivated the warp-speed property tax ordinance amendments that were enacted at the end of 2020.

In any event, this episode seems to show a government being run on the fly, with lots of back room deals that regular people could not hope to have access to.  The likelihood of arbitrary application of the laws is sky high.  Is that really the government that we want to have?