The Honolulu City Council will start debating an overhaul to the property tax system next month, even though the idea is already been dismissed as a dead-on-arrival election-year tax increase.

Council Budget Chair Ann Kobayashi told Civil Beat Monday she plans to hold hearings starting in late January to discuss “the property tax system as a whole.”

The discussion, she said, will focus on balancing revenues and expenditures. A major part of the debate will revolve around recommendations from the Real Property Tax Advisory Commission, which in its draft report advocates eliminating or reducing numerous exemptions that together return more than $100 million to city taxpayers.

The recommendations were quickly panned by some critics, but they highlight the inequities in the current system. For example, a widower getting by on Social Security benefits and a multi-millionaire pulling in six figures are eligible for the same exemption simply for owning their own homes.

The hearings will begin after the 30-day public comment period for the recommendations closes Jan. 9, Kobayashi said.

Some of the recommendations have already been lambasted. A weekend Honolulu Star-Advertiser editorial (subscription required) said raising taxes in an election year was politically untenable and “a spectacular miscalculation.”

In addition to taxing homeowners and nonprofit organizations harder, the recommendations, if adopted by the Council, would take aim at another sacred cow: disabled veterans and their widows.

Two letters sent by citizens to the Council summarize the opposition.

In one unsigned letter, the author says changes to the property tax exemptions would hit elderly residents hard, turning “our last remaining days of our twilight years (into) a financial nightmare.” The other asks about the disabled veteran exemption: “What kind of government is it that tries to balance its budget on the backs of the totally disabled?”

Kobayashi acknowledged the political realities — after all, her seat is one of five on the Council that’s up for election next year, and there’s a mayoral election too. She said she’s loathe to further burden Honolulu families. Electricity, water, fuel and food prices are all on the rise even as wages stagnate, she said.

But that doesn’t mean the recommendations are a dead letter. Kobayashi said the city government plays an important role in people’s lives, providing police, fire, lifeguards, garbage collection and more.

“The city has to provide all these services,” she said. “We’re looking at many different ways and trying to see what would work.”

Finding a Way To Make It Fair

On Oahu, 144,092 homeowners got a tax break for living in their homes, exempting more than $14 billion worth of property from taxes. That cost the city more than $49 million, according to the commission’s report.

Other exemptions costing the city big bucks were 1,709 parcels owned by charities that were handed $25.9 million in tax breaks; Medical facilities and hospitals that got $7.6 million in breaks; and low-income rental housing properties that saved $6.6 million.

Type of Exemption Total Exempted Valuation Tax Benefit
Homes $14.1 billion $49.3 million
Charitable purposes $4 billion $25.9 million
Nonprofit medical, hospital indemnity association $674 million $7.6 million
Low-income rental housing $1.6 billion $6.6 million
Other exemptions (Hawaiian Home Land Lease) $1.3 billion $4.7 million
Homes of totally disabled veterans $515 million $1.8 million
Credit Union $119 million $1.5 million
All Others $1.3 billion $2.8 million
Total of All $23.6 billion $100.2 million

Source: Real Property Tax Advisory Commission Draft Report, December 2011

All told, 154,268 taxable properties together received $100.2 million in property tax breaks because nearly $24 billion worth of property wax not taxed, according to the recommendations. (These figures don’t include another 10,000-plus non-taxable properties owned by government agencies that would have generated another $177.9 million for the city if taxed at normal rates.)

The gap was made up with subsidies from Honolulu’s other taxpayers, and the commission said its principal goals were to improve equity and efficiency in the system.

If the Council were to follow the commission’s recommendation and eliminate the homeowners exemption, that could create up to $49.3 million in tax revenue. But that number would end up being much smaller because some of those impacted by the change qualify for a different break based on low income and an inability to pay.

The exemption as currently written means people who own their own home don’t have to pay taxes on the first $80,000 of assessed value. Taxpayers 65 and older are exempt for the first $120,000 of assessed value.

At $3.50 per $1,000 of assessed value for residential properties, an $80,000 exemption means $280 of savings per year; the $120,000 exemptions saves elderly homeowners $420. Those savings are available to all homeowners regardless of their ability to pay. Everyone, from retirees just getting by on their Social Security checks to multi-millionaires still earning six figures or more, is eligible.

The commission said that system isn’t equitable, and Kobayashi agrees.

“We just have to find a way to make it fair,” Kobayashi said. “It’s really not fair that those who are able to pay get the same exemption as those who are struggling.”

The commission suggests that the exemption should go by the wayside. The recommendations say the existing county tax credit for households making less than $50,000 would serve as a safety net instead.

That credit essentially caps taxes at 4 percent of the titleholders’ combined income up to $50,000; 3 percent for homeowners 75 or older. So citizens who are land-rich but cash-poor have a mechanism to avoid spending all their money on property taxes.

Retirees v. Millionaires: Crunching the Numbers

Let’s crunch the numbers in a representative example.

The average Social Security benefit for a retired worker was nearly $1,200 per month at the beginning of 2011, according to the U.S. Social Security Administration’s website. That comes to around $14,000 per year for one retiree, on average.

The credit for low-income taxpayers means a couple 75 or older with a combined income of $28,000 would pay a maximum property tax of $840 per year, regardless of how much their property was valued at. That’s the bill on a residential property assessed at $240,000 — after exempting $120,000 of assessed value. So if an elderly couple’s property is assessed at $360,000 or more, there is zero financial impact from eliminating the exemption and instead relying on the tax credit.

For a 75-year-old widow or widower relying on a single $14,000-per-year Social Security income whose home is worth $240,000 or more, the homeowners exemption makes no difference. The maximum yearly tax for that owner is $420.

For younger homeowners making $50,000 per year, the maximum tax bill is $2,000. All properties assessed at higher than $650,000 will hit that maximum.

Homeowners whose properties are worth less than those thresholds or those making more than $50,000 per year would be impacted if the exemption were deleted from the city’s tax code.

Kobayashi said eliminating the exemption and pushing people toward the credit would create problems of its own. The city doesn’t maintain income information and staffers would need to review applications for the tax credit. Some people won’t even apply, she said.

“Some of them don’t want to apply for the 50,000-or-below (credit). They feel embarrassed or something. I wouldn’t, if I made less than 50,000,” Kobayashi said.

She said she recently had a conversation with Gov. Neil Abercrombie about creating a city-state cooperative “one-stop shop” for credit and tax applications and forms.

“We should start doing stuff like that, because they have the income information. We don’t. And so rather than hiring more people to read through all the income tax forms, the state already has all that information. They know who would qualify,” she said. “We have to start finding ways to be more efficient. We don’t want to have to increase the number of people who have to go through these income tax forms, and yet we want to give out the needed credits.”

Eliminating Exemptions = Tax Increase?

Critics, including the newspaper editorial, have characterized the recommendations as tax increases. But the tax commission makes explicit in its recommendations that it does not want to increase city revenues.

When eliminating the home exemption, Commissioners believe that this action be undertaken with an overall reduction in real property rates so as to maintain revenue neutrality. The opportunity that this action can contribute to revenue neutrality should be extended across the board to both residential and nonresidential classes of real property.

In other words, raising rates on some homeowners should be offset by lower rates for renters and businesses.

While $49 million isn’t the right number to use to represent the potential revenue gains from eliminating the homeowners exemption, redistributing even $25 million in savings would be meaningful to other city taxpayers.

(Exact numbers are tough to come by. Robin Freitas, a property technical officer who works for Real Property Assessment Division Administrator Gary Kurokawa, said it’s “a little premature” to run numbers at this stage. Kurokawa’s team will provide data support to Budget Director Mike Hansen and Mayor Peter Carlisle when they reach a position on the recommendations next year, Freitas said.)

Kobayashi quickly threw cold water on the idea of lowering tax rates.

“That to me is not a good way to do it, because at some point, you don’t know what the financial picture for the city, and it would be very hard to then increase rates,” she said. “Do you then put back the home exemptions?”

So that means any revenue increases are unlikely to be passed back to taxpayers. The exemptions will be evaluated on their merits, both fiscally and politically. And the change might be incremental, if it comes at all.

“We can slowly chip away at inefficiencies and try to bring more balance,” Kobayashi said.

Read the full recommendations here:

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