The tax increase on people who own their homes but don’t live in them was presented as a way to protect resident homeowners from additional taxes.

However, not all City Council members are convinced raising the real property tax rate 30 cents per $1,000 of assessed value for just one class of homeowner goes far enough to protect Honolulu residents.

While Mayor Mufi Hannemann has described the move as a way to distinguish “owners who live in their homes from the many speculators, investors and others who don’t,” some council members have raised objections about the burden the tax hike would place on renters and families who occupy more than one unit on the same property.

What’s been little discussed is that the other three Hawaii counties have already created separate tax categories for different types of residential properties. On the neighbor islands, homes that aren’t eligible for homeowner exemptions have higher rates than what is proposed for Oahu — from $4.55 to $8.10, or at a minimum 33 percent higher than Honolulu’s $3.42.

In the years leading up to the 2008 economic collapse, home values soared and Honolulu was able to lower the tax rate. Hannemann points out that his proposed rate increase would still keep the real property tax rate 3 cents below the 2006 rate of $3.75. The rate was lowered to $3.59 in the 2007 fiscal year and to $3.29 in 2008 to offset higher property assessments.

Hannemann said about 120,000 properties fall into the “non-homeowner” class created last year. Raising the tax rate on those properties to $3.72 from $3.42 would generate an additional $18 million in revenue, enough to cover almost 18 percent of the city’s $98 million budget shortfall. For a home worth $450,000, assuming no exemptions, the annual property tax would rise to $1,674 from $1,539 — a difference of $135. Of course, if the assessed value of the property changes, so will the tax bill.

When he presented the budget to the City Council in March, the mayor said he didn’t expect the tax increases to be passed on. “While some were concerned that owners of rental units would pass on any increase during the time of rising real property tax payments, we have contended that rents are market driven. This appears to be confirmed insofar as it has recently been reported that landlords are lowering their prices,” Hannemann stated in the budget proposal. Rental trends in Honolulu showed a decline through the first half of the fiscal year, despite the 13 cent rate increase for all residential property owners last year. After the non-homeowner tax increase proposal was introduced, however, updated U.S. Housing and Urban Development data shows Honolulu’s fair market rent for a two-bedroom apartment increased by about 6 percent in 2010 over 2009.

Property taxes aren’t the only costs landlords may take into consideration when setting rents. The city is in the midst of incremental hikes in sewer and water fees, which are often folded into monthly rents. Honolulu Electric Co. also increased its rates about $1.34 a month on average in February. With other revenue generators on the table — including a 3 cent per gallon gas hike — along with threats to cut services due to furloughs, the move to insulate Honolulu residents (and voters) by presumably going after out-of-state or high-income property owners could fall flat.

Council members who oppose the property tax increase note that the broad “non-homeowner” classification doesn’t only include landlords and more affluent owners who can afford second homes. Some 5,300 properties occupied by owners fall under the non-homeowner classification because the city uses homeowner exemptions as a way to distinguish between the two types of residential owners.

Property owners who have “ohana” (family) housing on their land will pay the lower property tax rate only for one of their units, even if relatives reside in the other dwellings. Apartment and co-op building owners could also be charged the non-homeowner rate, even if they live in their units. When it comes to multi-family housing on the same parcel of land, the current law requires every unit in a building to be occupied by its owner. If one apartment is used as a rental, the entire building will fall into the non-homeowner class, explained Robin Freitas, property technical officer for the city’s Real Property Assessment Division.

Council Budget Chairman Nestor Garcia said he wasn’t sure the property tax increase would survive a third, and final, full Council vote next month.

However, if the Council approves the increase, it will bring Honolulu in line with the rest of the state. Hannemann noted that the other three counties in Hawaii have already created different classifications for residential property owners.

Maui, Hawaii and Kauai counties also have higher property tax rates for “non-homeonwers” — $4.55 to $4.85 on Maui; $5.55 to $8.10 on the Big Island and $3.44 to $7.90 on Kauai. Only Maui’s $2 homeowner rate is lower than Honolulu’s.

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