The Honolulu City Council is plunging into what looks like a turbulent budget season amid a potentially acrimonious debate over sky-high assessments for property taxes.

The city faces some very large new expenses, imposed by state or city officials who are long gone from the scene, just as the last of the federal Covid-19 relief money drains from its coffers, as inflation continues to surge and as rising interest rates make it more expensive to borrow.

State officials, negotiating on behalf of the city through collective bargaining agreements with government workers statewide, added $100 million to the city’s tab this year in the form of higher salaries and benefits for city workers.

Operating costs for the troubled light rail project will commence this year and city officials have projected they will add another $85.1 million annually to the city’s financial obligations, coming to fruition just as transit systems nationwide face a death spiral because of lost ridership during the pandemic.

The city also faces steep bills from necessary stormwater improvements, inherited from a consent order from the U.S. Environmental Protection Agency back in 2010, and the need to make catch-up payments to cover retiree pension costs that were inadequately funded in previous decades.

These are all costs that current city officials played no role in generating but must find a way to pay. That means they will need to turn to the city’s primary source of income, which comes from property assessments, and, ultimately, property taxes.

Lower Property Taxes Not The Full Story

Many Honolulu homeowners are livid that their assessments rose this year, arguing that the increase in home prices was fueled in part by out-of-state investors or remote workers who arrived as Covid refugees, and that the spike was only temporary. They want tax cuts.

Honolulu property tax rates are already among the lowest in the country, according to two studies released last year — one commissioned by the District of Columbia government and the other by the Lincoln Institute of Land Policy.

Honolulu was listed dead last on a list of the largest cities in each of the 50 states in the D.C. government study. Honolulu’s residential tax rate is 35 cents per $100 of assessed value, compared to 85 cents in Washington, D.C., and $1.22 in Salt Lake City, and up to $22.23 in New York City and $28.35 in Charleston, S.C.

Similarly, Honolulu property tax rates were the lowest of 53 cities studied by the Lincoln Institute, and the actual taxes paid were among the 12 lowest in the nation, according to the report.

“Honolulu’s property tax rates are exceptionally low,” said Carl Davis, research director of the non-partisan Institute on Taxation and Economic Policy, based in Washington, D.C. “Any way you slice it, Honolulu has a very low tax rate.”

“Any way you slice it, Honolulu has a very low tax rate.”

Carl Davis, research director of the Institute on Taxation and Economic Policy.

But that fact, while accurate, is incomplete, says Ted Kefalas, director of strategic campaigns for the conservative-leaning Grassroot Institute of Hawaii, who points out that Honolulu’s tax rates are lower because unlike most cities, the state pays for education statewide, sparing the city that expense.

“In terms of how much property owners actually pay, we’re closer to the national average,” he said in an email. He cited a report by the Washington, D.C.-based Tax Foundation that found that Hawaii overall was ranked 29th nationally, with an average annual property tax bill of $1,455, compared to an average of $1,758 nationwide.

The average Honolulu home owner’s property tax bill is $2,470 for the fiscal year 2023, the city said.

Some people pay much more, according to that study, with residents of New Hampshire, Connecticut and New Jersey paying more than $3,100 a year.

Kefalas said that Honolulu’s lower tax rates are offset by high property valuations determined by lofty real estate prices.

But Honolulu’s tax rate seemed problematically low to several city leaders from other cities who gathered this week for the annual Washington conference of the National League of Cities. Hundreds of them gathered in the nation’s capital to discuss pressing issues affecting their communities.

Coming out of the pandemic and with relief money drying up, city budgets were high on their minds. Several city leaders interviewed there expressed sympathy for city leaders in Honolulu.

“35 cents is low; ours is 73 cents,” said Patricia Ledbetter, a city council member from DeSoto, Texas, where they have been able to build new fitness centers and libraries recently, as well as installing new sidewalks and sewers. “We couldn’t do our bonds or pay our debt interest at rates that low. That’s how we create the city we want on our master plan. It would take you 20 years to do what we do in 15.”

Iva Nelson, city clerk and treasurer of Gadsden, Alabama, said she could commiserate because taxes there are even lower, or 29 cents.

“We’re the lowest in the country and our county is the lowest in the state,” Nelson said, adding that not having enough money makes it hard for local governments to provide critical infrastructure.

Tax Credit Or Tax Relief?

For the people of Honolulu, taxes seem anything but low. Part of the perception of high taxes on Oahu comes from the fact that Hawaii residents are highly taxed, thanks to a combination of the gross receipts tax or GET, and a heavy state income tax.

Hawaii has the third-highest taxes in the nation, according to the Tax Foundation study, with households hit with an average $5,296 by the state government.

But the city of Honolulu gets very little of that money, according to city budget director Andrew Kawano. He said the city gets half of 1% of the GET revenue to help defray the costs of the rail.

“The lion’s-share (of the money) goes to the state and stays in the state general fund,” he said in an interview.

“Obviously we would like to have more,” Kawano added.

For now, however, real estate taxes remain the primary source of income for Honolulu and the way the city pays for the services that its residents want and need, from police protection to street repairs and park improvements.

Honolulu city officials are busily trying to find a way to placate homeowners while not damaging the city’s financial base or reducing the already-low tax rates.

“Obviously we would like to have more.”

City budget director, Andrew Kawano

In lieu of a tax cut, Mayor Rick Blangiardi has proposed a $300 tax credit for homeowners, which would reduce home owners’ tax bills without reducing the tax rate. If enacted, it would cost the city $45 million.

The initiative was introduced in early March as Bill 14, and is advancing to a second reading April 19 following the March 30 Special Budget Briefing.

Davis, of the tax policy institute, supports the idea of a tax credit, which he says is more equitable than decreasing tax rates because, with overall rate changes, people who own expensive houses get more of a cut in total dollars while lower-income people get less.

“Most families would do better under the tax credit approach,” Davis said.

But financially strapped property owners are leaning hard on City Council members for more, and debate at a recent council meeting showed that council members are vying for ways to get Honolulu residents some additional tax relief on the city level.

Council member Esther Kiaaina has two competing bills, Bill 37 and Bill 38, both of which would give more Honolulu residents a tax credit on their real estate taxes. Current law allows a credit for people who earn less than $60,000 a year. Bill 37 would boost that threshold to $70,000, while Bill 38 would permit an annual inflation adjustment by tying the threshold to 80% of area media income for a two-member household.

“Area median income” is an income benchmark established and updated annually by the U.S. Department of Housing and Urban Development. That figure now is $83,600, but it would rise as HUD recalculates it.

Council member Matt Weyer, however, questioned how well that two-income standard would work for poorer households, such as three people living together.

Kiaaina said she would consider making amendments that could help more people.

Another bill introduced by Kiaaina would increase the property tax exemption for homeowners from $100,000 to $110,000, and from $140,000 to $150,000 for senior citizens. But after council discussion, Kiaaina said she was considering making the exemption bigger. Weyer agreed.

Budget Committee Chair Radiant Cordero and Council Chair Tommy Waters have also recently co-introduced four tax relief measures that Waters said “will provide respite for our kupuna, low-income residents, and homeowners, as well as … for the rental community.”

Council member Andria Tupola wondered whether a greater exemption could be offered for seniors who are 75, 80 or 85, who she said she believes make up a small percentage of the population but who live with difficulty on “fixed incomes.”

During the same hearing council member Calvin Say pressed budget director Kawano for more information on the city’s budget realities. Kawano told him that the increased assessments would generate $165 million, after the $45 million for the tax credit was subtracted.

Say pointed out that the city has little discretionary income because it is already committed to paying an additional $100 million due to the collective bargaining agreement. He suggested that the $300 tax credit could be reduced to provide more money for city services.

He said he expected that tough decisions would need to be made and that some taxpayers would not be happy with the choices council members make.

“It’s not easy being in the forefront taking the whacks,” he said.

In a pointed exchange, Say and Waters sounded a sober note about what those choices may entail. Waters said that Blangiardi had proposed a balanced budget to the City Council, but that some of the things the mayor wanted might need to be stripped away to make room for council priorities.

In the interview, Kawano said council members will need to balance what they want and what they want to give to residents against the needs of the city.

“We have to live with what we have,” he said. “We are dealing with complex problems that have festered for years.”