Property tax exemptions in peril as panel tries to make system fair

Members of a city advisory commission want to end levy breaks for homeowners as well as for schools, churches and charities

By Rob Perez

POSTED: 01:30 a.m. HST, Nov 14, 2011

An independent review panel is leaning toward recommending that the city abolish property tax exemptions for roughly 150,000 Oahu homeowners, including the blind, elderly and disabled, as part of a major but controversial effort to bring more fairness, efficiency and accountability to the tax system while generating additional revenue for city services.

The Real Property Tax Advisory Commission also is leaning toward proposing to the City Council that exemptions for charitable organizations, credit unions, schools, churches and other groups be eliminated or substantially pared.

The reforms being discussed are meant to provide tax relief that is more closely linked to a landowner's ability to pay rather than giving such breaks simply because one belongs to a particular category, such as homeowners or disabled veterans, according to the commission's chairman, Lowell Kalapa, who heads the Tax Foundation of Hawaii. The reforms also would more equitably spread the burden of funding city services, he said.

The commission, formed by the Council in the wake of several recent property tax controversies, has been meeting since August to discuss ways to reform the system. Despite the potential impact of what's being considered, the discussions so far have drawn little public attention.

But that's likely to change once the panel makes its recommendations to the Council before the end of the year.

Politically influential groups that have long benefited from the exemptions — many have been on the books for decades — are expected to intensely lobby the Council, arguing that the tax breaks are justified. And with five of the nine Council seats up for election next year, the chances of anything especially controversial passing are slim, some say.

Kalapa, a tax policy expert, acknowledged the political storm that could be created but said the commission's task was to propose ways to improve the system without regard for political consequences.

"We were created to take the political heat off elected officials," he said.

Council Chairman Ernest Martin said he expects the commission's recommendations to get serious consideration by the Council, and agrees that some exemptions are obsolete and should be eliminated. But he said he doubts the Council would support abolishing the homeowner exemption.

"No doubt, it'll be very contentious," Martin said.

The main focus of the advisory commission thus far has been the 40-plus property tax exemptions that economist Paul Brewbaker, vice chairman of the panel, described as a "gobbledygooky hodgepodge with seemingly no rational pattern."

The exemptions, amounting to roughly $100 million in lost revenue annually, cover a range of categories, from slaughterhouses, crop shelters and for-profit child care centers to historic homes, cemeteries and foreign consulates.

"I had no idea how complex and convoluted some of these things were," said Brewbaker, who questioned the need for any exemptions.

ELIMINATING the homeowner exemptions, claimed by more than 144,000 owners and amounting to nearly $50 million in lost city revenue annually, is the most controversial proposal being discussed. The main exemption reduces the taxable value of a residence by $80,000, saving occupant homeowners who apply $280 a year based on current tax rates.

Additional exemptions are permitted if the homeowner is 65 or older, blind, deaf, a disabled veteran or in a variety of other categories.

Kapolei homeowner and Realtor John Riggins said eliminating the standard exemption wouldn't be fair because many homeowners made their retirement plans partly based on the tax breaks. He also said removing the exemption would exacerbate Hawaii's already serious housing affordability problem.

"I just don't think that's a good idea at all," Riggins said.

But Kalapa and other commission members questioned the fairness of giving tax relief without regard to one's ability to pay, noting that multimillionaires living in mansions are getting the same breaks as homeowners living in modest homes struggling to pay their bills.

Kalapa also questioned the fairness of homeowners getting tax relief while renters — who make up nearly half of Oahu's households — get none.

"There is no equity for people who don't own their own homes," he said.

Similarly, some commission members noted that wealthy nonprofits pay the same $300 minimum tax for parcels valued at more than $100 million as cash-strapped nonprofits owning small patches of land assessed at fractions of that value.

Property taxes generate the bulk of the city's revenue and are used to pay for fire, police, ambulance and other services.

The idea behind the reforms is that everybody uses those services, so everyone should pay their fair share, with adjustments made for those who can't afford their tabs or those who provide services that benefit the city, Kalapa said.

"If you don't pay for it, then someone else does, subsidizing your share," he added.

And if people forgo paying their fair share, they still get the same level of city services, but the accountability link — making sure taxpayer dollars are spent wisely — becomes obscured because they aren't footing the bill, according to Kalapa.

For homeowners who can't afford their property taxes, the city has a low-income tax credit program that reduces the tab, assuming the homeowner meets the eligibility criteria. If the exemptions are eliminated, Kalapa said, that program can provide relief for those in need.

The commission was not asked to consider the city's budget challenges in coming up with recommendations, but panel members understand that eliminating exemptions will result in more tax revenue.

"We're keenly aware of the fact that there's a $100 million shortfall," Kalapa said.

While the commission is not evaluating the city's property tax rates, some members say the Council should consider lowering the residential rate in conjuction with eliminating the homeowner exemptions.

Natalie Iwasa, a certified public accountant and member of the commission, described the current property tax and exemption system as a mess that needs to be overhauled.

Holly Huber, a database specialist who has been examining the city's system for more than a year, said she continues to find numerous errors or inaccuracies because of a lack of oversight.

"Every time I look at something, I just shake my head," she said. "I can't believe what a nightmare it is."

She noted, for instance, that the city assessed the land for Punahou School's 74-acre campus at only $37,000, while ‘Iolani School's 22-acre parcel is valued at $105 million.

City Budget Director Mike Hansen explained that assessments for tax-exempt property owned by nonprofit groups, including schools, have not been a top priority because those organizations pay only $300 regardless of the value of their parcels. The city has focused its limited staff on taxable properties, he said.

That would have to change, though, if one of the proposals under consideration by the commission is adopted. According to the proposal, only nonprofits with a 501(c)(3) designation would be eligible for an exemption, and the relief would be based on a percentage of the value of the organization's parcel.

Commission member Lisa Maruyama, president of the Hawaii Association of Nonprofit Organizations, said land values don't reflect an organization's ability to pay, given that some nonprofits are land rich but cash poor. She opposes changing the existing nonprofit exemption.

Kalapa acknowledges that whatever the commission decides, the proposed changes will face tough going at the Council. "People won't like what we're going to say, but at least it'll be out there for people to talk about and debate."