INDEX - ECONOMIC
SUBJECT: REAL ESTATE TAXES
SOURCE: RAY CHUAN email@example.comThe Task Force Plan
21 September 2004 - 6:30am
Here is an attempt at explaining the Real Property Tax Task Force’s Plan as it has been presented to the Council and is scheduled for public hearing on Oct 7 at 6:00pm at the Convention Center. (Check the time and place. There might be changes.)
What we have now:
Eight classes of property, each with separate valuations of land and building. A Tax Rate is then applied to each of the sixteen valuations (or assessments as they are commonly called.) The way building (or improvement) is valued (assessed) has a generally valid basis: namely the replacement cost minus depreciation. The way land is assessed is where the problems lie. And they are huge problems. The Kauai County Tax Code has this to say:
Article 8. Valuation, in General
Sec. 5A-8.1 (a) The director shall cause the fair market value of all taxable real property to be determined and annually assessed by the market data and cost approaches to value using appropriate systematic methods suitable for mass valuation of properties for taxation purposes, so selected and applied to obtain, as far as possible, uniform and equalized assessments throughout the county; ……
Suffice it to say that the “director” does no such thing at all
From the valuation of the sixteen classes of properties to the fixing of taxes the Tax Code has this to say:
Section 5A-6.3 (c)
(1) Net taxable lands and buildings within each class of property shall be assigned a percentage of the total revenue to be derived from real property.
(2) Net taxable buildings …. (same method as for lands)
(3) The amount of revenue to be raised from net taxable buildings within each class shall be divided by the net taxable value of buildings to determine the tax rate.
(4) (Similar language for land)
The rates (expressed in dollars per $1,000 of the valuation) were as follows for 2003:
Catagory Building Land Homestead 3.64 4.35 Residential 4.50 5.49 Apartment 8.15 8.55 Commercial 8.15 8.55 Agricultural 4.50 7.95 Conservation 4.50 8.45 Hotel/Resort 8.15 8.55
It is the Council that determines the tax rates. But history will show that the rates don’t really change. With the total assessed value of real property (arrived at not according to the Tax Code, of course) rising steeply for certain areas and homes (the rise totalling 26% from 2003 to 2004, for example) and the Council keeping the rates unchanged (except for tiny insignificant changes – decreases- for PR and political purposes), the revenue rises accordingly. The Administration then creates expenses to match the revenue increase. Some examples: In the current year budget the Public Works Department added an item simply listed as “heavy equipment” without any specification, for $700,000. The Police Department has had about 15 officers postions unfilled for several years; but each year the budget includes the same unfilled positions, thus creating a slush fund called the Un-appropriated Surplus that grows from year to year, reaching about $7 million this year.
With this dismal picture as the background let’s now talk about the Task Force Plan.
The Plan is deceptively simple. It would take running it through examples to show how effective it is in meeing the criteria the Task Force set for itself --- that the results of applying the Plan would be equitable to all property owners, that it would be simple to understand and easy to implement, and that the results are predictable from year to year. And that it places the true responsibility on rate setting and thereby total tax revenue visibly on the Council where it belongs but has been purposely muddled up by the cooperative efforts of the Council and Administration year after year.
The number of classes is reduced to TWO: Owner-occupied and all others.
The method of assessing (evaluating) buildings remains the same: Replacement Cost minus Depreciation.
The land assessment is fixed at a base value, for each property, determined by taking the average of the assessed values over the five-year period from 1999 to 2003; and the base value is allowed to rise at no higher rate than the Consumer Price Index (CPI) for Honolulu (that being the only index produced annually by the Labor Department fo the state of Hawaii which is at somewhere between 1 and 2% currently, I believe) With the widely uneven changes in land assessment with respect to geography and time there is no way to pick a single year to base the land assessment. The beginning is chosen at 1999 because the wildly escalating real estate market began around 1998.
The land and building assessments will not change with a transaction. In other words, a property may get sold in 2007 at a price (if the real estate market is still hot then) considerably higher than the CPI-adjusted value, but the land assessment part will not rise. This is intended to reduce the burden on a local young family buying its first home, even though it probably gives benefit to someone coming from the Mainland with a big wad of money. The reality is that our real property tax is so low compared to Mainland (typically one third of California) that the amount of property tax is of no consequence to a Mainland buyer.
Exemptions, which are applied against the building assessment, are not affected. For the home owner these typically are the Income and Age Exemptions (triggered at age 60 and 70), which when exercised at age 70, amounts to $150,000, which in most moderately priced homes here would mean just about zeroing out the building assessment.
The Tax Rates for Building and Land are to be set at a ratio of 1 to 3. For example, for an owner-occupied home the rates might be, for example, $2 for land and $6 for building. The low rate for land is designed to lesson the punishing effects of the market place. For many, if not most of the average homes in areas not affected by real estate inflation the Plan would result in practically no change in the property tax. For example, a modest home on the Eastside may have a land assessment of , say, $150,000 and about the same assessment for the building. With the $2 rate for the land and $6 rate for building the effective rate for the whole property comes out at $4, which is about the same as it is today. On the North Shore, on the other hand, the land assessment would be very high and the low tax rate would help lesson the impacts of the real estate market; while the buildings are likely to be more substantial than in Kapa’a and would command a higher tax rate and a higher tax, which is not really unfair because someone who builds a house for $500,000 can comfortably cope with the possibly higher building tax while enjoying a low tax on his land which may well be assessed (even after the Plan goes into effect) at $1,000,000.
I have dwelt on only the Owner-occupied class of property here, because owners of this class have been affected the most by the market, and because I am not equipped to go into the more complicated and subtle aspects of such as Agricultural property and Condos and Time Shares. I’ll leave those to the professionals on the Task Force whose expertise and dedication to working selflessly to fulfill the criteria set forth at the start of the Task Force have produced what I believe is a very good package. Having been forced to have to read the Tax Code of over seventy pages in connection with my work on the Task Force I have to admit I was impressed by the fact that changes have been applied to only eight of those seventy-plus pages.
I urge you to come to the Public Hearing on Draft Bill 2108 before the County Council on October 7, beginning at6 pm at the Convention Center. Be sure to check the time and place, as there may be changes. This is where the process begins whereby the recommendations of the Task Force are scrutinized by the Council with inputs from the public, to produce the necessary piece of legislation in the form of amendments to the Tax Code.
There is also a forum open to the public sponsored by the Kauai Board of Realtors and the Kauai Business Council, at which the Task Force and Ohana Kauai, sponsors of the charter amendment to cap property tax for owner –occupied homes will present their plans with a moderator befoe the public. The date is Thursday, September 30. The time 5 to 730 pm. The place the Convention Center.