WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of July 22, 2018 Who Can We Beat Up with Property Tax? By Tom Yamachika, President The ongoing furor in Honolulu over the extent to which the rail project is adequately funded, or lack thereof, and the possibility of new state-mandated property taxes to fund education lead us to look at how we can or should make property tax classifications. Real property tax is currently a county tax. It applies to real property that is owned by a taxpayer, or to residential property subject to a long-term (varies by county, but usually more than 20 years) lease. If the object is to raise more revenue, and to spare all or most normal people who otherwise would be motivated to kick out present or future county officials at the ballot box, we need to make classifications. How can that be done? According to the teachers’ union’s public testimony on the constitutional amendment bill, we should be heavily taxing nasty foreign real estate speculators and vacation home buyers. If they can afford million-dollar homes, so they say, then they can afford money to educate our keiki. Under constitutional law, it’s easy to create tax classifications. They only need a “rational basis,” which means it is very hard for a classification scheme to fail. For example, most counties already have different tax classifications for residential property, commercial property, hotel/resort, and agriculture, and they apply wildly different tax rates to those classifications. There are some classifications that are impermissible, however. Governments can’t discriminate based on race, sex, or religion. That comes at no surprise. They also can’t discriminate on nationality. So, a higher tax classification for foreigners wouldn’t fly. Most jurisdictions that impose a real property tax give a break, typically a “home exemption,” to people whose primary residence is the property being taxed. So far, courts haven’t viewed that kind of classification as discrimination against those in other states and countries. The City & County if Honolulu then took this principle to the next level when it established its “Residential A” classification, which targets properties over a certain dollar value that are not registered for a home exemption. That classification was challenged in court and has survived, at least for now. Just because a classification is constitutional, however, doesn’t mean that it does what it’s supposed to. Does Residential A hit speculators and the owners of vacation homes? Sure, but it also hits rental properties and properties where the owner wants to but can’t live there (for example, where the owner is of advanced age and needs to be in a nursing home; we wrote about that some time ago). Residential A also applies where the owner was eligible for a home exemption but, for whatever reason, didn’t apply for one — ouch. It turned out that there were quite a few people who fell into that category, prompting the City Council to enact relief measures. To be administered properly, a tax classification should be simple and should be capable of verification with information that the tax agency has or can get without excessive additional cost. If a county wanted to tax homeowners with high incomes, for example, it would need access to Social Security numbers and income tax data. But what about the foreigners it might want to tax? Neither the State nor the IRS might have data on how much these people make, or what their net worth is. So, how does a county zero in on foreign fat cats and speculators? It’s tough to find a classification that is constitutional, works correctly, and doesn’t create collateral damage. We wish the authorities good luck, because they are going to need it!
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WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of August 27, 2017 Highest and Best Use, and Why You Should Care By Tom Yamachika, President Earlier this year, the City & County of Honolulu tinkered with its real property tax system. People who aren’t aware of what happened may find themselves with property tax bills many times what they are now. In Honolulu, as in most other counties here and in many jurisdictions on the Mainland, there are several property tax classifications. For example, there is residential use that is taxed at $3.50 per $1,000 of assessed value; commercial use, taxed at $12.40; and hotel/resort, taxed at $12.90. The classification that you fall in is determined by the “highest and best use” of your property. Highest and best use has nothing to do with how you are actually using your property. It means the most productive use that your property could be put to, if it is legal under applicable law and zoning. So, for example, a person who owns industrial zoned land next to a shopping mall can build a farm on it and grow vegetables, but the property tax rate that will be applied won’t be the agricultural rate, it will be the higher commercial rate. For most people, qualifying for the residential rate, the county’s lowest, is not a problem. Much of the land that people build houses on is zoned for residential use, which means it’s not legal to run businesses or resorts on that land. The highest and best use is residential, and that’s what determines the tax classification. However, some properties in the Honolulu urban core are given “mixed use” designations, which means it is legal to build a house on the property or to have a shop there. This is where the problem arises. Currently, the tax ordinances allow condominium units to be classified based on actual use, not highest and best use. Thus, people who live in condominium units were allowed the residential rate if they said they were actually living in them, even though the zoning allowed commercial use. Some complained that the system was inconsistent: if the farmer in the example above had to pay at the commercial rate, why does the person living in the condominium unit get to qualify for residential? Ordinance 17-13, enacted earlier this year, took away the actual use “loophole,” bringing back the highest and best use rule for condominium units. To get around the highest and best use rule, the ordinances allow property owners to make a “dedication.” A dedication is a contract with the county that says the use of your property will be restricted to a particular use even though the zoning allows something else. With the dedication in place, commercial or hotel uses become illegal even though the zoning may allow them, so those uses cannot be considered highest and best. Ordinance 17-13, mentioned earlier, also allows for those living in mixed use areas to make a dedication to residential use. A property owner who makes one will be allowed the residential tax classification. A property owner who doesn’t may well be reclassified to commercial or hotel/resort, with severe financial consequences. To make a dedication, the appropriate form needs to be filed by September 1. It’s referred to as Form BFS-RP-P-41E, Petition to Dedicate Certain Property for Residential Use (5 Year Dedication). Don’t be late! WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers Weekly Commentary For the Week of March 26, 2017 Yes, Toto, Tourists Also Pay Real Property Tax By Tom Yamachika, President On March 8, the Hawaii Department of Business, Economic Development, and Tourism released a study on Hawaii real property taxes. It may be unusual for a State agency to do a study on a county tax. But this study appeared to be an outgrowth of a move by our teachers’ union during the 2016 legislative session, which we wrote about last year, to establish that our real property tax is too low. (Once that was established, the obvious strategy was to seek a surcharge on that tax to fund education, which we have written about in our last two weekly commentaries here and here.) The bill that we talked about then didn’t pass, but its substance was incorporated into the state budget bill, obligating DBEDT to do the study. One of the study’s key findings: “Nearly one third (32.3 percent) of the property taxes were contributed by property owners residing out-of-state.” To us, the fact that some of our real property tax is being exported is not news. Honolulu’s “Residential A” property classification, for example, was designed to squeeze more dollars out of land owners who had residential properties they didn’t live in. The idea was that most of these absentee owners lived out of state and maybe out of the country, so they could help foot the bill for those of us who actually live here. In addition, residential property is not the only property in town; all counties have different, and more expensive, property classifications for commercial, hotel/resort, and perhaps timesharing uses. A good amount of tax in those classifications is paid by nonresidents. Rather, the news is the extent to which the tax is exported – nearly a third. This number blows a large hole in the City & County of Honolulu’s principal argument in the rail debate. The City administration had been arguing forcefully that the best solution to fund rail is the GET surcharge, and so that the surcharge should be extended forever. Why was it the best solution? About a third of the GET is exported, they said, and if the surcharge is not extended the fiscal shortfall would need to be made up by other county funding sources, the largest of which by far is the real property tax. But the real property tax falls almost exclusively on our residents, the argument goes, so it would be hurting all of us a lot more. Mayor Caldwell’s State of the City address in February 2015, for example, included: “Why would I as mayor want to give the visitors a break and make all of us pay everything? Let’s make the visitors pay one third.” If a third of the GET is exported, as the City claims, and a third of the property tax is exported, as the DBEDT study indicates, then the argument doesn’t hold water. Moreover, the extent to which the GET is exported is a matter of debate. The Hawaii Free Press, using a City Auditor report, concluded that 14.1% of the GET is exported. The Foundation came up with its own estimates using calculations from Hawaii Tourism Authority and Department of Taxation data for 2011-2013, and found that the proportion of the surcharge attributable to visitor spending was 15%-20%. If those numbers are closer to the truth, then the City administration has it backwards, and we might be able to export more tax using the real property tax than by using the GET. But then again, if we rely more heavily on the real property tax to fund transportation, then what is going to happen to the real property tax surcharge to fund education? Clearly, this debate may lead to some cascading effects. We do hope that our policy makers will take the time to consider these matters fully before deciding to amplify the burdens on an already beleaguered populace. To view the archives of the Tax Foundation of Hawaii's commentary click here.
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