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Wasted Resources Implied in Home Exemption

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By Lowell L. Kalapa

As the deadline for the first payment of the real property tax nears, more and more homeowners have called to complain about a substantial jump in their real property tax bills.
The vast majority of these calls are from seniors who by now have paid off their mortgages and get their real property tax bill directly from the county real property tax office. For those of us who still have mortgages, the property tax is collected each month by the bank or mortgage company and so the full impact of the real property tax on our homes is not as apparent as it is for those who must pay the tax collector twice per year.
And despite the fact that many of these seniors are entitled to a multiple home exemption, they complain that their “fixed incomes” cannot afford the hike in real property tax. They question whether or not county council members hiked the tax rate – actually rates either stayed the same or in a couple of counties, the rates were lowered. The glitch is the fact that in almost all cases where complaints were raised, the valuation of the property went up.
What many of these seniors have discovered is that the home exemption and the multiple home exemption to which they are entitled because they are over 55, 60, or even 70 years of age, falls short of providing the tax relief that many of the seniors seek. As property values being to escalate again, there will no doubt be calls for an increase in the home exemption. Unfortunately, the home exemption will continue to be inadequate in addressing the need for tax relief for those who cannot afford the property tax on their homes.
If in fact the argument is true, that those on limited incomes cannot afford rising property tax bills because of their homes, then tax relief should measure the ability of those taxpayers to pay the property tax bill. Reducing the taxable value of a value of a home by merely carving out a portion of the assessed value does not address the claim that the homeowner cannot pay the tax.
Enter the “circuit breaker” which two of Hawaii’s four counties have on the books. The “circuit breaker” tax relief mechanism acts just like the electrical circuit breaker in that it “trips” when there is an overload. In the case of the real property tax, it is when the burden of the property tax exceeds a specified percentage of the homeowner’s income. When the real proeprty tax bill goes over that percentage, the excess is “forgiven” or refunded. The percentage can range anywhere from three to five percent of the household income.
The advantages of the circuit breaker over the home exemption are numerous. For elected officials the best argument by those who would protest higher tax bills and the inability to pay the tax bill is that the circuit breaker measures the ability to pay of the homeowner. It would be difficult for a taxpayer to argue that the real property tax bill was too big if elected officials knew that the bill did not exceed 3% or 5% of that taxpayer’s income.
And unlike the home exemption, the threshold for tax relief would be based on the homeowner’s income and not on the tax rate or the value of the home. So a home’s value could go up and the tax bill would go up because of the increase in value, but the circuit breaker would insure that the actual tax bill could not exceed the 3% or 5% of household income.
Replacing the home exemption with the circuit breaker would impose the tax from dollar one of the property’s value. For those who have substantial incomes, they would not be getting the same tax relief as someone who is on a fixed income.
For example, under the current home exemption system, the retiree who is bringing in a six-figure income from his stocks and bonds is granted the same amount of home exemption as the retiree who is living only on Social Security. Yet no one would disagree that the well-to-do retiree can probably afford the additional $400 in real property taxes that the current home exemption confers. Meanwhile the retiree living on Social Security probably can afford one more dollar in real property taxes but gets no additional relief.
For county lawmakers, adoption of the real property tax circuit breaker would allow the setting of real property tax rates with the knowledge that any increase in the final tax bill will be “affordable” for the taxpayers because relief will be provided if the bill goes over 3% or 5%.

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