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Saving the Overburdened Real Property Taxpayer

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By Lowell L. Kalapa

Last week we looked at one of the problems that still plagues the real property tax system here in Hawaii. And while each county has various unique aspects about their county ordinances governing the application of the real property tax, their provisions for tax relief for homeowners is basically the same, hit and miss.
Why hit and miss? Well for one thing, the home exemption which all counties provide is granted regardless of whether or not the homeowner needs tax relief. Further, larger and larger exemptions are afforded individuals as they age. For example, upon reaching age 55 the basic home exemption of $40,000 goes up by 50% to $60,000. It doubles at age 60 to $80,000 and triples at age 70 again all without regard to the person’s ability to pay the property tax.
Similarly, a home owned by a totally disabled veteran or a widowed spouse of a totally disabled veteran is completely exempt from the real property tax – again totally without regard to the veteran’s ability to pay the real property tax. Those totally disabled or who suffer from leprosy enjoy a $25,000 exemption.
The point of the issue is that all of these exemptions are granted without regard to the homeowner’s ability to pay the real property tax. The ironic thing is that the exemptions are granted to homeowners and not to people who rent their shelter. The home exemption has its genesis in the Great Depression when people across the country pulled up roots and migrated to where they could find jobs. In order to encourage people to settle in one place and create communities, the home exemption was adopted.
Times have certainly changed and here in Hawaii where housing is so expensive, renting one’s shelter is more a matter of necessity than a convenience. As a result, for those people who rent rather than own their own shelter, no similar provision is made to alleviate the real property tax burden. Thus, the real property tax discriminates in favor of homeowners and against renters.
But more importantly, granting the so-called tax relief of a home exemption results in a waste of resources and helps to blur the accountability for the cost of local or county government. If there was no home exemption, the basic homeowner would have to pay an additional $160 to $360 more per year depending on which county they lived. If a homeowner’s tax bill had to go up by that amount there is no doubt people would pay more attention as to how elected officials spent that money.
In some counties, like Kauai, officials have set up a separate category for residential property that is occupied by its owner as opposed to all residential property. This allows elected officials to set a lower rate for that category as opposed to residential property that is not owner occupied. Again, a hit or miss sort of thing, because a famous movie star or rock musician making millions of dollars of income could fall into that category of having an owner-occupied residential property.
So how can county officials be more judicious in utilizing the real property tax and yet provide relief to taxpayers who truly will be “taxed out of their house and home?”
The model that has been around for nearly 40 years is the real property circuit breaker. Maui County has a circuit breaker that is universally available to all taxpayers without limitation. However, Maui County also retained its home exemption – a duplicity that creates inefficiency. Honolulu has a limited circuit breaker as does the county of Kauai.
So how does this tax relief mechanism work? Just as its namesake indicates, the circuit breaker trips whenever the tax burden exceeds a specified threshold. The threshold is set as a percentage of the household income for which the claim is being made and in many cases ranges between 3% and 5% of household income. For example, with a threshold set at 3% a homeowner who earns $50,000 a year and receives a tax bill of $2,000 would only have to pay $1,500 of that bill as the $1,500 is 3% of the $50,000 income. Anything over and above that amount would be forgiven.
Thus, only the truly overburdened homeowner would get the tax relief. For those homeowners who have substantial income, they would continue to pay the full tab due. As county officials desperately search for new money, they might want to consider this strategy as fair and accountable. We will look at how this can be accomplished next week.

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