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Extreme Response to Property Tax Overload Hurts More Than Helps

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By Lowell L. Kalapa

Hawaii is going through another bout of real estate boom and this time it is not only limited to Honolulu. That means that property owners, primarily homeowners, will demand that local officials do something about the rising property tax burden as a result of rising assessments.for sale
While local lawmakers do have the ability to ease the burden on taxpayers by adjusting rates, the temptation to leave the rates at the same level as last year is so great because county officials can claim that they didn’t raise tax rates while at the same time enjoying a windfall of tax collections. However, in doing so those very local officials incite extreme responses to the rising real property tax burden.
Probably the most infamous of all extreme reactions to rising real property tax burdens is Proposition 13 which was adopted in California in 1978. Basically, Proposition 13, and all of its imitators, freezes valuations or assessments to a point in time and then allows those values to grow by only 1% or 2% per year. It benefits primarily homeowners who own their property at the time the freeze occurs. For those who acquire their homes after the year of the freeze, the base for their real property is the purchase price of their home.
This is one of the down sides of the Proposition 13 approach to tax relief. Two identical homes perhaps built at the same time, of the same materials, on the same size lot would have two vastly different valuations for real property tax purposes. One could be the original owner who moved in when the house was brand new. The other owner is a newly wed couple buying their first home.
The original owner, under a Proposition 13 type of mechanism, would have an assessment of the value of the home 25 years ago plus about 28% added by the annual 1% limitation on the growth in value. The new owners next door, on the other hand, may have a valuation that is 300% to 400% more than the original value of the home when it was built 25 years ago. Thus, the new owners would probably pay three or four times more than the family who bought their home 25 years.
Yet, both families would need the same level of services from the county be it police or fire protection or garbage collection and sewer disposal. It hardly seems fair that just because one is a recent purchaser of real property that the cost of getting services from the county should cost that family three or four times more than a family that has lived in the same home for a number of years.
Slapping a ceiling on how much assessments, and therefore tax collections can grow also has serious implications for elected county officials. One of the serious results of Proposition 13 in California was that bond buyers shied away from purchasing any local bond issues because the local governments no longer had the ability to raise taxes as needed to insure the repayment of debt. As a result, local governments in California could no longer issue bonds without going through extraordinary hoops and dances. This, in turn, affected the development of infrastructure for localities throughout the state.
One of the other extreme reactions to the rising burden of real property taxes practiced both on the mainland as well as here in Hawaii is to shift the tax burden to nonresidential properties under the theory that businesses can pass on the tax burden to others where as homeowners have no one to whom they can pass the increased burden. The problem with that rationale is that county officials fail to realize that many of those businesses are businesses that homeowners patronize or for whom homeowners work.
With higher property taxes, businesses either have to raise prices on everything from milk to auto repairs or cut back on expenses which means a smaller pay raise or no pay raise at all or being less competitive on the world market because of the higher real property tax burden.
We all wish that we could pass the cost of running government on to someone else. The problem is not one of high taxes, but of spending that requires higher taxes. If there is any problem to be attacked, it is the spending problem and to a large degree, taxpayers are probably just as guilty in contributing to higher spending. We assume that government can do everything without realizing that we end up paying for those services. Elected officials who like that spending are merely pandering to constituents to insure their reelection. The result is a spending plan that is much more than we can afford in higher property tax bills.
Finally, if you believe elected officials are spending too much, there is always the ballot box in November.

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