By Lowell L. Kalapa
The real property tab usually comes as a surprise to people who move here from the mainland because relative to what the new homeowner used to pay in real property taxes on the mainland, the annual tab in Hawaii is quite low.
It is not uncommon to talk with someone from the mainland, especially from the East Coast, who berates their annual tax bill of $7,000 or $10,000. And no, we are not talking about 40-acre estates with 20 bedrooms, but what we would consider average, middle-class homes. Of course, those homes on the mainland sell for a lot less than a similar home would sell for in Hawaii. Why is there such a disparity between values and real property tax bills?
To begin with, while real estate prices and therefore valuations for real property tax purposes are very high in Hawaii, the rates are traditionally low by comparison to mainland counter parts. This is due to the fact that local governments in Hawaii do not provide the breadth of services local governments on the mainland provide. In particular, the costly budget items of education, health and welfare services are the responsibility of state government in Hawaii whereas those functions are usually the responsibility of local governments on the mainland.
Again, as one looks across the national landscape, those states that rely more heavily on the real property tax tend to be at the eastern end of the country. That tendency probably stems from the historical fact that income and sales taxes are largely the products of the early 20th century. Thus, the older states “grew up” with the real property tax as the source for local government receipts while the federal government relied on customs duties and tariffs until 1914 when the income tax was introduced.
Sales taxes are largely the product of the late 1920’s and 1930’s when the Great Depression caused foreclosures on people’s homes and businesses, particularly farms in the Midwest, and local governments searched for another source of revenue to pay for programs like education and welfare. While Hawaii initially depended on the real property tax, the bulk of the money that paid for the services provided by the territory in the first half of the 20th century came from the federal government.
When the federal government was also strapped for resources during the Great Depression, territorial officials turned to the sales tax which eventually evolved into the general excise tax. Thus, Hawaii has never put a great deal of reliance on the real property tax to pay for government in Hawaii. And given that local government, which has complete control over the real property tax, is responsible for services limited to sanitation and public safety, like police and fire protection, it is no wonder that Hawaii ranks in the bottom five or ten states when it comes to property taxes per $1,000 of personal income.
For the year 2002, the last time a national survey was reported, the state of Maine took top honors with $54.81 per $1,000 of personal income. It was joined by six other eastern states in the top ten while the other three states placed in the top ten because they lacked either a sales tax or an income tax like Wyoming and Texas which have no net income tax on either their residents or businesses. Hawaii garnered the 45th spot in that ranking of the states with a $17.50 per $1,000 niche.
With that sort of comparative burden for the real property tax, it remains curious why there is a spate of proposals, largely on the Neighbor Islands, to cap the growth in real property valuations and tax bills. No doubt these efforts are driven by the heated real estate market and the prospects that valuations will also rise for real property tax purposes and therefore tax bills. However, what taxpayers and some elected officials seem to forget is that there are two parts to the formula that determines how much real property tax bills will be.
True, valuations are one component of the formula and valuations are truly a reflection of what market value based on sales sets as the base for the tax. The other component is the rate that is set by elected officials, by mayors when they submit their budget proposals and by the county councils in adopting the operating budget or spending plan for the county in the coming year.
Do all of these proposals to limit the growth in property values indicate that advocates don’t trust their elected officials to spend the tax dollars wisely, or do advocates just want someone else to pay for the services they enjoy? After all, by comparison, the real property tax burden in Hawaii is relatively low.