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Policy Drove Development

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By Lowell L. Kalapa

(Released on 04/29/07)

It is always fascinating to look back and see from where we have come and where we are now and where we want to be in the future.

Today efforts are being made to carefully plan our communities so as to insure that the pristine natural beauty of Hawaii is preserved for years to come. Indeed much of the land use policy from the late 1970’s to present made it difficult to upzone agricultural lands to urban use.  The 1978 Constitutional Convention even added a provision that important agricultural lands were to be identified and preserved forever for agricultural use.

Such was not the case in years following Hawaii’s admission to the union in 1959. Fueled by the arrival of the jet age and the growing world awareness of Hawaii as a paradise, the visitor industry was about to take off to become the major economic engine that it is today. But pre-statehood Hawaii was but a sleepy cow town that existed to support the sugar and pineapple industries where the tallest building was the Aloha Tower and the tallest apartment building in Waikiki was the Roselei Cooperative.

If Hawaii was to play host to the world, it needed to develop the infrastructure to house and entertain the thousands of visitors who were to arrive in the coming years. It was at that time that state policymakers decided that they needed some sort of incentive to encourage landowners to develop the needed infrastructure. They learned that Pittsburgh had undertaken a plan to revitalize its urban core by utilizing the real property tax system. Lawmakers there decided that if they imposed a higher rate on the underlying land, it would encourage the landowner to maximize the use of the property by building an improvement that would generate income from the property.

So lawmakers decided to adopt this approach to real property taxation in Hawaii. This was a time when the state legislature set real property tax policy while county officials adopted the annual tax rate. This strategy was indeed successful especially in the nonresidential categories or classifications of property. This created a building boom during the late 1960’s as hotels mushroomed throughout the resort areas of Honolulu.

In addition to having a higher rate on land than on improvements there was the assessment process which called for the valuation of real property at its “highest and best” use. So small one-family residential properties located in a resort area like Waikiki would be valued at the highest and best use like a hotel or a retail store. The land under a little two-story apartment building was valued as if there was a twenty-story hotel sitting on it.

However, the Pittsburgh plan also had unintended consequences. The tear down and build new mentality also endangered a number of historic buildings and created a concrete jungle of high rises that dot the Waikiki area today. The most symbolic of these endangered species of historic buildings was the Halekulani Hotel which at that time was a collection of bungalows that surrounded the two-story main building.

For years the rallying call to repeal the Pittsburgh approach to real property tax took on the moniker “the Halekulani bill.” Some ten years after adopting the Pittsburgh approach, legislators voted to repeal the law. However, elements of the law remain with us as part of the current real property tax policy. “Highest and best use” is still the approach real property assessors use in valuing land in Hawaii. In those counties – Honolulu and Maui – where the county ordinance still has a class for unimproved residential property, a higher rate is imposed on that class than on improved residential property.

With the exception of Honolulu, the other counties still retain separate rates for land and improvements although in most cases the rates for each are the same. However, that does allow county lawmakers to define different rates for land and improvements.

But the real point of the matter is that while policymakers believe that they can cause taxpayers to undertake certain activities by using the tax law as an incentive or disincentive, in many cases those efforts end up creating unintended consequences that are not necessarily for the better. One can only wonder what would have happened to resort areas like Waikiki had the tax policy not driven landowners to develop as rapidly as they did during the building boom of the 1960’s. Would there have been more even and measured growth of the resort infrastructure?

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