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Severing the Accountability

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By Lowell L. Kalapa
(Released on 8/30/09)

The Mayor of the City & County of Honolulu would like to join the Neighbor Island counties by establishing a homeowner class of real property with presumably the intent of being able to set a lower tax rate for that class of taxpayers.

Meanwhile, a member of that county’s council would like to establish a lower rate for landlords who set affordable rental rates for their rentals. While all of this sounds like elected officials care about their constituents and the potential heavy burden of real property taxes, these proposals are nothing more than another scheme to hide the true cost of operating county government.

This way the vast bulk of voters thinks that their real property taxes aren’t so bad, so they continue to ask for more and more services from the county. What they don’t realize is that they end up paying for those added county services as those properties to whom the burden is shifted pass the cost of the increased real property tax burden on to their customers, be it renters or the customers of the local supermarket. By allowing the tax burden to be shifted to other classes of real property, elected officials sever the accountability relationship between those who benefit from those services and those who must pay for them.

In a sense, using such schemes as the homeowner class, elected officials create a monster that eventually will come back to devour them. As the demand for county programs and services increases, elected officials shift more and more of the burden to the not-so-favored classes of property, in particular non-owner-occupied residential property and nonresidential property such as commercial, industrial, agricultural and hotel property. These businesses must recover that increased cost of the real property tax by either passing the cost on to customers in the form of higher prices or back to the employees of the business in the form of smaller pay increases or perhaps fewer benefits or shorter hours or, in the most extreme case, a reduction in the size of the workforce.

While the Honolulu City administration argues that the homeowner class has been available on the Neighbor Islands for almost 15 years, they fail to acknowledge that many of the elected officials on the Neighbor Islands regret having the specialized class as it limits how much they can raise from this particular class. While they try to balance the demands for services while shifting the cost for funding those programs and services to other classes of real property, they recognize that those other properties can only bear so much in added taxes. If county officials truly want to alleviate the growing burden of real property taxes, the only true form of tax relief must come with a reduction in the demand for those dollars which means spending has to be curtailed. Of course, that will only happen when the taxpayer is faced with paying higher taxes or doing without some county service or program. As stated before, it is the accountability relationship between those who enjoy those services and those who must pay for those services.

Once taxpayers understand that county programs and services are not “free,” they realize that they must make choices in deciding which services are truly essential and which services are luxuries which they are unwilling to pay for out of their real property tax. However, when elected officials shield certain taxpayers, in this case owner-occupied-residential taxpayers, that particular class has no clue what the services they demand cost the county to provide.

And when the economic fortunes of the county, or even the state, turn downward, it becomes difficult to continue shifting the burden of taxes to other classes of taxpayers. Thus, instead of dreaming up schemes to protect homeowners, county officials should take this opportunity to first decide what county services are crucial to the health and welfare of the community and put the rest of the services on the chopping block.

Attacking the problem from the other end, consideration might be given to mandating a single real property tax rate for all classes of property. This would bring a dose of reality back to taxpayers as to the true cost of operating their county government.

Although this latter alternative might be bitter medicine, it is probably what the patient needs in order to be able to cope with the future and to insure that elected officials be held accountable for how they choose to spend hard-earned tax dollars.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

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