By Lowell L. Kalapa
(Released on 12/4/11)
Coming under fire in the City & County of Honolulu is the plethora of real property tax exemptions from those granted to charitable organizations to those offered to homeowners who promise to preserve their historical residences to credit unions and to churches.
Perhaps realizing that dealing with a politically sensitive issue, such as who gets a tax break from paying the real property tax, was best left to folks who didn’t have to worry about being reelected, the Honolulu City Council left the task to a group of citizens concerned about the fairness and equity of the real property tax system. Recognizing that each of the existing exemptions from the real property tax has a vocal constituency, the Real Property Tax Review Commission examined the principles of a good tax policy as the genesis of its discussion rather than being swayed by the arguments of the various constituency groups.
One of the primary principles of a good tax policy is imbedded in equity, that is, where taxpayers are basically the same, they should be treated alike. What is likely to be a highly controversial recommendation of the Commission is the possible elimination of the home exemption. The Commission questioned why taxpayers who owned their shelter got a tax break while those who rent their shelter get none. In many cases renters do not own their own shelter but rent because home ownership can be very expensive in Hawaii. Although renting one’s shelter may not be a true indicator that one is not capable of purchasing and owning one’s own shelter, it is certainly a consideration.
Thus, if one were to look at providing equity between those who own and those who rent their shelter, then the home exemption tips the scale against renters who get no similar break on the property tax burden imposed on their landlords which is imbedded in their rent.
Similarly, Honolulu, as well as its Neighbor Island colleagues, provides multiple home exemptions because the homeowner happens to be older than the general population. While filial piety may dictate that one honor their elders, again, there is no economic reason why a person who happens to be over a certain age should get any greater tax relief than those in the general population.
Additional exemptions are also conferred on those who happen to be blind or disabled or for that matter are disabled veterans. Again, the tax principles breached include not only equity but also efficiency, as these disabilities must be verified.
One the other hand, commissioners questioned the exemption for public utility property and it was explained that the counties receive payments from the state’s public service company tax in lieu of the real property tax. If the counties were to tax the real property of utility companies, which includes obscure rights of way and booster station boxes sitting in a forest of high-rise condominiums, the valuation of these parcels would create an administrative nightmare. Thus, the exemption from the real property tax is provided for public utilities in return for being able to tax these particular landowners on a percentage of their gross income. In this case the tax principle of efficiency is achieved.
Then there is the huge problem of what to do with all those charitable organizations that currently are exempt from the real property tax. First of all, the Commission learned that unlike federal and state income tax laws, the provision that the counties inherited from the state when the duties for the real property tax were transferred to the counties was so vague that the exemption was liberally interpreted. In an effort to give more precise direction to real property tax administrators a rewrite of the provision for charitable nonprofit organizations was undertaken to define it as for those that are recognized by the federal Code as being section 501(c)(3) organizations.
The Commission then recognized that while many of these organizations provide services or goods that government might otherwise have to provide, they, like taxable property owners, utilize many of the same county services such as police and fire protection, sewers, mass transit and so on. To that end, it was generally believed that all property owners should pay something for those very basic health and public safety services albeit at a discount in recognition of the fact that they provide services for the public good. This recommendation recognizes the tax principle of revenue adequacy.