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Tax Appeal Court Strikes Down Honolulu’s “Residential A”

By Tom Yamachika, President

 

In 2013, Honolulu established a new property tax classification for residential property (1) valued at over $1 million and (2) for which the home exemption was not taken.  Honolulu set the tax rate for this classification, called “Residential A,” 70% higher than the tax rate for other residential property.  Earlier this year, a member of the City’s 2014 Real Property Tax Advisory Commission, Schuyler “Lucky” Cole, who was represented by Ray Kamikawa, who happened to chair that Commission, sued in Tax Appeal Court to attack the legality and constitutionality of the Residential A classification – and recently won.

In court, Cole’s side argued that the Residential A classification was illegal for four reasons, and the Tax Appeal Court agreed with all four of them.

Cole argued that the classification was illegal because the property tax ordinance classifies property according to its highest and best use, but the two triggers for Residential A – valuation over $1 million and no home exemption – are not based on use.  Valuation of a property has nothing to do with how it is used.  And, because use of the property is determined by what it is used for rather than who is using it, the home exemption has nothing to do with use either.  This problem could be fixed through careful rewording of the ordinance, but then there are also constitutional problems.

Cole argued that the classification ran afoul of three protections that the U.S. Constitution, and, to some extent, the Hawaii Constitution, provide under the Commerce Clause, the Equal Protection Clause, and the Privileges and Immunities Clause.

The Commerce Clause states that the Congress has the power to regulate commerce, but the courts have held that limitations are placed on the States’ taxing powers even when the Congress doesn’t explicitly regulate.  One limitation is that taxes can’t discriminate against commerce from citizens of other states and countries.

The Equal Protection Clause limits the power of the government, at both the federal and state levels, so that it may not impose taxation that unequally burdens persons or property of the same class (although the government may make certain classifications if it has a rational basis for doing so).

The Privileges and Immunities Clause says that a citizen of one state cannot be forced to pay taxes in another state that are heavier than those imposed on that state’s own citizens.  Thus, no discrimination against out-of-state Americans is allowed.

Cole’s argument is, basically, that the Residential A classification was intended to penalize wealthy people from other states and countries who are buying up Hawaii property and, in the process, appear to be driving up the cost of housing for our locals to unbearable levels.  If a tax discriminates against nonresidents or foreigners just because they are nonresidents or foreigners, these constitutional problems arise.  The City argued very strongly that the tax ordinance is written to be neutral and in fact applies to locals, like Mr. Cole.  But one critical point emerged in the Tax Appeal Court hearing:  Residential A status depends on the lack of a home exemption, and there is no way a nonresident can qualify for a home exemption.  The City pointed out that home or homestead exemptions appear in 48 states, and argued that they couldn’t possibly be unconstitutional.  The Tax Appeal Court seemed to disagree.

It may be too late for Honolulu property owners to contest their property tax classifications for this year – the deadline was September 30th – but we expect further developments in the case this and next year.  Homeowners who are in this property class would be well advised to watch for these developments.

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2 Responses

  1. admin
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    I recently read your article in the Maui News on “Residential A” Property. I reside on Maui (since 1986) but own a home in Aina Haina which is being occupied my son and his family. So I have been following this matter closely and read your article with great interest. However, I am aware that the Caldwell Administration has indicated it will appeal the court’s decision.

    When I first learned about this, I wrote a letter to all the members of the Honolulu City Council expressing my displeasure (for the record). Even though I cannot vote for the council member of the Aina Haina community, Council member Trevor Ozawa still does represent me and contacted me…but there was not much to his response.

    In the meantime, I filed an appeal regarding my property assessment for FY2016-2017 because I calculated that the assessment was a 20.75% increase where the 3 previous years averaged about 7.8%. I also alluded to the unfairness of my property being placed in the ILLEGAL (my characterization) “Residential A” category. Recently I called the Real Property Assessment Division to find out the status of my appeal. I was told that I shouldn’t expect any action soon because their backlog reaches back to even the prior year. Will I ever get a refund on an adjustment to the amount of tax I paid and will have to pay again for the 2nd half? Who knows.

    Anyway, I wanted to share my story. I am sure there are many who feel taken advantage of because of this situation. Thank you for your important work by bringing transparency and information to the public regarding tax matters. I truly appreciate it and have signed up for your “Weekly Commentary” posts.

    Stephen K.

  2. Tom Yamachika
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    Judge Reverses Decision on City Property Tax for Pricy Homes
    By – Associated Press – Saturday, December 24, 2016
    HONOLULU (AP) – The city of Honolulu’s residential tax for homeowners who live in million-dollar properties part-time will remain in effect after a state judge reversed his decision that it was unconstitutional.
    Judge Gary Chang heard new arguments Friday from Honolulu Corporation Counsel Donna Leong. He ruled the city’s Residential A tax classification didn’t discriminate against non-residents, The Honolulu Star-Advertiser reported (http://bit.ly/2hSoAmX).
    The judge’s decision comes after 20 Residential A property owners sued the city earlier this year. They argued that the ordinance requiring them to pay more taxes than standard residential class owners was unconstitutional. Chang had agreed with them in an October ruling.
    Residential A owners, who live in homes valued at $1 million or more only part-time, pay $6 per $1,000 of assessed value, while standard properties are taxed at $3.50 per $1,000.
    Chang said his new ruling was based on a more in-depth review of the matter.
    “Simply, the court, upon further study, came to a different conclusion,” he said.

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