Several states have so-called “Truth-in-Taxation” laws designed to mitigate steep property tax hikes like the ones Honolulu homeowners are facing.
When Andria Tupola first heard of a policy designed to prevent property taxes from rising sharply when property valuations rise, she filed the idea in her head as an interesting concept unrelated to her job at the time .
Then, Tupola was a Hawaii state representative seeking to learn more about the government’s tax policies at a national conference for state legislators held at the Utah State Capitol. One presentation focused on Utah’s “truth in taxation” statute.
The law is based on the premise that property taxes shouldn’t automatically increase simply because property values rise due to a hot housing market. Instead, taxes for homeowners generally remain stable unless elected officials explicitly raise taxes, even as property values skyrocket.
Fast forward to 2023 and rising property taxes are suddenly a big deal for Tupola, now a member of the Honolulu City Council. She and her city council colleagues are considering how to change Oahu’s property tax ordinances to deal with a firestorm of criticism from homeowners facing rising tax bills.
On an island with a high cost of living, such changes are especially difficult for homeowners struggling to get by, especially kupuna with fixed incomes.
Tupola says it’s time Honolulu started talking about a truth in the tax ordinance.
“It didn’t concern me when I first heard about it as a state legislator because we didn’t deal with property taxes,” he said.
But now that property taxes are the hot topic before the Honolulu City Council, he said, “that can be part of the discussion too.”
Tupola’s idea is just one of the proposals. Honolulu politicians are scrambling in the face of growing criticism from homeowners who pay most of the taxes used to keep Honolulu operating.
A bill proposed by Councilman Calvin Say, for example, could provide relief for some homeowners by streamlining residential property categories. A system that now classifies some properties as “Residential A”, on which the municipal tax is increased, would be eliminated. The properties would be categorized simply as “owner occupied” and “non-owner occupied”.
Meanwhile, Radiant Board member Cordero also proposed changing the categories used to tax properties by creating, among other things, a classification system in which Honolulu would tax properties at four levels based on value.
Mayor Rick Blangiardi’s administration has floated the idea of giving homeowners a one-time tax break, such as a refund, that would pay off taxpayers if tax collections exceed what the city needs to operate.
The reason for this flurry of proposals has been well documented. After a decade in which Honolulu’s property tax collections soared more than 80 percent — to $1.51 billion in fiscal 2023 from $834 million in 2014 — city officials in December sent notices to homeowners heralding even larger-than-usual tax increases in the next tax year.
The reason: soaring real estate valuations. Even if the city doesn’t raise property tax rates, many landlords face tax escalation because officials have determined that property values have soared over the past year. On Oahu’s North Shore, for example, property valuations have increased by an average of 20.4%.
Honolulu City Council member Matt Weyer says the changes are affecting residents in an area already notorious for a tight housing market.
“If it keeps going up at the rate it is, people won’t be able to afford to live here,” Weyer said.
The situation has led to absurd results, says SharLyn Foo, a North Shore resident and secretary of the North Shore Neighborhood Board. An empty lot of her property used as a parking lot was valued at $3 million, she said.
He acknowledges that during the Covid-19 pandemic new residents have come to the North Shore inflating the prices used to calculate appraisals for nearby properties. But, she said, the ratings just don’t make sense.
“This is a goddamn parking lot,” he said.
And it’s not just the North Shore. Valuations for the nearby Koolauloa area which includes Kahuku and Kaaawa rose 18.4%, according to the city, while values overall rose 13.3%.
Despite the ratings hike, it’s still unclear how much additional revenue the city will garner, said Andy Kawano, Honolulu’s budget director. This will depend in part on how many successful protests property owners file challenging their appraisals.
Additionally, Kawano said, the Blangiardi administration is still calculating how much it will need to cover a range of city services, as well as pensions and retirement benefits that take up about 40 percent of the city’s budget each year.
Property tax collections have soared despite constant rates
One thing that is clear is that property tax revenues have risen steadily over the past 10 years. There are two key reasons for this steady growth: the increase in property inspections coupled with tax rates that have remained unchanged.
Technically, residential property tax rates aren’t fixed, Kawano said. The city council sets the rates each year and could lower them so the city only raises what it needs to cover expenses, Kawano said.
“They want to equate a tax increase with a tax increase, while ignoring the huge increase in valuations. It’s nonsense. I’m writing a bigger check. — David Trabert, Kansas Policy Institute
But he said it’s best to keep the current rate, even if it means charging taxpayers more than the city needs and paying back any excess revenue later.
The reason, Kawano says, is that it’s too difficult to raise rates later once they’ve been lowered.
Politicians “don’t want to go back” on the tax rate, he said
Policies like the one proposed by Tupola take the opposite approach. They start with the idea that property taxes shouldn’t go up simply because residential property values go up due to rising home prices.
As a result, under these laws, revenues generally remain neutral. This means that tax rates are generally expected to fall if appraised home values go up.
Tax authorities, such as the Honolulu City Council, can raise rates and thus raise revenue. But a key provision is that if a tax authority wants to raise taxes on homeowners it must do so transparently with notice and public hearings.
“I think it’s fair,” Tupola said. “If there’s a tax hike, why wouldn’t you let the public know about it?”
The general idea is to be honest with the public that government officials are raising people’s taxes, says David Trabert, chief executive officer of the Kansas Policy Institute.
The organization helped Kansas lawmakers adopt a property tax transparency bill in 2021 with a message that local politicians simply weren’t being honest, claiming they were “holding the line” on property taxes even as they filed bills larger each year to homeowners.
“They want to equate a tax increase with a tax increase, while ignoring the huge increase in valuations,” Trabert said. “It’s nonsense. I’m writing a bigger check.
He added, “There’s a saying that some farmers here have, which goes, ‘Don’t tell me it’s raining outside when your dog is dashing over my boots.'”
While rates remain stable, increases in property valuations have driven Honolulu property tax collections by more than 80% over the past decade, from just over $800 million in 2014 to over $1.5 billion. dollars in fiscal 2023. Skyrocketing valuations suggest increases in 2024 outpace those in recent years.
Tupola admits that getting a Kansas-style bill passed in Honolulu will be difficult. With the exception of Minnesota, the other states with truth tax laws — Utah, Tennessee, Texas and Kansas — have been red states, though Tupola notes that Kansas Gov. Laura Kelly, a Democrat, signed the state bill into law .
“I don’t think it’s a Republican issue as much as a tax transparency issue,” he said.
However, even some conservatives in Hawaii do not embrace the idea.
Jonathan Helton, a policy researcher at the Grassroot Institute in Hawaii, said Utah’s truth to tax law created unintended consequences. For example, it can be costly for cities to provide public notice to taxpayers, Helton said. Also, he said, cities have refrained from going through the notification and hearing process for years only to slap residents with a sudden and unexpected hike.
“The best thing to do is cut the rate,” Helton said. Specifically, she said, the organization will ask for the standard residential rate to be reduced by 29%, from 3.5% to 2.5%, and for spending to be cut.
Meanwhile, Kawano, Honolulu’s budget director, said fluctuating tax rates could hurt the city’s bond rating. In any case, he said, now is not the time for big changes
“We are in a difficult moment now,” he said. “If we do things out of the ordinary, there can be unintended consequences.”
For now, Tupola said it might be easier to pass the measures introduced by Say and Cordero, or increase the exemption for owner-occupiers, which is now $100,000 and $140.00 for seniors 65 and older. .
However, he said, with property tax hikes showing no signs of slowing amid ever-rising home prices, Tupola said it’s time for broader changes, even if the changes are difficult to adopt and implement.
“I think the excuse that it’s too hard… well, everything is hard in life,” she said.
“Struggling To Get By” is part of our series on “Hawaii’s Changing Economy,” which is supported by a grant from the Hawaii Community Foundation as part of its CHANGE Framework project.
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