Property Tax increases

Recently the Kauai county council was flooded with feedback from unhappy taxpayers who saw their tax bills increase dramatically. Facts are in short supply so I have been researching.

One could write a book on the history, present crisis (if that isn't too dramatic of a term), and philosophies and potential policies going forward. Having scratched the surface with some basic research - using materials not generally available that I have gotten with the cooperation of the county clerk's office - I feel obligated to share this important information that is not in the public forum or I suspect really available anywhere. Here's my plan for the weekend:

• This piece describes the workshop and status quo
• Another piece will detail property tax rates historical trends
• I will separately write my personal opinion about the tax workshop and critique of our tax code

I attended the county tax workshop in council chambers yesterday [Agenda Video MP3 MP4 Captions news article] to learn what I could. It was quite informative, on several levels. Here are a few key takeaways:

• citizen testimony was uniformly outraged - people feel that they livelihood and ability to own a home for their children and grandchildren is endangered
• the county has struggled with this problem for many years - when land prices spike, homeowners are suddenly impacted
• years ago a cap was instituted as an interim measure to stabilize taxes until a better way could be found - and it was the removal of that cap that caused the sharp increases
• when council was debating the tax change, the administration estimations of impact (presented as estimated and actual) were largely accurate - no surprises at all - which means they were not looking at the right things
• the county failed to sufficiently notify and educate citizens - even though notices were mailed, printed in the paper, and so forth - the county has no good means of communicating messages
• Kauai county taxes on average are a little higher than neighbor islands but not way out of line
• Accusations were made that residential taxes were increased to hold down the hotel tax rate

County council members uniformly expressed surprise that taxes had gone up so much. There is no suggestion that any mistakes were made preparing the bills so what exactly happened?

The problem in a nutshell

All the hubbub started with Ordinance 953 (as Bill 2495 introduced July 17, 2013 by Tim Bynum) which became law August 28. Since the county fiscal years begins in July, it did not take effect until tax bills appeared last month.

In a nutshell, back in 1991 the council put a 6% cap on homeowner property tax amounts to stem the problem people were facing as land prices on the island were taking off. In 2006(*) the cap was changed to 2% and then around 2012 to be based on consumer price index. Details aside, here's the point: while real estate has inflated considerably since 1991 (easily doubled if not much more) everyone's taxes just went up a few percent every year. At this point it should be obvious that when the council removed the cap - after in some cases over twenty years of holding taxes artificially low - even with various provisions that attempted to "give back" to compensate, some taxpayers took a serious hit.

Starting over twenty years ago, even though property values went up, and tax rates went up, your taxes would only rise a few percent - enough that most people would just shrug and pay, perhaps remembering it was a little higher than last year but no big increases. Suddenly with the cap gone all those years of property valuation growth suddenly catch up.

I think a big factor that isn't getting enough attention (even though many people speaking at the workshop mentioned it) is the change to value mixed use property at the highest rate. If you rented out a room one night that now completely voids your homestead classification and makes the property vacation rental tax rate for the whole year. The vacation rental rate is nearly triple homestead - only hotel/resort is higher. 

But that isn't all and notably for homestead (roughly principal residence rate) classification, the tax rate is no lower than it was all those years - in 1989, when there was just residential rate, the tax was $5.71 per thousand compared to $3.05 now. That taxes are higher now shows how much property values have risen as well as that the compensations the council intends to offset are not helping enough.

The details

First off, I freely admit that I am digging into this but there is a lot I have still to learn and welcome construction feedback to get this right. Some basics - property is zoned residential, commercial, etc. and taxed by similar classifications; however, taxes are figured by actual use, not according to the map. Classifications [defined at tax code Sec. 5A-6.4 Real Property Tax Rate Classifications] are fairly clear:  Residential; Vacation rental; Commercial; Industrial; Agricultural; Conservation; Hotel and resort; and Homestead. Think of Homestead as a lower rate for owner-occupied residential, and other residential as second homes, rental properties, and vacant land in residential zoned areas.

Even focusing on just residential (Homestead, Residential, and Vacation Rental) property tax code are fabulously complex - and I believe this is a big part of the problem. The best way to understand what happened, as a first step to figuring out what to do now, would be to write a simple explanation of how taxes were computed this year compared to last year. However, there are so many rules and so many changes made over the years that it would take a multi-hour seminar to cover everything - yesterday we got part of that seminar covering a sketch of the full details but certainly not all the details.

(*) Dates tax code changes take effect are approximate: in researching this I soon gave up exactly following the tax code because it changes almost every year (see below) and it was often unclear when a code change would be effective given the fiscal year starts in July and that the finance department must require time to implement changes to the system. Thus, the timing of the tax code change, what fiscal year it begins to have impact, and when taxpayers actually see the result may vary slightly. Fortunately, the big picture is clear without knowing this level of detail.

Going back to basics, I thought I would look up the tax code and just figure it out myself. I had no idea what a difficult task that was. To get an idea of the effort involved take a look at how many times the real property tax law here has been changed. While not every one of these necessarily impacts residential taxes, many do. I count twenty times in thirty two years, fourteen in the last fourteen years!

Ord. No. 394, July 1, 1981; Ord. No. 420, January 1, 1983; Ord. No. 561, December 27, 1989; Ord. No. 572, July 16, 1990; Ord. No. 584, March 12, 1991; Ord. No. 603, April 20, 1992; Ord. No. 779, December 10, 2001; Ord. No. 784, May 13, 2002; Ord. No. 789, August 26, 2002; Ord. No. 799, December 23, 2002; Ord. No. 805, September 19, 2003; Ord. No. 819, October 26, 2004; Ord. No. 820, November 8, 2004; Ord. No. 834, October 7, 2005; Ord. No. 836, October 7, 2005; Ord. No. 915, November 16, 2011; Ord. No. 920, December 14, 2011; Ord. No. 932, September 5, 2012; Ord. No. 940, April 24, 2013; Ord. No. 953, August 28, 2013

Taxpayers need to confront a lot of complexity in the system as well. Homeowners have a number of options for tax relief but only if the file the proper paperwork, and some filings must be renewed every year. The system is complex and I suspect many people pay more than they have to because they either forget or do not know or fully understand the system. Not knowing about of the ways to reduce your taxes will cost you significantly.

• Home use exemption
• Low income exemption (annual)
• Disability (for veterans, Hansen's disease, and other various types)
• Safe Room exemption
• Kuleana
• Home Preservation (annual)
• Ag Dedication
• Hawaiian Homelands
• Long-term Affordable Rent (annual)
• Recording a 15 year lease gives the lessee owner equivalent rights
• Deeding a percentage interest to family member

I'm guessing that virtually nobody knows about all these ways of lowering residential property taxes, or even those who researched taxes when they bought have managed to remember it all and keep up with not only filing the forms but also learning about the frequent changes in the tax code itself. Is it any surprise that people fail to get this exactly right? Should that cost them a heavy toll in taxes?

And now to get to the FY2014 tax change itself. Many years ago (I am still researching the origins) when Kauai real estate started to skyrocket as tourism, rapid development, and wealthy second home owners started arriving - property taxes proportionately jumped up in response. To address the outcry from homeowners the council implemented at first a 6% cap so that no matter how much assessed values and tax rates rose, homeowner's bills would only go up at most 6% from the previous year.

In 2005 Ordinance 826 (Bill 2127) dropped the cap to 2% in response to an accelerating raising market. As the preamble says, "The purpose of this Bill is to provide immediate property tax relief to qualified homeowners with a home exemption under section 5A-11.4 by lowering the Permanent Home Use PHU exemption from its present 6% to 2% commencing July 1, 2005. The County recognizes that by the close of 2004, average median home sale prices on Kauai had risen to $495,000. The Honolulu Advertiser reported that, for February 2005, the median home sale price on Kauai was $627,000 - a 48% jump from February 2004 and the highest ever for Kauai." That even a 6% cap needed lowering indicates a remarkable further intervention in the system.

In 2013, Ordinance 940 (Bill 2467, Draft 2) added Sec. 5A-11.4(e) Low Income Homeowner Credit as yet another attempt at tax relief in addition to the cap, then later in the same year Ordinance 953 (Bill 2495, Draft 3) enacted several important changes in an attempt to improve things that seem to have precipitated all the trouble.

• Sec. 5A-6.4 on tax rate classifications adds this: "If a property has multiple actual uses, it shall be classified as the use with the highest tax rate." This means if you have a small room occasionally used as a vacation rental then the entire property now pays the vacation rental tax rate (which is the highest rate except for hotel/resort).
• Sec. 5A-9.3 Permanent Home Use Tax Limit is removed completely. 
• Sec. 5A-9.4 Certain Lands Dedicated For Residential Use is removed completely 
• Sec. 5A-11.4. (a) Principal home exemption was increased (in hopes of offsetting the changes somewhat) 
• under 60: from $48,000 to $160,000 
• 60 to 70: from $96,000 to $180,000 
• over 70: from $120,000 to $200,000 

This still does not give you a full story of how residential property tax works here. Up until 2012 land and build rates were separate. The Apartment classification changed last year into the Vacation Rental rate apparently (I haven't chased that down yet). The precise rules for qualifying for various rates and exemptions vary from year to year.

For the county's summary of changes for 2014 see REAL PROPERTY TAX CHANGES FOR 2014.

Postscript: How to find county ordinances

You can see a fairly recent version of county code here with all the latest changes made. The very latest ordinances of the past few months are not included but there will be a warning triangle indicating change has been made recently, and these very latest ordinances are here.
Individual ordinances of the past few years are at http://qcode.us/codes/kauaicounty/revisions/930.pdf (replace "930" at the end with the number you want, so long as it isn't smaller than 930).
Finally, there is a listing of all ordinances since number one here.