Before addressing what we do from here I wanted to try to put down an explanation of home property tax. The big news is that it appears to me that the removal of the cap was handled relatively smoothly, but that a one sentence change that slipped in is what may be causing all the upset over taxes: if the details are more than you want to tackle, be sure to read "Mixed use" toward the end.
Apologies up front that this will run long just to get the essence of the impact of the changes wrought by Ordinance 953, and I must begin by stating that this is not(*) a definitive exact description of the tax code. If you take away one thing from this article, it's that the tax code is complex: just skimming down below without even reading it should serve as evidence of the complexity.
(*) I believe that this is reasonably accurate picture of the current tax code but to focus on what I take to be the key issues, it is definitely a simplified description (believe it or not). For full details, please see Kauai County Title II Chapter 5A Real Property Tax. IANAL; TINLA.My focus here - to keep this from turning into a tax accounting course - is on the recent tax code changes, what the situation was like up to last year's taxes, and what impact resulted. There were changes relating to minimum tax, to tax classifications other than homestead, and so forth. Also, in laying out how taxes are computed there are a number of provisions that only affect small numbers of people that I have omitted where these are not controversial and do not impact the larger issues.
With fair warning that this won't be easy, here goes. The concluding section may or may not be intelligible without going through everything, but if you don't relish the details it may be worth a look.
Ad Valorem
Real property taxes here are ad valorem (a fancy Latin term) meaning the tax is levied as a proportion of the assessed value of the property. This means that, for example, in its pure form, a $2,000,000 property owner pays double the taxes a $1,000,000 property owner pays. When property changes hands the sale price sets market value, and in intervening years the county assessor adjusts the value to keep it updated, based on market trends, sales of similar properties, and many other factors.
The Boom
The story begins in 1990 with Ordinance 571 (not available online to my knowledge). The preamble to the bill actually explains the situation clearly: the following are excerpts from Bill 1341 Draft 1.
... faced with assessments which have been increasing by approximately 15 percent annually over the last 2 years 1988 and 1989.
To address the needs of these permanent homeowners, this bill would allow those with home exemptions to dedicate their property to permanent home use for a 10 year period, and have their assessment remain more or less stable for this 10 year period. Thereafter, the dedication may be renewable for additional 10 year periods. A 6% annual inflationary increase shall be allowed in assessments, and increases in valuation due to improvements shall also be added. If the homeowner breaches the dedication, for example by selling or losing the homeowners exemption, there would be severe penalties.
So property values were skyrocketing and since for longtime homeowners the increased market values were "on paper" only, people were struggling to keep up with the higher taxes.
Of course this happened a long time ago, but I am curious why the council did not simply lower the tax rate to maintain revenues instead of instituting this cap which we are now paying for in a very real sense. Presumably the real estate market was booming and everyone's property values going up, yet if real estate was up 15% that doesn't mean the county needs 15% more revenue so they could just drop the tax rate by 15%. And in fact, the residential tax rate (this was before "Homestead" classification existed, and by the way, land and buildings were taxed separately) from 1989 to 1990 changed from 5.71 to 4.96, a decrease of about 15%.Note that this was a ten year dedication but renewable with penalties. For many of us pondering whether we might sell our home in the next ten years is a difficult question and I wonder why the tax relief was based on that commitment: why if I planned to sell in eight years I should not deserve protection against large tax increases? By simply adjusting the tax rate none of this would have been at issue.
The Cap
So this is how the cap began, and to my best knowledge, people who saw sharp tax increases this year all had been "under the cap" for a number of years.
In 2006 the cap was dropped to 2% by Ordinance 826, and then in 2011, Ordinance 915 replaces the percentage with the urban Honolulu Consumer Price Index (which I must say is fairly different that the Kauai real estate market). Ironically, for 2012 and 2013, the CPI was 2.4% and 1.78% which averages out to just about 2% per year. The Honolulu CPI numbers can be found here.
But the most important thing to understand about the cap is that the longer it is in effect, by suppressing any large increases greater than 6% and then 2%, etc. the taxes that longtime homeowners pay become increasingly less than what their neighbors pay on similar homes, merely by virtue of having owned for many years.
On top of the cap holding down taxes year to year, it also in effect locks in the assessed value all the way back to the time the cap first went into effect for a given home. Some lucky capped homes may have had assessed values on the low side at the time, even when that was adjusted back to fair market value the cap continued holding down the tax you paid. Anecdotally I have heard from more than one source that assessors did not routinely reassess all properties every year, so it was hit or miss if your property was reassessed any given year. If true, this means that even homeowners who have owned for the same length of time will have different benefit from the cap depending on the foibles of assessment - and so long as the cap is in place that can't effectively be remedied in later years.
In terms of numbers, there are nearly 11,000 Homestead class properties on the island. Over 70% had cap credit reducing their taxes up to last year (FY2013). Of these, 1695 (or 15%) the cap credit was greater than 50%, 815 the cap exceeded 75%, and 423 the cap credit reduced taxes by 90%. For many homeowners the cap was a major factor, holding down their tax liability while the market rose.
Revenue and Bond ratings
On top of the cap which only homeowners (not businesses) can take advantage of, the tax rate on Homestead class has been holding steady or drifting lower since 1999. Why give homeowners a break?
Most of the revenue to operate the county comes from real property taxes and if you give one group of property owners low rates plus a cap it mean you have to lean more heavily on all the other property owners to pay more, and over time that has real consequences.
Kauai county bonds have been downgraded recently and it is a concern for the county's financial health, as well as impacts ability to raise funds through bonds in the future. Finance director Steve Hunt testified at the RPT workshop that bond raters have mentioned the real property tax situation as one factor they are looking at. In a nutshell, for FY2014, the Homestead class represents about 22% of property value on the island but taxes amount to 9.9% of total revenues. In effect, the bond raters are suggesting that homeowners on Kauai need to step up and pay more of their share of county services.
Axing the cap
Last fall Ordinance 953 repealed the tax cap and made some other changes intended to cushion the blow. I know that a lot of effort went into trying to smooth the transition but it seems there were adverse impacts for lots of folks from the reaction that led to the RPT workshop and now several competing bills to change the tax code further.
Just given how much some people's taxes were held down so much by the cap makes it extremely difficult to even know what the "right thing" is. For example, under the cap, you could have two identical homes side by side, one paying ten times the taxes as the other, simply due to one being newly purchased and the other owner being there twenty years or more. On the one hand, it isn't fair to have such inequity in taxes between similar homes and taxpayers. On the other hand, it isn't fair to suddenly raise taxes on the lucky ones who have benefitted over the years from low rates either.
I would say that be letting the tax cap credit grow over the years to be such a big factor in some people's taxes, the council created an untenable situation. Why didn't the 1990 council simply adjust rates to ease taxes in the face of huge market growth? Yet the 6% cap was much more in line with real property market growth than the 2% cap later instituted (would be interested to learn what the thinking was) later and the CPI based percentage ends up being about the same.
Compensatory measures
Ordinance 953 is a complex piece of legislation but I want to focus on two pieces of it for purposes of understanding the impact that has caused so much unhappiness.
The only major change for most homeowners introduced presumably to cushion the blow of losing the cap is that the homeowner exemption was raised significantly for all Homestead properties. Here are the details:
| Homeowner exemption | Sec. 5A-11-4(a) | ||
| under 60 | 60 to 70 | over 70 | |
| previously | $48,000 | $96,000 | $120,000 |
| from FY2014 | $160,000 | $180,000 | $200,000 |
| difference | $112,000 | $84,000 | $80,000 |
| tax reduction | $341.60 | $256.20 | $244.00 |
In short, if your tax cap was less than the amount at the bottom of the table (by homeowner age range) you saved more, but to the extent the cap was greater you had more taxes to pay. Here are some estimates I calculated of how many people had cap credits.
| No cap credit | 3207 |
| under 250 | 4475 |
| 250-499 | 2625 |
| 500-749 | 416 |
| 750-999 | 131 |
| 1000-1999 | 104 |
| 2000-2999 | 26 |
| 3000-3999 | 5 |
| 4000-4999 | 3 |
| 5000 and up | 2 |
While a majority of people had either no cap (3,207) or under $250 (4,475), a few hundred did lose out more than the added exemption compensated. For caps well over $1000 the hit was significant but then for the most part these well higher priced homes that benefited from another measure in the change.
Sec. 5A-11A.2. Limitation of Taxes for Home Preservation.There are a bunch of conditions I won't detail here but this applies only to homes valued over $750,000 that have had homeowner exemption for at least ten years and income under $100,000 per year. Under this provision, you can live in a multi-million dollar home and pay greatly reduced taxes, so long as your income is not excessive.
(b) A homeowner who meets the criteria in Subsection 5A-11A.2(c) shall pay as real property taxes the higher of an amount equal to three percent (3%) of all the owners' income(s) or the amount of five hundred dollars ($500.00).
But what about homes under $750,000 market value? Depending on their age they get about a $300 break and above that will have to pay the difference losing the cap. (It's hard to understand the thinking by which people over 70 get the least compensation against potentially losing the cap, under 60 the most.)
In homes under $500,000 in value, I count six people with tax cap over $1000 who will see taxes go up several hundred dollars which will be a significant percentage of the total tax. Depending on financial situation these people could be in for a shock (and of course my $1000 cut off is arbitrary, losing $900 cap is a bit hit, too). While the amount of money is not great in terms of real estate prices, an unexpected extra several hundred dollars is not a small impact. I would say this is a gap not well handled by the change but it is a small number of folks and in total not a lot of money.
Counts for over $1000 cap $500,000-750,000 is 34; $750,000-$1,000,000 is 25; $1,000,000-$1,500,000 is 41; and $1,500,000-$2,000,000 is 18. To some extent the folks with under million dollar homes could feel a big impact, too, depending on how much of that value is appreciation "on paper". Over a million dollars the numbers are relatively small and the home values are great enough that presumably most of them can afford it.
Low income exemption
- Low income exemption Sec. 5A-11-4(d)
- AFFORDABLE HOUSING GUIDELINES EFFECTIVE : 12/18/2013
- Depending on household size (1-8) income must be below 80% median (in bold below)
| HUD/RD Limits : | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
| 30% Limits | 19,100 | 21,800 | 24,550 | 27,250 | 29,450 | 31,650 | 33,800 | 36,000 |
| 50% Very Low-Income | 31,800 | 36,350 | 40,900 | 45,400 | 49,050 | 52,700 | 56,300 | 59,950 |
| 60% Limits | 38,160 | 43,620 | 49,080 | 54,480 | 58,860 | 63,240 | 67,560 | 71,940 |
| 80% Low-Income | 50,850 | 58,100 | 65,350 | 72,600 | 78,450 | 84,250 | 90,050 | 95,850 |
I would think that rather than an exemption - which is a flat rate amount off taxes - something that took into account the problem of a family home on land that has grown to large valuation "on paper" would be an improvement. It isn't hard to imagine a family property of a few acres that happens to be near an area with lots of land speculation such that the market value could have grown past a million dollars yet the people living there won't see any of that unless they sell and would be hard pressed to pay taxes commensurate with that valuation.
It is hard to know how best to handle the "land poor" situation where an owner has valuable land holdings yet little income or other assets with which to pay taxes. I don't know what the best solution is but I think we can have that discussion fruitfully and explore possibilities beyond what is being done.Mixed use
Here is what I believe is the untold story: much of the hubbub I believe is due to a single sentence introduced with Ordinance 953 (I wish I knew how and why this got in).
If a property has multiple actual uses, it shall be classified as the use with the highest tax rate.I believe this has caused a lot of the problems we are hearing about and the removal of the cap may be only a minor piece. This seems to be what caused this gentleman's taxes to go up 98% this year. At the RPT workshop I also heard people mention cases that ran afoul of this as well.
In the extreme this says that if you rent out a room in your home even for only a short time that makes the entire home for the entire year taxed at Vacation Rental rate ($8.85 or nearly triple the Homestead rate). If you have any commercial use of the home, it goes to Commercial rate, and so forth.
Tax table
Some 2500 words later I think I have touched on the main points but certainly not everything.I can't guarantee it but here is a table of taxes by assessed value showing a number of options for exemptions and what the resulting taxes are. You can see clearly that getting Homestead rate (everything below the two top rows) is a huge discount, so the mixed use clause is expensive when it applies. If you can get into Homestead and get any of the extra exemptions, taxes are quite reasonable.
| Assessed value | $400,000 | $500,000 | $600,000 | $700,000 | $800,000 | $1,000,000 | $1,500,000 | $2,000,000 |
| Residential rate | $2,300 | $2,875 | $3,450 | $4,025 | $4,600 | $5,750 | $8,625 | $11,500 |
| Vacation rental rate | $2,800 | $3,500 | $4,200 | $4,900 | $5,600 | $7,000 | $10,500 | $14,000 |
| Homestead with exemption | $732 | $1,037 | $1,342 | $1,647 | $1,952 | $2,562 | $4,087 | $5,612 |
| 60 to 70 | $671 | $976 | $1,281 | $1,586 | $1,891 | $2,501 | $4,026 | $5,551 |
| over 70 | $610 | $915 | $1,220 | $1,525 | $1,830 | $2,440 | $3,965 | $5,490 |
| Low income under 60 | $366 | $671 | $976 | $1,281 | $1,586 | $2,196 | $3,721 | $5,246 |
| Low income 60 to 70 | $305 | $610 | $915 | $1,220 | $1,525 | $2,135 | $3,660 | $5,185 |
| Low income over 70 | $244 | $549 | $854 | $1,159 | $1,464 | $2,074 | $3,599 | $5,124 |
Summary
In summary, taxes are complicated. To my mind, far too complicated. It's always difficult for homeowners to get all the tax savings they are entitled to when they don't understand how the system works, or when they need to make filings every year (such as for low income) or file other forms which are all too easily forgotten. Also when the tax implications of renting a room for a short time may have major impacts that is also hard for taxpayers who don't have professional business managers and accountants not to make costly mistakes.
I don't know what the answer is but I hope by laying all this detail out it helps convey some useful facts about the system as it is as a starting point to understanding.
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