Real property taxes at council today

The council meets today to take up, among other things, the issue of real property taxes in response to the uproar when bills went out in July. The agenda is here. I have been unsuccessfully appealing to the county clerk to make the full text of bills easily available online. If you look at the link above, first, it's a PDF you need to download to view, and more importantly, you won't see links to the bills to be discussed. I spent perhaps fifteen minutes recently and managed to find these and will share them here. Anyone else who would value better publishing of these public documents online please feel free to leave a comment to that effect (a common response to my request is that nobody except me cares).

Here they are:
Bill No. 2551: Pay As You Throw
Bill No. 2552: Kaua’i Police Department, Exercise Equipment —$70,000
Bill No. 2554: Real Property Tax Relief for the 2014 Tax Year (administration proposal)
Bill No. 2555: Real Property Tax Relief Funding — $750,000
Bill No. 2556: Reinstating the Permanent Home Use Tax Limit
Bill No. 2557: Low Income Tax Credit
Bill No. 2558: Retroactive Real Property Tax Measures and Extensions
Bill No. 2559: Tax On Use

Other than the first two, these are all property tax changes in response to complaints. Bill 2555 funds the cost difference resulting from any changes to keep the budget bottom line the same, and that amount will vary depending on which bill or combination is adopted (the amount is computed for Bill 2554).

I have made a concerted effort to dig into this and I can tell you it is devilishly complex and difficult. Several hours spent poking into the ordinances and some data about tax rolls have convinced me that this is simply too complicated. A basic ad valorem system has been tinkered with over the years, mostly involving homeowner taxes, to such a degree it seems guaranteed to have plenty of unintended consequences. Kauai county code Title III Chapter 5A - Real Property Taxes - runs well over forty thousand words: that's about one hundred pages. 

A tax system that complicated should not be necessary for an island this size. It's expensive to administer requiring lots of custom database and software I would imagine, many forms to file, and it must be very prone to errors of all kinds. 

I have not researched other counties in the state or elsewhere but I seriously question that any local tax system is nearly this intricate. I suspect that the tax code has just organically morphed rather than anyone designed it to be some ornate, but if any council member supporting Ordinance 953 would like to justify the complexity of our tax code for homeowners here - that is, why does Kauai uniquely require so many provisions and exemptions and special loop holes -  that would be a of great interest. Rapid development and quickly raising prices mixed with long-time residents is not such a rare circumstance.

More importantly, this tax system requires citizens to file the right forms to very early deadlines in order to get the best deal: if you are lazy or confused or uninformed then that inaction can result in a significantly higher tax bill. I think that not how we should operate, where forgetting to file for low income exemption each year penalizes the homeowner (for a 70-year-old with a modest $400,000 home the difference is $610 instead of $244 [reference]). How many times this happens every year nobody knows. In the RPT tax workshop we heard testimony about some cases like this.

But major tax reform won't and shouldn't happen today - that will take time and study. Not necessary today, but soon I hope the council recognizes that the tax system has grown unwieldy and begins long-term  efforts to rewrite it.

Frankly, I am worried that five competing bills are going to turn into any kind of good short-term fix. Probably they will waive penalties and extend deadlines to help people recover and adjust to the new system which is a good thing but this costs money and adds to the finance department managing this.

As I said before I don't think the council has yet attempted to actually define the problem clearly and check the data to confirm that their perception is accurate. My analysis shows that the removal of the cap was less of a problem than the multiple-use-at-highest-rate effect, but I don't have the data to know for sure. For at least the people who have publicly testified with complaints can we get follow up that they were able to refile forms and get a good solution with existing tax code or if they feel over-taxed what is the special circumstance that is harming them unfairly? We need these solid numbers before we can "fix" the problem.

So if I was in charge here is how I would approach this starting from defining the problem.

• if removing the cap was a big problem then define how much tax increase due to that is too much - what amount or what percentage or anything, but define it clearly
• it seems hard to argue that the multi-use change is fair - I very much want to know who introduced that and why and if they can defend it
• proportional use tax seems better but it does potentially make tax accounting very complex - we should be investigating cost-effective ways of handling that
• instead of generalities people should be presenting real property examples of unfair taxes - (for example) 70 year old long time resident in Anahola lives in modest home on 1/2 acre that nearby high-end development has made worth $1 million

Everyone doesn't have to agree on the problem but they should be able to articulate their position with numbers and examples. As is, I am very concerned that different council members have their own view of what the problem is that if they communicated there would be significant differences. Starting from unspoken different problems, it's hardly surprising to see such a mixed bag of solutions.

With a clear set of problems and examples then I think we can tackle how to fix it more sensibly, and then see the effect of the proposed changes on each example raised and of course the revenue impact. Absent this data, here are the kind of approaches I would look at:

• For the cap removal, limit the one-time impact to (say) $1000 or 50% increase. Phase in the cap removal in excess of these amounts over a few years. It is more tricky accounting to deal with but the number of cases is probably on the order of a few hundred.
• For mixed use, it is not fair to charge a much greater tax rate for very limited rental or other use that disqualifies from Homestead classification. This gets complicated quickly as there is a spectrum of use cases including affordable rental and various arrangements sharing property with family and friends. Significant for-profit uses need to be defined and that should move people out of Homestead as the cost of doing business. There are likely issues with this but only by identifying real examples can we craft the right language to handle appropriately.

Finally, one detail I just discovered to my great surprise is that the tax cap was applied to properties not in Homestead class. I do not see how this is correct as up to FY2013, Ordinance 915 (not online) says:

Sec. 5A-9.3 Permanent Home Use Tax Limit For Home Exemption Property.
(a) Any owner who has a home exemption under Sec. 5A-11.4, K.C.C. 1987, shall receive a permanent home use tax limit and shall have the property taxed as provided in subsection 5A-9.3(e)[note: Homestead class, as I understand it.].  

I have found 2013 cap credits on properties in Residential (paying $5.75 rate) and a few in Commercial even. If anyone case explain this to me please leave a comment! If this is just my misunderstanding of the tax code or of the tax recodes at kauaipropertytax.com then this will serve as another example that our county tax system is just too complicated.