Understanding home property taxes

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.
(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).

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.

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

There is provision for an additional $120,000 exemption for low income households. Details are:

• 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.

Intentions

I want to write to explain about what you will read here, about what my intentions are in posting. This is not your typical "blog" (a terrible sounding word for a wonder way for a private citizen to have a chance at writing to lots of folks who may be interested), or at least why I hope to avoid it becoming one. Specifically, I want to write about the considerable length of this writing and about data based opinion which I believe are the two unique aspects of this writing not often seen. The idea is to explain why this is a little different, in hopes that it can be understood as different in a useful way.

Brevity is overrated

To date the primary tax related posts have been way too long by any reasonable standards other than perhaps government accounting standards (which is actually an important area of expertise) and let me begin by stating I am not a trained accountant.

Perhaps this quote says it best - apparently it's a common enough sentiment that the quote has been attribute to any number of famous people:

“I am sorry this is so long. I didn’t have time to make it shorter.”

To put a positive spin on it, by writing at length I can publish in real-time as I work, without a proofreader and editor (not that such staff is available anyway). Also, cutting detail is a tricky business because different readers have different background knowledge - and of course different tolerance for verbiage and time constraints - so there is no right answer as to how much is too much. In my defense, this stuff is complicated. With respect to how Kauai should fairly tax homeowners, I do not (yet) have any wonderful proposed solutions. However, I am quite certain there will be no good answers that are simple and can be explained briefly. Besides, I assume everyone using the web has already learned how to skim - to get the words to you no paper and ink is wasted. Some key points are written in bold to aid skimming.

These issues are important and I think that too often we form opinions based on too little information, in part because our society is so complicated. Newspapers and online media typically impose word length limitations on writers: even with unlimited space editors don't want to subject their readers to overload. Yet, ultimately, these limitations are arbitrary; I have heard of struggles to how to give a solid explanation of an important public policy question when you only get 500 words. If "devil is in the details" (a phrase often seen in The Garden Island) there is little chance of pointing him out given 500 words but you just might catch a glimpse of the devil in here from time to time.

So, dear reader, please skim all you like here. I have tried to organize things into sections and usually there is an intro at the top and a conclusion, if there is one at all, at the end. Particularly gory details may be relegated to the end so many who probably wisely just stop at the point their interest in minutia is satisfied may never even see them. At least few readers should ever reach the end wanting more - if such folk are out there, consider leaving a comment what more they want!

Seth Godin says it well: "The public square is more public than ever, but minds are rarely changed in 140 character bursts and by selfies." If nothing else I can guarantee you will see neither of those here. Personally, I don't try to change minds, but I do strive to at least make my thinking understandable to anyone genuinely interested.

Data based

I intend to ground everything written here on data - taxes happen to be conjured almost entirely with numbers, but other topics where the data may be sources or references or photos, but point being that the writing should be grounded with supporting information. I think this is a critical starting point to having a chance of getting it right, and if I slip I welcome getting feedback to correct that.

Now the data that I use may be faulty or my analysis flawed or you simply may have different data, but at least if I show you my data and where it comes from then we can compare and make our own conclusions. Note that I am not claiming all data used is absolute indisputable fact, such data is precious hard to come by, but by backing up my conclusions with the data that produced it you get a fair chance to make that assessment yourself. Most of what you read, especially in the media with their arbitrary word length limitations already mentioned, people will claim things without telling you where they get a particular fact, and then you are stuck deciding if you trust them or not.

But trust is not a very good way to assess facts, even if you have a highly tuned sense of judgement. Often intelligent and well intentioned people get their facts very wrong: they may be misled by others, unaware of the quality of information they rely on, or simply make a mistake. Only when they disclose their sources do you have a chance to check their facts. That good people can easily get it wrong is so common (who hasn't made mistakes?) I don't think in this case specifics need mentioning.

Another great aspect of this approach is that opinions can be set aside when you focus on the data and people with different takes on an issue can find some common ground. Pesticide use and GMO has been a decisive issue on Kauai, but there is no reason that so-called "red shirts" and "blue shirts" can't have a discussion about, for example, finding the best possible data on how much Atrazine was used when and where on the island. 

Finding data that all sides agree on in the first place isn't an easy task by any means, but total agreement do not have to be the goal. Look at the range of possibilities just by attempting to find some data.

• Together, you may realize that you don't know and can't find out, and as a result consider that instead of jumping to conclusions, it might be well worth further research with perhaps a slightly more open mind.
• Some facts you can agree on, others maybe not, but you have found something you agree on and now you know what the other side disputes and can begin to ask questions as to why that is.
• One side trusts a given source while another doesn't. Knowing this you can dig into why they don't trust it, or alternatively look for other sources they might accept.

There are more possibilities to be sure but the point is that data grounds discussion. It's not going to be perfect but understanding the limitations of the information you have suggests what you need to learn.

To be clear, opinion colors all we do, so I would never claim that everything you see here is 100% true by any standard. I do choose what to write about and what not (though I try to maintain integrity and not purposefully hide data contrary to my position), how to present data. Opinions (ideally based on data) I try to label clearly as such but any interpretation of even the most cut and dried data becomes subjective quickly. There very definitely is opinion mixed in with what I hope is fairly solid data, but it should be clearly identified as such.

Perhaps most importantly data enables and sustains discussion between opposing views. Too often people are shouting past each other, uninterested or unwilling to consider new information or changing their position. "Stop poisoning the island," doesn't help build understanding, nor does "Don't worry, we know what we are doing."  Instead, we need to look at what "poisons" and how much and what effect and understand what science does and does not know about cause and effect; on the other side, if you know what you are doing then please show us what you are doing and how you know it to be safe.

This, if you will, is the data behind my approach. You don't have to agree with it but by explaining it as best I can you can now tell me what's flawed, and show me your better ideas. Even wrongheaded, by laying it out for examination - at length - I believe we can really talk about it in a meaningful way.

Feedback loop

Finally, I do want to welcome feedback. The beauty and the curse of working with data is it is very easy to get something wrong, but with corrections that can be a good thing. Since I don't have staff doing proofreading and fact checking, I welcome readers to point out errors and discrepancies and poor reasoning when it slips in. Comments have become a notorious feature of the so-called "blog-o-sphere" (a term worse than "blog") but for now are the best of a number of bad alternatives.

In the spirit of being data based, please feel free to point out errors or express disagreement. If you have better data please reference it so we can share that information. When I get analysis wrong, please point out the error and if you can offer better analysis. If you disagree with my opinions, please respect that; if you want to try selling a conflicting opinion feel free but please base it in data and rationale.

The more the merrier so long as comments are sincere and respectful - that's a given. While I get to go on and on at great length, that does not work well in comments. If you need more space, the digital equivalent of adding extra sheets of paper is to start a blog (you can get started quickly at Blogger.com, as just one possibility of countless many) and provide a link in your comment for "the rest of the story".  Perhaps the highest purpose blogging serves is as an outlet for stuff you want to write about to tell somebody because it's important to you: what I do is blog it and people will or will not read it, but my friends won't be subjected to this stuff unwillingly at least.

Anyone on the planet with a connection to the internet can read these words (a rather amazing but commonplace reality these days). In the spirit of quality data, let's keep the discussion respectful and out in the open. I am going to trust people to be civil and not moderate comments (there is some automated filtering turned out) and not make you jump through hoops to leave your thoughts. Since "logins" and passwords are such a mess, anonymous comments are allowed but please consider signing with your first name or nick name and perhaps noting what part of the island (or elsewhere, for visitors) you call home (mine is Kalaheo).

If any of this helps us understand the challenges Kauai faces a little better, make better choices about how this place works, possibly bring people together rather than divide them, that will be a good thing. That is my intention. If you read this far, mahalo!

PAYT, go small

One detail in the Pay As You Throw (away) waste disposal plan seems wrong to me: the minimum size container for household garbage is 64 gallons. That's huge - it's almost ten gallons a day, which is one Texas sized ten gallon hat's worth. We have been easily managing with one 32 gallon trash container now week after week and often that isn't particularly full. There are two of us but even when we have guests we have managed. I do take recyclables to the drop off center at Eleele every month or so which is easy, it's right by the Big Save and takes just a few minutes.

I think they should offer a smaller option - 32 gallon - at a very low price. It can be done: there are garbage services that have 10 or 20 gallon minimums (see for example) so I strongly encourage Kauai to set high expectations for minimal garbage. Some will take the challenge as the right thing to do, others to save a little money - either way it's a good thing.

I read the plan briefly but did not see detailed explanation of the reasoning and still think my suggestion makes better sense. I wrote to the Solid Waste Program Coordinator of the County of Kaua'i Solid Waste Division: they were kind enough to write back at length but basically said they have a plan created by experts and are sticking to it. They seem convinced that 32 gallons of waste is unreasonably small for most Kauaians until they institute curbside recycling. I'm no expert but here is my reasoning:

1. It sounds like the only reason not to have 32 gallon in Phase 1 is an assumption that nobody will use it - I certainly would and I often see one can out at curbside. What data suggests it is not worth the effort to offer 32 gallon?
2. Even if 32 gallon is not popular, in Phase 2 you need those containers anyway so why not get them sooner for people who want to reduce?
3. In Phase 2 as people start using 32 gallon you have extra larger containers now that need conversion - why not skip this step altogether when you can?
4. The plan notes a few households will remain on manual collection and many already have 32 gallon containers already I would think.
5. It sets an aggressive goal for reducing land fill sooner than later.
6. It is consistent with PAYT philosophy of saving more money the less garbage you produce.
7. For smaller size families and people living alone we should give them a break on cost since they impose a lesser burden on collection and landfill resources.
8. It sends a positive message as something to shoot for and people will see that others are doing it and it can be done.

Don't underestimate people making an effort both to do the right thing as well as to save a few bucks.
That's the argument for it which seems solid to me.