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Sunday, January 15, 2012
Using Exemptions to Shift the Burden of Taxes
By Lowell L Kalapa @ 4:07 AM :: 6595 Views :: Maui County, Education K-12

by Lowell L. Kalapa, Tax Foundation of Hawaii

Probably the most controversial recommendation that the Honolulu Real Property Tax Advisory Commission has made in its recently submitted report is to repeal the tried and true exemption for homeowners.

Ranking right up there with “Mom and apple pie,” repeal of the homeowner’s exemption would seem almost sacrilegious as the exemption is synonymous with the American dream of home ownership. However, a close reading of the Commission’s reasoning behind that recommendation raises some very telling effects of granting such broad exemptions all in the name of providing tax relief.

The report of the Commission points out that the homeowner’s exemption actually discriminates against those who do not own their own shelter, that is the renter. While it may be a broad generalization, the report notes that more than likely those who rent can’t afford to buy their own shelter are probably less capable of bearing the full burden of the property tax. Without a similar break that homeowners get with the home exemption, the full cost of the property tax is embedded in the amount of the rent paid or the landlord is absorbing the additional cost and, therefore, renting the unit at a loss or with little financial gain. The other point the report makes is that the home exemption is granted to people who happen to own their shelter whether or not they are rich or poor. It is granted solely because the shelter or home is owned. Further, the same amount of relief is granted to the high-income family as to the low-income family. The only time a larger home exemption is granted is when the homeowner is over a prescribed age, be it 70 years old, 75 years old or 80. Again, the multiple home exemption is based on the age of the homeowner and not necessarily whether or not the homeowner is financially strapped.

As readers would expect, recommending that the home exemption be done away with elicited all sorts of emotional cries that homeowners’ real property tax bills would increase based on the assumption that the Council would keep the real property tax rate at the same level. But that is a false assumption when one realizes that the Council has the ability to increase or decrease the real property tax rate and does so each year. Even the editorial writer of the local daily newspaper seemed to infer that the loss of the home exemption would see real property tax bills rise.

However, the Commission was careful to point out that all of its recommendations, including getting rid of the homeowner=s exemption, should not “give license” to the Council to merely realize a windfall of tax revenues. What the Commission pointed out is that exemptions tend to shift the burden of paying for government from the favored class of property owners to another class of real property owners since someone has to pay for county services. The Commission also went on to point out that shielding certain favored classes of real property owners from paying for the cost of county services breaks the accountability relationship between those who pay for those services and those who receive or enjoy those services yet pay nothing for those services.

The Commission was also sensitive to the fact that many homeowners complain that because the cost of real estate continues to rise over time and that valuations or assessments are based on comparative sales of surrounding properties, the value of their homes increases which, in turn, drives their real property taxes higher and higher. With firm conviction in the belief that everyone should pay for the county services they receive as long as they have that ability to pay, the Commission directed critics to the fact that the county already provides relief to homeowners who do not have the means to pay their fair share of the real property tax burden. That relief is provided through a tax credit that forgives a homeowner’s tax bill of any amount over 4% of the titleholder’s income (3% if the titleholder is 75 years and older) and extends that relief to those with less than $50,000 of income. The credit approach allows the county to provide tax relief to those homeowners who truly do not have the ability to pay their real property taxes while at the same time precisely targeting those who are poor.

Although many observers believe that Council officials will not have the political will to undertake such a controversial proposal this year as some of the Honolulu Council members will be up for reelection, having the recommendation on the table will at least put the issue squarely before elected officials as well as the public. Getting rid of exemptions that have no relationship between the need for tax relief and paying one’s fair share for County services should be at the top of the agenda for reforming the real property tax.

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