Ka Wai Ola - Office of Hawaiian Affairs, Volume 5, Number 9, 1 September 1988 — Taxes and You [ARTICLE]
Taxes and You
By Lowell L. Kalapa, Director Tax Foundation of Hawaii
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Propertu Taxes: A Courtty Sore Spot
We have devoted quite a bit of attention to state government and some of its financial facets. It is only fair that we give some time to the financial affairs of county governments.
Unlike state government, the counties have a limited scope of responsibility and likewise a limited resource of funds to help pay for those public programs. In fact, the counties are heavily dependent on the real property tax whieh provides anywhere from 50 percent to 60 percent of all the revenues received. Since the mid-1960's, county programs have been limited largely to poliee and fire protection and sanitation services. Major responsibilities for education and health services were assumed by the state at that time since it was reasoned that the state was in a better financial position to carry this burden with its nearly complete control of the tax system in Hawaii.
Since that time, other public programs, such as the county jails whieh became part of the eommunity correctional system, have been taken over by the state so that on an absolute basis the eounties should have fewer services to perform. This has not been the case as the counties have found new programs and services to provide to the community either on their own initiative or as a matter of participating in a federal program. This latter practice was more eommon during the late 1960's and early 1970's when Washington gave birth to a number of community action programs whieh involved loeal governments. Now, with the concerted effort to reduce the federal deficit, funding for these federally initiated programs have either been cut back or eliminated, leaving the counties holding the funding bag. Given that the counties are highly dependent upon the real property tax, they tend to be more eautious about getting into new programs whieh will involve the commitment of a substantial amount of city tax dollars.
This is largely due to the difficult task of setting annual real property tax rates. Unlike the taxes whieh the state administers, the real property tax rates must be set eaeh year after all the real property in a county is reevaluated or reassessed. The counties realize that the state tax rates have not changed in nearly 25 years yet state tax eollections continue by leaps and bounds. Since the real property tax is a product of the value set on a taxpayer's property multiplied by the tax rate, the taxpayer tends to be more aware of how mueh the tax will cost eaeh year. The "awareness" of the tax also tends to be more apparent for older homeowners who have no mortgage on their homes than it is for those who have just purchased their homes. This is because
for mortgage holders, property tax is paid as part of the monthly mortgage payment whereas those who have paid off their mortgages will gēt their property tax bill semiannually from the county finanee department.
Thus, with the publicity spotlight on the rate-set-ting and assessment process, county officials have sought ways to avoid the wrath of their constituents. In some counties, the burden of property taxes was shifted to other classes of properties. First, the shift was made to resort and hotel properties, mainly because it was politically popular to say that the visitor should be paying a greater share. Then, when it appeared that the hotel class of property could bear no more without the potential for litigation, commercial and industrial classes were hit with higher rates. As a result, county officials could afford to keep the tax rates and therefore property tax bills under control for the largest segment of their voting constituents, the residential homeowner.
This past spring, elected officials in all counties were faced with the same dilemma as they had to bite the bullet and eall for increases in property tax rates across the board. Thus, it appears that push is coming to shove as the counties continue to squeeze the turnip for more blood. One interesting development on the horizon is that the property tax ordinance whieh was turned completely over to county control by the 1978 Constitutional Convention will undergo one final change. Under the law, the property tax law was to remain uniform among the four counties at least for an ll-year period starting in 1978. During this period, the exemptions and dedication provisions of the law could not be eliminated or reduced from the level at whieh they were at the time the tax was transferred from the state's control to the eounties.
With this expiring in 1989, the counties will have free rein to do as they wish with the property tax. Counties may decide to take their own approach to assessing property. Another possibility would be to set different assessment ratios for different classes of property. Of greater interest is what will happen to the various exemptions, some of whieh are not even in the county ordinance but are in the state law. For example, there are exemptions from the property tax for urban renewal projects, fruit and nut orchards, forest reserves, as well as for public utilities and Hawaiian Homestead properties whieh will be subject to review and recognition. Given that the counties are hard-pressed for new and increased sources of funds, targeting the elimination of the various property tax exemptions may be one of the options the counties willchoose.