IN 1965, a city and county building inspector and his wife bought their dream home in Ewa Beach for $13,500. In 2005, he retired on a state pension and Social Security, enough to get by in Hawaii. However, their house is now valued at $650,000 by the city. They cannot sell because they need a place to live, and their property tax this year is expected to be $1,875. Last year it was $1,448. That's an increase of 30 percent in one year. How much more can this fixed income afford?
Greg was born and raised in Kailua. When he got married, his parents helped him buy a house in Kailua. He had a promising career as an airline pilot. In 2003, the pilots had to make significant pay concessions that are still in effect today. During that same time, his property tax doubled.
These are just two examples of why the property tax is considered to be a regressive tax. It is also one of the most unfair taxes. How fair is it that we get large tax increases because a few out-of-state people pay inflated prices for a second home in Hawaii? How fair is it that resident homeowners get an exemption, but renters do not? The Honolulu City Council is reducing the residential and apartment property tax rate this year, but guess what? Because of higher assessments, our tax bill will still go up.
The use of an ad valorem tax base has been the norm for many decades on the mainland and in Hawaii. It has been the main source of revenue for counties and local municipalities. However, nationwide, there have always been problems with the residential and apartment categories such as easily changed rates, unfair assessments and actual political scandals. The tax was first used in the Midwest, where the value of agricultural property was a good indication of how much a farmer could afford to pay. But now people have actually lost their homes in other states because they could not afford the tax.
Locally, we have seen attempts to salvage what is a broken system with all sorts of exemptions and credits that never do get at the real problem: that the market value of a house or apartment is not a fair measure of the ability to pay for the financing of city government. Witness the problem the City Council had last year when it wanted to do something to help renters, but could not find a way to do it. Also, the much-touted change that capped property tax for resident households making less than $50,000 helped only about 1,600 homeowners out of more than 250,000, and helped no renters.
But things are finally beginning to change, spurred by the voters of California who, in 1978, approved a system where property values are addressed in a much different way known as Proposition 13. Much closer to home, the voters of Kauai have changed their County Charter to adopt new procedures similar to those of California. These new procedures basically replace annual assessed values with acquisition values, which means that a property is reassessed only when it is sold. Included in this is that tax rates can rise only with the cost of living and at a maximum of 2 percent per year. So both assessments and rates are limited. Also, in 2004, the Big Island put a cap of 3 percent on assessment increases. Yes, as is said, the handwriting is on the wall for tax reform.
A Proposition 13-type reform could significantly benefit the homeowners and renters of Honolulu. However, the problem with these methods is that they have not provided sufficient revenue for government to operate the services it must provide, and have led to many increases in user fees, which are even more undesirable and regressive. In Hawaii, because the state funds our public schools, altering the property tax assessment method would not affect the schools as it can in other states, but it could have an effect on a county's ability to adequately fund public employee salaries, and on the provision of services such as reconstructing sewerage systems. This is why our local government and others, such as public employee unions, can be expected to resist the California-type procedures.
HOPE FOR HOMEOWNERS
Fortunately, there is a better way. What if the residential and apartment property tax were replaced with an increase in the existing general excise tax? Not a new tax, but a revenue-neutral substitute for the property tax.
Consider these facts: This coming fiscal year, the City and County of Honolulu is proposing to raise about $500 million from residential and apartment properties. In the fiscal year ending June 30, 2006, the state collected $1.68 billion from the then-4 percent GET on Oahu. That includes the 4 percent GET on rents. Since we would not want to increase the GET on rents, if we subtract collections the state received from rental apartments, the amount collected would have been $1.5 billion. Divide that by four, and we see that each 1 percent of GET on Oahu would have raised $377 million, if we don't include what was received from rentals. So, if the City and County of Honolulu could collect the desired $500 million via the GE tax instead of the property tax, it would require an increase in the GET rate on Oahu of 1.32 points ($500 million divided by $377 million). Based upon the current GET rate of 4.5 percent, the new rate would amount to (4.5 plus 1.32) 5.82 percent.
Imagine completely doing away with the property tax on homes and apartments by using a GET rate on Oahu of 5.82 percent. No more arguments over property assessments, no more tax increases because of rich people buying second homes, no more passing the tax on to the renters, no more seniors facing losing their homes. This is not smoke and mirrors -- it is a real opportunity. It can work, because the GET is a much broader-based tax; for example, visitors pay more than 46 percent of it.
GOOD FOR BUSINESS
What would this mean for us in terms of dollars? To get some idea of how much we would pay in taxes under this plan, here are two examples: If the members of a household spend $40,000 a year on items subject to the GET tax, they would pay an additional $528 instead of the property tax. Many now pay more than $3,000 a year, essentially a tax cut of $2,472 for this example. If our retired building inspector spends $20,000 on things subject to the GET, he will pay $264 instead of the $1,875, that's $1,611 less.
Businesses also would benefit because residents would have more money to spend in local stores every year. Also, the city will still get its $500 million. A total win, win, win. Substituting the GET would be a benefit to everyone who has a roof over their head on Oahu, whether they own or rent. (The law could require that landlords pass the decrease on to tenants).
This is a serious, workable proposal for genuine tax reform. What is needed now is for a few enlightened elected officials to come forward to champion the cause. More discussion of details might be needed, public input and support are necessary, and bills in the Legislature and the City Council would be required. But it is a proposal with great potential, and it is time to start considering this alternative before people are forced to give up their homes or food or medications to pay the property tax. Similar proposals are being considered in other states such as Florida, but I would be happy if you called this the Prentiss Plan.
Charles Prentiss is a retired former executive secretary of the Honolulu Planning Commission. He has a master's degree in public administration from the Fels Institute of Government, Wharton School of Finance at the University of Pennsylvania.