10% rule
allows city higher
tax appraisalsSome experts say it leads to
overpayment of property taxes
Up to a certain threshold, the city government can tax Oahu homes and other real estate based on values greater than what the owners believe their properties are worth, and owners in those cases often have no grounds for appeal.
Such a practice can and does happen because of a long-standing ordinance that some real estate experts say is fundamentally unfair, resulting in overpayment of property taxes.
"I can't imagine any government entity being able to charge you more than what your property is worth and you can't do anything about it," said Bob Johnson, executive director of the Minnesota-based National Association of Real Estate Appraisers, the largest appraiser group in the country. "It sounds so un-American. It sounds so atrocious."
The city administration, however, says it is simply following the law and that if people believe the ordinance is unfair, they should talk to lawmakers.
"You should ask the (City) Council, they set the law," said spokeswoman Carol Costa.
When the city sends out annual property tax assessments to thousands of owners in December, the assessments are supposed to reflect what the city believes are fair market values for homes, buildings and other properties.
If an owner wants to dispute the assessment, he or she can do so based on four grounds, a city ordinance says. Three deal with such issues as whether the method of assessment was illegal or erroneously applied, an exemption was improperly denied, or a legal or constitutional question arose.
The fourth and most common basis for an appeal deals with the actual assessed value. According to the ordinance, the owner has grounds to contest the assessment if it exceeds the market value of the property by more than 10 percent. Anything below that wouldn't meet the criteria.
The city defends the 10 percent rule, saying mass appraisal programs should have an "acceptable tolerance" range, given that doing appraisals is an inexact science. It also noted that the International Association of Assessing Officers, a nonprofit educational association that specializes in tax policy, says 10 percent is an acceptable range for such programs and that most other jurisdictions allow for leeway.
But Arthur Reinwald, an attorney who has handled appeal cases, said allowing a 10 percent cushion makes no sense when the assessments are supposed to reflect fair market values.
"To me, it's grossly unfair," Reinwald said.
Heather Taylor found out the hard way about the 10 percent rule.
In July, she purchased her Honolulu mid-rise apartment -- originally a two-bedroom unit that was converted into a one-bedroom one with a larger living room -- for $186,000. It was appraised at $182,000.
Three other two-bedroom units with the same floor plan as the original one in Taylor's apartment sold last year for prices ranging from $167,000 in March to $189,500 in August, according to real estate records.
Yet when Taylor received her property tax assessment at the end of the year, it was based on the city valuing her property as of Oct. 1 at $203,600, or 9.5 percent greater than what she paid less than three months earlier.
Falling just shy of the 10 percent threshold, Taylor figured she couldn't appeal and didn't file one by the Jan. 15 deadline.
"I hope someone's not trying to get more money from (me) than what is fair," she said.
Mardi Kersting, head of one of the two city review boards that evaluate appeals, said Taylor and anyone else coming close to the 10 percent threshold should have filed an appeal anyway, even though the assessment forms don't indicate amounts below that threshold can be contested. Still, they should have cited the 10 percent rule and the one dealing with methodology, Kersting said. Appeals cost $25.
When the city rechecks its assessment, new evidence may surface that benefits the property owner, Kersting said.
But if no new evidence turns up and the assessment still falls below the 10 percent threshold, the appeal would be rejected.
"That's the rule," Kersting said. "It's very simple."
On the neighbor islands, property owners have the same four grounds for appeals, but instead of a 10 percent threshold, those counties use 20 percent.
But representatives for the Kauai and Big Island governments said their review boards often approve appeals even if the 20 percent threshold is not reached.
"I can't remember a time when an appeal was rejected on that basis," said Wesley Takai, administrator for the Big Island's real property office.
Even if an assessment on Oahu is inflated by close to 10 percent, it probably isn't worth the effort for most homeowners to file an appeal to save a few hundred dollars a year in property taxes, Reinwald said. By the time the tax write-offs and other factors are considered, the change likely will end up costing the homeowner more than what is saved in property taxes, he said.
The issue of whether Oahu property owners have been overcharged on property taxes was raised recently when a former city appraiser filed a federal lawsuit accusing his employer of knowingly sending out inflated and erroneous assessments.
Philip English said in his Feb. 13 complaint that many assessments for the 2001-2003 tax years were flawed and designed to maximize tax revenue for the city.
He also accused managers of retaliating against him for reporting those and other problems, including colleagues performing non-city work on city time using city resources. English said appraisers did work for a company owned in part by the head of the real property assessment division.
Because of stress from the retaliation, English said, he has not worked since February 2003.
City Budget Director Ivan Lui-Kwan, in a written statement, disputed English's allegations and said the city will "vigorously defend the lawsuit in court."
Lui-Kwan said the city stands by its assessments from the years in question.
"The tax appeal process is a mechanism to protect property taxpayers who do not agree with their assessments," he said.
The city, however, would not comment on the allegation that city workers did work for the private company, citing the pending lawsuit and the need to investigate the charges.
