Ease Residential A property tax for local homeowners

Honolulu’s Residential A ordinance, which taxes homeowners at a higher rate for million-dollar homes that they don’t live in full time, was drafted with the intent of tapping wealthy and offshore Oahu homeowners with a revenue-generating levy.

That tax rate — 71 percent more than the regular residential tax rate — sounded good on paper. But when the City Council rolled out the new law three years ago, some homeowners, trying to hold onto modest properties now valued and taxed at the $1 million level due to soaring property assessments in the islands, cried foul.

The Council should pass Bill 7 or a similar measure that offers some Residential A relief to that group of homeowners, especially those in our aging population and their ohana who have owned older Oahu homes for generations. Many of them rent to local families who can’t afford their rent to skyrocket along with the landlord’s taxes.

The proposal, which will be considered for a final vote today, amends the law by creating a tiered system.

The intended result: Properties valued at between $1 million and $1.5 million will see a lower or unchanged bill, and higher-end houses will end up paying more. The shift would allow the city to avoid losing much-needed Residential A revenue for its programs and services while easing tax pain for some property owners.

Islandwide, there are some 250,000 residential properties, with about 8,000 fitting into the Residential A classification. Since the law took effect in 2014, those property owners have been paying at a rate of $6 per $1,000 of assessed value, generating about $39 million a year. The standard residential class tax rate has stayed put at $3.50 per $1,000.

Through the relief measure, Residential A properties would be taxed at $4.50 per $1,000 for the first $1 million and double that rate — $9 per $1,000 — for any value above the million-dollar mark. For example, the owner of a property assessed at $1.4 million, would pay $4,500 on the first $1 million and $3,600 for the $400,000 above that, for a total of $8,100. That owner now pays $8,400.

Initially, Residential A was criticized for its jarring “cliff effect,” which occurred when some property owners were stunned to see their tax bill nearly double. In response, the Council approved a one-time break for those who could claim an exemption tied to their own occupancy but had not done so.

Also, about 20 property owners with parcels tagged as Residential A sued the city, arguing that the ordinance is unfair and unconstitutional, in part, because it discriminates against nonresidents. In October, a state judge agreed, but two months later reversed that decision. The switch was based on arguments from the city that the tax classification is justified by Honolulu Hale’s interests in protecting the “stability and continuity of local neighborhoods.” That aim is rightly echoed in the proposed amendment.

Stability is a struggle in Oahu’s surreal housing market, which has hit record prices in recent years — the 2016 median price for a single- family home posted at $735,000, which was more than double the mainland median of $313,600.

The Honolulu Board of Realtors called the bill a step in the right direction, but would rather see the Council establish several tiers — starting at $1 million and topping out at $4 million — or a system through which the Residential A rate is set as a multiplier of median home price, allowing the city to generate revenue directly tied to appreciation of property.

In written testimony, the Board of Realtors’ president, Sue Ann Lee, said Honolulu’s current standard for the luxury property market now kicks in at $2 million and million-dollar properties are commonplace on-island.

Her group correctly contends that the current Residential A tax classification places a too-heavy burden on local families whose property values are inflated due to Oahu’s rising cost of home ownership in areas such as Manoa and Pauoa and some mauka neighborhoods, including Saint Louis and Pacific Heights.

In an effort to pinpoint the most equitable version of the tax, the Council should take a careful look at the group’s suggestions. And the Council should review the tax and housing market periodically to ensure that Residential A doesn’t place an unreasonable burden on those flagged to pay it.