Big or small, nonprofits that own land pay a cash-strapped city the same low sum
POSTED: 1:30 a.m. HST, Nov 14, 2010
As landowners, they couldn't be more different.
Kamehameha Schools, a multibillion-dollar charitable trust, is the largest private landowner in Hawaii. Among its most prized parcels is the 425 acres overlooking Pearl Harbor where its flagship campus is situated. The Kapalama property has been assessed by the city at more than $157 million.
Hawaii Aiki Kwai, a small nonprofit aikido organization, owns a single Oahu parcel, not even a quarter-acre, in Kaimuki. The tiny spit of land, wedged between buildings on two sides, is the site of the all-volunteer Aikido of Honolulu's dojo, where students learn the Japanese martial art. Its assessed value is less than $800,000.
As different as the two landowners are, they share one striking similarity. The tax bill on their two sites is identical: $300 annually.
That two organizations with vastly different resources incur the same bill for two hugely dissimilar parcels underscores what some City Council members, a tax expert and others say is a fundamental inequity of Honolulu's property tax system, one that is being eyed as the city scrambles for ways to plug an anticipated $100 million-plus budget gap.
Schools, nonprofit groups, churches and other exempted land owners pay a minimum tax of only $300 for each of their qualified Oahu parcels, regardless of the value of the property, the condition of their finances or other factors related to ability to pay.
The one-size-fits-all approach is not unique to Honolulu. Many cities and counties on the mainland exempt schools, nonprofits, churches, hospitals and other public-benefit organizations from paying any property taxes. Many state constitutions -- Hawaii's is not one of them -- even prohibit such taxation, embracing the notion that charities provide important community benefits that more than offset losses in tax revenue.
But with the city hurting for revenue, some believe Honolulu's exemption program needs to be re-evaluated and possibly overhauled, bringing more equity to the system and better reflecting the cost of providing city services to the properties.
"The time is now," said City Councilwoman Ann Kobayashi. She said the exemption program is riddled with inequities and that she supports forming a blue ribbon panel to recommend changes.
Councilman Romy Cachola likewise backs forming such a panel but said he is unsure that changes are warranted.
"We've got to proceed very cautiously," he said. "We don't want to do anything that would hurt those in need."
THE PROSPECT of nonprofit organizations having to pay more taxes in an economy that already has forced many to trim staff and programs sends shudders throughout the industry.
Many of the nonprofits offer services that lessen the burden on government coffers and enhance the community's well-being in ways that go beyond the bottom line, industry executives say. These organizations feed the poor, house the homeless, shelter the abused, educate the young -- tasks that otherwise would be the responsibility of the public sector.
"They save the government and the community lots of money and heartache," said the Rev. Marc Alexander, vicar general of Hawaii's Roman Catholic diocese, which property records show owns Oahu land with an exempt value of more than $420 million.
Adding to the local charities' tax burden in these tough times potentially would be devastating, especially because demand for their services in many cases is up, industry executives say.
"You would see an increased number of well-intentioned nonprofits collapse because they just couldn't handle the added costs," said John Howell, president of Easter Seals Hawaii.
The previously sacrosanct area of property taxes -- typically a city or county's largest source of revenue -- increasingly has been targeted, usually unsuccessfully, by local governments in some states as they look for ways to offset big drops in revenue caused by the recession.
In areas where the constitution prohibits the taxing of land owned by nonprofits, some municipalities have adopted new fees -- such as Minneapolis' "street maintenance" charge -- that exempt groups must pay, according to Daphne Kenyon, a visiting fellow at the Lincoln Institute of Land Policy in Massachusetts.
"Municipalities are simply strapped for cash," Kenyon said.
Some jurisdictions have embraced so-called PILOTs (Payments In Lieu of Taxes), a voluntary system in which a nonprofit -- often a private school or hospital -- agrees to pay a set amount to help cover the cost of city services. Those programs have met with mixed success.
On Oahu, the City Council this year approved an increase of the minimum property tax for all landowners to $300, from $100, despite opposition from the nonprofit community and others.
"We are worried about the 'slippery slope' of these tax increases," Lisa Maruyama, president of the Hawaii Alliance of Nonprofit Organizations, said in an e-mail. "When increased over time, they begin to erode the tax exemption altogether. ... Taxing organizations that are working to the community's benefit only hinders their ability to provide the very service on which government relies so heavily."
But those who advocate revising the system say nonprofits with considerable assets should pay more for large or highly valued properties, compared with tiny charities that own small properties and are struggling to stay afloat.
They say the city should adopt a system that will better reflect the value of the parcel or the ability of the landowner to pay, such as charging tiered rates for organizations with revenue or income over certain thresholds. That way the property owners would pay a more equitable share for fire, police, ambulance and other municipal services they use, proponents say.
"I think there can be more fairness injected into the system," said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawaii. "If you are a huge nonprofit like Kamehameha Schools, you should be paying something (more) because you are accessing these city services."
Kekoa Paulsen, a Kamehameha Schools spokesman, said in a statement that the organization hopes any discussion of raising taxes "would consider the rationale for why nonprofits are accorded their exemption in the first place."
Typically, Paulsen said, relief is provided as recognition of the value nonprofits provide to the public good. "As a result, and regardless of the size or value of a specific property, the real property on which the nonprofit conducts its charitable activities are exempt from the tax."
Paulsen noted that Kamehameha Schools pays more than $40 million annually in property taxes for its non-school parcels on Oahu.
"We feel that the parcels owned by Kamehameha Schools that we use for educational purposes, including our Kapalama campus and at our preschool sites around the island, provide an important public benefit and are worthy of the property tax exemption they currently receive," he said.
When asked whether he thought it was fair that the multibillion-dollar organization paid the same property tax as Aikido of Honolulu, which as lessee covers the bill for the Kaimuki parcel, the dojo's Gary Hirata said he hadn't given that any thought.
"I just pay the bills," he said. "We don't have much."
THE CITY'S acting budget director, Michael Hansen, said the Carlisle administration supports conducting a comprehensive review of the roughly 50 exemption categories recognized by the city. The Oahu land being exempted this year has an assessed value of roughly $46 billion.
"We want to work with the Council in doing that (review)," Hansen said.
He was unaware of when the last time such a review was done. Hansen also said it would be premature for the administration to take a position on whether changes are needed without gathering the facts and working with the Council and other affected parties.
Even a tiered system concerns nonprofit executives.
Many of the larger nonprofits that receive substantial donations are supported because the donors recognize that the charities are operated efficiently and that most of the money will go directly to the services benefiting the community, according to the diocese's Alexander.
By creating a tiered system, "You're taking away money that directly helps people," he said. "Every dollar you take away from a nonprofit -- that takes away money that can be used to help the nonprofit's mission."
Making any changes to further tax the nonprofit sector will be tough politically, especially so soon after Oahu's minimum tax was increased, observers say.
A bill that would have repealed Hawaii's general excise tax exemptions for nonprofits other than religious ones didn't even get by its first House committee at the state Legislature this year.
At the city level, a bill that would have revoked or greatly restricted the exemption for nonprofits failed to pass the Council last year.
If the city's exemption system were revised so nonprofits with greater assets paid more, the decision on where to draw the line requiring higher payments would be difficult, according to the Easter Seal's Howell. But he said that discussion would be worthwhile.
"What I think would be foolish is not to have a good, solid conversation on this topic," Howell said.
Calls for re-evaluating the city's exemption program have intensified since problems with the tax break given to owners of historic homes were disclosed earlier this year by the Star-Advertiser. The newspaper found that many owners were not complying with requirements of the program, including providing reasonable visual access to their homes.
But rather than look just at the historic-home exemption, Council members are pushing for a broad review.
A retired Maui couple who purchased a Waianae apartment for their disabled adult son said changes desperately are needed.
The wife, who asked that her name not be used to protect her son's privacy, said the couple recently received notice that the property tax bill for the single parking stall they purchased for their son so he could park closer to his apartment was increased to $300 a year.
That's the same tab Kamehameha is paying for its 425-acre Kapalama parcel.
"That's mind-boggling," said Councilwoman Kobayashi. "It's so unfair."