City could lose $2.5M due to tax compromise

A plan to provide relief to homeowners unintentionally shoved into the new, higher-taxed Residential A tax class may end up costing roughly $2.5 million in lost city revenues.

City Budget Director Nelson Koya­nagi told the Hono­­lulu Star-Advertiser that 652 property owners filed claims for tax compromise bills aimed at giving a one-time break this year to those whose properties were placed into the Residential A tax class even though they live in those homes.

Of those who filed by the Sept. 30 deadline, more than 60 came from homeowners not in the Residential A category and therefore not eligible to receive the break, Koya­nagi said.

The Department of Budget and Fiscal Services has not yet verified how many applicants actually meet the criteria, but if all did it would drain city coffers of $2,474,623 in anticipated revenues, Koya­nagi said. The loss would be absorbed and shouldn’t have repercussions on the city’s $2 billion operating budget.

Utility bills, income tax returns and completed requests for homeowner exemptions for next year were required to qualify for the so-called compromise tax bills.

The Honolulu City Council, with the support of Mayor Kirk Caldwell, created the Residential A tax class last year. It was intended to include all residential properties valued at $1 million or more but exclude those with homeowner exemptions in an effort to shield owner-occupants from higher tax rates.

But after tax bills went out this summer, a larger-than-expected number of Residential A property owners complained that they live in their homes but, for a variety of reasons, never filed to receive a homeowner exemption.

Residential A property owners are paying $6 per $1,000 of assessed value. Those remaining in the residential tax class are paying at a rate of $3.50 per $1,000. Coupled with skyrocketing assessments, some in Residential A said their bills were as much as 71 percent higher than last year.

The compromise tax bill program was created by the City Council’s adoption of Resolution 14-179, allowing homeowners to apply for a one-time tax compromise if they qualified for owner-occupant tax breaks by Sept. 30, 2013, but did not get them. The compromise essentially entitles a homeowner to pay at last year’s tax rate.

Council members have been attempting to find other ways to help owner-occupants they believe were unintentionally hit when their properties were placed in Residential A.

On Wednesday, Koya­nagi persuaded the Council’s Budget Committee to hold off on advancing a bill that would allow homeowners to get a tax credit if they give up a homeowner exemption for a home they sell but miss the Sept. 30 deadline to qualify for the exemption on their new "live-in" home. Koya­nagi told Budget Committee members that his staff wants more time to study the ramifications of the latest version of Bill 57.

The measure, introduced by Councilman Ikaika Anderson, initially called for the city to allow exemptions to be transferred from one house to another regardless of when properties are sold and bought. But officials said they rely on a certified, once-a-year tax revenue projection to help balance the city’s multibillion-dollar operating budget, and such transfers would inhibit their ability to budget.

To meet the administration’s concerns, Anderson reworked his bill so that an owner-occupant homeowner who cannot make the exemption filing deadline could instead receive a credit. The tax credit would be applied on the new house in the following year, making it easier for budget officials to determine in advance what the impact might be.

Koyanagi said he prefers the tax credit plan over the exemption transfer idea. But the administration still has concerns about the bill because it focuses on providing relief only for those who have benefited from an exemption. It excludes others like those who missed the exemption deadline but did not have a previous exemption, such as first-time homebuyers and those who recently moved to Oahu from other islands or abroad, Koya­nagi said.

"It’s not consistent because certain homeowners would not benefit by this," he said.

Anderson said "we would be happy to include those (other) folks" if the administration is willing to include them.

That’s when Koya­nagi asked for more time for his department to study the proposal more thoroughly.

Council Budget Chairwoman Ann Koba­ya­shi said she intends to put the bill on next month’s committee agenda.