Key city attorney takes on tax case

City Corporation Counsel Donna Leong will try next week to persuade a judge to change his earlier ruling that strikes down the city’s Residential A tax classification, a decision that could cost the city $39 million per year — and possibly more.

Leong, the city’s top civil attorney, is scheduled to appear before Tax Appeal Court Judge Gary W.B. Chang on Thursday after he granted a request allowing her to again argue the city’s case against striking down Residential A.

About 20 property owners with parcels designated Residential A brought the lawsuit earlier this year, arguing it was unfair and unconstitutional for the city to tax the designated property owners at $6 per $1,000 of assessed value instead of the $3.50 per $1,000 that standard residential class owners pay.

Property taxes are by far the largest source of revenues for the city.

Leong’s appearance before Chang on Nov. 22 asking for the continuance marks the first time she has appeared in an official capacity before a judge since becoming corporation counsel in May 2013. Historically, the corporation counsel provides direction and administrative oversight and rarely steps into a courtroom to litigate and defend the city.

In an email response, Leong said she is going to court herself because of the importance of the case to the city.

“The continued hearing on Dec. 22 is not an alternative to an appeal,” Leong said. “If the city does not prevail at tax appeal court, the city will appeal to the Intermediate Court of Appeals or Hawaii Supreme Court.”

Ray Kamikawa, an attorney for those property owners who brought the case against the city, said he and his team are undaunted by Leong’s presence or her legal tactic.

“If the city attorneys feel that they didn’t do their best at the previous hearing and they want a do-over, then bring it on,” he said. “We’re confident that the result won’t change, and this time, no excuses.”

Residential A is the tax category created by Mayor Kirk Caldwell’s administration and approved by the Honolulu City Council two years ago aimed at creating a new tax classification for those properties valued at $1 million or more and without a home exemption. A home exemption, which subtracts a significant chunk of value from the assessed amount to be taxed, is granted to those residential owners who live in their homes.

Both the administration and City Council members have made no secret that the new class was created to make it easier for them to shield longtime residents from higher tax bills.

But Residential A opponents argue that those with properties in that category are being taxed arbitrarily. They also have said they believe the classification poses a hardship for property owners living on an island where a home valued at $1 million increasingly is not considered a luxury.

Kamikawa, a former state tax director, said the city is allowed to create tax categories based only on usage, not value. Other tax categories include commercial, hotel/resort, agricultural and industrial.

Kamikawa suggested that the city may be forced to give back all the money it’s taken in from Residential A taxpayers, not just the difference between what they paid and what they would have been taxed under the standard classification.

“Our position is that there is no authority giving the city the power to reclassify property owners after the class has been assessed,” Kamikawa told the Honolulu Star-Advertiser in an email. “For previous years and now for 2017-2018, the assessments for Res A were issued. No more assessments can be made for owners in this class.”

City officials estimated that Residential A property owners paid about $39 million more in 2016 than they would have otherwise.

If Kamikawa is correct, the city could be in jeopardy of losing significantly more than $39 million.

Gary Kurokawa, the city’s deputy budget and finance director, said in court documents that there were 8,557 Residential A properties in tax year 2016 and 9,723 Residential A parcels in 2017.

This week, as new tax assessments were mailed to property owners, Kurokawa said about 1,000 additional properties are falling into the Residential A category.

Veteran tax attorney Arthur Reinwald, who is not involved in the current case, said it is not uncommon for attorneys to ask for a rehearing if things don’t go their way. To be granted a second opportunity, the losing side needs to convince the judge that evidence was omitted and not available at the time of the original proceeding. But ultimately, attorneys are seldom successful in changing the verdict, he said.

As for the Residential A category, Reinwald said he can see Kamikawa’s argument. Ultimately, the city might need to get approval from the state Legislature to change the law that outlines how they can assess property taxes since that authority comes from the state, he said.