Judge reverses decision, keeps property tax category intact

A Honolulu ordinance that taxes homeowners at higher rates for million-dollar homes that they don’t live in full time will remain in effect after a state judge Friday reversed his October decision that found that the tax classification was unconstitutional.

After hearing new arguments from the city’s top civil attorney, Donna Leong, Tax Appeal Court Judge Gary W.B. Chang ruled that the city’s Residential A tax classification did not discriminate against nonresidents and was justified by the city’s interests in protecting the “stability and continuity of local neighborhoods.”

The new tax class, which is bringing in tens of millions of dollars in revenue annually for the city, was passed by the Honolulu City Council in 2013.

The higher property tax bracket affects nonresidents, investors with multiple residential properties on Oahu and property owners who may have qualified for the home exemption but didn’t apply for it.

City Corporation Counsel Donna Leong said after the hearing that she was “very happy” with the judge’s decision.

“It’s a very significant decision for the entire city,” she said. “The tax revenues generated by this are about $39 million a year, so it is a very important piece of tax legislation. I can’t tell you how important it is for the city’s finances.”

About 20 property owners with parcels designated Residential A sued the city earlier this year, arguing that the ordinance was unfair and unconstitutional, in part, because it discriminated against nonresidents.

Property owners who fall under the Residential A classification are taxed at $6 per $1,000 of assessed value instead of the $3.50 per $1,000 that standard residential class owners pay.

The higher tax rate applies to properties that are valued at $1 million or more and don’t have a home exemption. The exemption is granted to residential owners who live in their homes.

For instance, one of the parties to the lawsuit, Schuyler “Lucky” Cole, owns 42 properties on Oahu valued at $25 million, according to documents provided by the city. Three of the properties fall under the Residential A category, after exemptions, meaning he owes the city about $16,000 more a year.

Ray Kamikawa, an attorney for the property owners and a former state tax director, said that his clients would consider appealing the ruling.

“Our complaint was that the statute on its face and its purpose was designed to penalize nonresidents by increasing their property tax rates because it is obvious that nonresidents cannot get a home exemption, which is an escape hatch to Residential A classification,” Kamikawa told the Honolulu Star-Advertiser after the court hearing.

Kamikawa added that the jump in the property tax rate for properties assessed at $1 million or more seems unfair and “takes people by surprise.” He suggested that city officials consider a more gradual tax increase.

“I’m not saying it would be legal, but it wouldn’t have as many people complaining,” he said.

In issuing his decision, Chang said that his reversal was based on a more in-depth review of the issues. He called the prior ruling “very terse and abrupt.”

“Simply, the court, upon further study, came to a different conclusion,” said Chang.

He emphasized that Kamikawa’s arguments were “thorough, well documented” and “extremely well written.”

But Chang found that the higher tax rate didn’t discriminate against nonresidents because they could indeed apply and in some cases qualify for an exemption.

“The court is not saying that it is easy, it may require that the nonresident actually reside on the property for six months, but that may not be six consecutive months, it may be cumulative or aggregate,” he said.

“That in particular gives great comfort to the court in concluding that the subject ordinance does not discriminate against nonresidents.”

It’s rare that attorneys on the losing end of a case are successful in getting a judge to change his or her mind. In this case Leong, the city’s top civil attorney, stepped in after Chang ruled against the city in October. It was the first time that Leong had appeared in an official capacity before a judge since becoming corporation counsel in May 2013.

Leong told the Star-Advertiser earlier this month that she was going to court herself because of the importance of the case.

The city was at risk of having to repay the $39 million per year or more it has been bringing in annually from the tax hike.

Asked whether he thought Leong’s intervention made a difference in the case, Kamikawa said simply, “Donna Leong is a very worthy opponent.”