Property tax measure would soften $1M line

Owners of properties classified as Residential A that are assessed at just over $1 million would benefit under a bill up for a final vote of the Honolulu City Council on Wednesday.

But those with Residential A properties assessed significantly higher than $1 million would need to pay more under Bill 7, which was initiated by Mayor Kirk Caldwell.

Residential A properties are defined as properties the city assesses at $1 million and more, and do not carry a homeowner exemption. A person has to be a permanent resident of the home to obtain an exemption for it.

The Residential A category was created by Caldwell and approved by the Council in 2013 as a means of taxing those who own second homes or live outside Oahu at a higher rate than so-called owner-occupants, who own the homes they live in.

Since the Residential A class went into effect in 2014, those in the category have been paying at a rate of $6 per $1,000 of assessed value while, the standard Residential class tax rate has remained at $3.50 per $1,000.

Gary Kurokawa, the city’s deputy budget director, said Friday that there are now about 8,100 properties in the Residential A category. That’s out of some 250,000 residential properties on Oahu.

Bill 7 would establish a two-tiered system for calculating Residential A properties, essentially allowing the city to tax the first $1 million at one rate and any value above the first $1 million at another rate.

“The criteria (to be classified Residential A) is still the same: a million dollars with no homeowner exemption,” Kurokawa said.

Council members set tax rates each June. Kurokawa told the Council Budget Committee last month the administration is recommending to Council members a plan for Residential A properties to be taxed at $4.50 per $1,000 for the first $1 million and $9 per $1,000 for any value above that.

So the owner of a property assessed at $1.4 million, for instance, 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 is now paying $8,400 on the entire $1.4 million.

The latest version should help those whose properties are between $1 million and $1.5 million to pay less, but will mean those with properties valued at more than $1.5 million will end up paying more, city officials said.

Council Budget Chairman Joey Manahan and other Council members have tried unsuccessfully in the past to look at several tiers. Owners of Residential A properties should be able to see savings, he said.

On the city’s end, “the idea is not to lose any of the revenue that we’re earning from Residential A right now,” Manahan said.

The creation of Residential A has sparked objections from those who feel the bill unfairly imposes a higher tax based on the value of the home, arguing that many longtime owners of such property are not out-of-state investors, but kamaaina on fixed incomes trying to hold onto their properties for future generations. Opponents have also argued that Residential A leads to sharp, sudden spikes in property taxes for unsuspecting owners, pushing their properties above $1 million and into the category, what some call “the cliff effect.”

Administration officials say Bill 7 is an attempt to address that latter concern.

Sue Ann Lee, president of the Honolulu Board of Realtors, said Bill 7 is an improvement over the current situation facing Residential A property owners but doesn’t go far enough.

“We realize the city must balance the budget, yet we are looking at the unintended consequences affecting our residents as properties escalate in value each year. More and more of urban Honolulu’s neighborhoods are seeing homes reaching the $1 million assessment each year,” she said.

“A million-dollar property is very common now in Honolulu,” she said.

Her group would prefer the Council create several tiers with progressively higher rates: one for $1 million to $2 million of value, a second for value between $2 million and $4 million, and a third for value above $4 million, Lee said.