City looks at redoing home tax categories

A bill introduced by two Honolulu City Council members would eliminate the city’s controversial Residential A tax category.

Mayor Kirk Caldwell’s administration has not formally issued a position on Bill 41 but is warning that such a move could cost the city tens of millions of dollars annually.

The measure is the latest in a slew of initiatives aimed at mitigating negative consequences of the Residential A category, which was adopted by the Council in 2013 and has been in effect since 2014. The Residential A classification consists of all residential properties valued at $1 million or more that do not carry a homeowner exemption. A homeowner has to be a permanent resident of a home to obtain an exemption for it.

Residential A was designed as a means to raise tax rates on those that ostensibly are more able to afford higher taxes while shielding those less able to absorb them.

Residential A property owners currently pay $6 per $1,000 of assessed value, significantly higher than the $3.50 per $1,000 that standard residential property owners have been paying for years. The administration’s March 2 budget included a proposal to increase Residential A property rates by 30 cents to $6.30/$1,000 but kept the standard residential rate at $3.50.

But in a move also designed to help those most vulnerable to tax increases, the Council advanced a budget last week that includes a plan to create a tiered system for the Residential A class, allowing payment of $4.50/$1,000 for the first $1 million of value and $9/ $1,000 for any value above that.

Bill 41, introduced by members Ernie Martin and Ikaika Anderson, would wipe out the Residential A category altogether and place its estimated 8,100 properties back in the standard residential class. There are about 250,000 residential properties in all on Oahu.

“Initially when the (original Residential A) bill was rolled out, I think there were good intentions,” Martin said. “I think the administration underestimated the impact on many homeowners. And that million-dollar threshold has always been a level of discomfort.”

Council members have been looking at a number of different proposals aimed at dealing with the unintended consequences of Residential A’s establishment nearly every month since 2014, Martin said.

“So rather than try to carve out exemption after exemption to where Residential A is truly ineffective, I figure we just scrap it and perhaps start over,” he said.

Anderson noted he was one of two of nine Council members in 2003 who voted against creating the Residential A class. One reason was concern that it would adversely affect renters of Residential A properties, he said. Another worry was for those on limited incomes whose properties jumped into the $1 million-plus range due to the general hike in values, and for those who live in $1 million-plus homes who, for whatever reason, never applied for a homeowner exemption.

Caldwell spokesman Jesse Broder Van Dyke said the administration is still studying Bill 41 but has concerns about its financial impact on the city’s budget. Budget Director Nelson Koyanagi said that using the two-tier plan now in the budget, the Residential A class is supposed to net the city $110 million. Having those properties paying at a $3.50/$1,000 rate would result in $41 million less in county coffers, money that would then have to be made up for through cuts or other types of revenues. Both Martin and Anderson are already looking at ways to make up the lost revenue.

Anderson said he is introducing another bill that would not only eliminate Residential A but create a new luxury condo category that will focus on units being marketed to non-Hawaii buyers. Such projects have been popular in Kakaako and other high-rise neighborhoods of late, he said.

“I don’t mind hitting the investor (for more property tax dollars), I really don’t,” Anderson said. The message of that bill is clear, he said. “If you do not live in Hawaii and you want to buy and maintain a $2 million condominium here, you’re going to have to pay for it.”

Martin, meanwhile, said he is introducing legislation to create two new tax categories specifically for bed and breakfast homes and transient vacation units not only to substitute the lost revenue but to make sure those businesses are paying their fair share of taxes as part of a plan that would also allow more legally permitted bed-and-breakfasts and TVUs.

The city could also look at raising the rates in all the remaining categories to absorb the lost revenue, Martin said.

In December, a judge ruled against a group of about 20 Residential A property owners who argued the tax classification discriminates against nonresidents and that it is unconstitutional to impose a higher fee based on value rather than usage. The ruling is under appeal.