The Honolulu City Council recently passed Bill 3, which, if signed by the mayor, would increase the standard real property tax home exemption from $80,000 to $100,000, and for homeowners age 65 or older, from $120,000 to $140,000.

It is estimated that this will reduce real property tax collections by an estimated $10 million annually.

This revenue loss will need to be made up somehow, and unless the mayor and the City Council devise a revenue source that is progressive (a revenue source that takes a higher percentage of the income of high-income taxpayers than of low-income taxpayers), a homeowner exemption is in effect a regressive tax, borne more heavily by low-income individuals and families than by high-income ones.

Homeowner tax exemptions are popular with homeowners but are bad public policy because they are regressive. The existing homeowner exemption reduces the taxable value of residential property on Oahu by about $14 billion. With a tax rate of $3.50 per $1,000 of value, this amounts to a loss of revenue of about $50 million. This revenue loss is made up by higher tax rates than would be needed if there were no homeowner exemptions.

Property taxes are a zero-sum game. If some people pay lower property taxes, other people have to make up the revenue loss to the city by paying higher property taxes.

This higher rate is paid by landlords (who pass it on to their tenants if it is residential rates that must be increased to offset the revenue loss from the homeowner exemption), and/or by businesses (who pass it on to their customers if it is non-residential rates that must be increased). The homeowner exemption hurts renters. And because tenants generally have lower incomes than homeowners, it is lower-income people who end up paying for the homeowner exemption.

In addition, homeowners of high-value properties already have a different and very substantial homeowner exemption in the form of not being subject to “Residential A” real property rates. Residential property valued at $1 million or more is currently burdened with a significantly tax rate than residential property valued at less than million. But homeowners whose property is valued at $1 million or more are exempt from the higher “Residential A” rate.

For example, a homeowner with a homeowner exemption whose residential property is valued at $1.5 million pays $4,970 annually in property taxes at current rates. The same property owned by someone without a homeowner exemption pays $9,000 annually at current rates. The homeowner has a $5,030 annual tax break. If the property is valued at $2 million, the homeowner with an exemption pays $6,780 less that for the same property without a homeowner exemption.

A more equitable system would be to structure the residential property tax so that the rate increases as the value increases. For example, tax the first $500,000 at $2.75 per thousand, the next $500,000 at $3.75 per thousand, the next $500,000 at $4.75 per thousand, and so on, with no homeowner exemption.

Jean-Claude Juncker, president of the European Commission and former prime minister of Luxembourg, famously said, “We all know what to do (about the Eurozone crisis) but we don’t know how to get re-elected after we do it.” Perhaps the same applies to property taxes in the City and County of Honolulu.

Randolph G. Moore is a retired business executive and Department of Education administrator. He now is a University of Hawaii regent, Hawaii Housing Development Corp. board chairman, and a director of Bikeshare Hawaii and Grove Farm Co. Inc.