The ongoing furor in Honolulu over the extent to which the rail project is adequately funded, or lack thereof, and the possibility of new state-mandated property taxes to fund education lead us to look at how we can or should make property tax classifications.
Real property tax is currently a county tax. It applies to real property that is owned by a taxpayer, or to residential property subject to a long-term (varies by county, but usually more than 20 years) lease. If the object is to raise more revenue, and to spare all or most normal people who otherwise would be motivated to kick out present or future county officials at the ballot box, we need to make classifications. How can that be done?
According to the teachers’ union’s public testimony on the constitutional amendment bill, we should be heavily taxing nasty foreign real estate speculators and vacation home buyers. If they can afford million-dollar homes, so they say, then they can afford money to educate our keiki.
Under constitutional law, it’s easy to create tax classifications. They only need a “rational basis,” which means it is very hard for a classification scheme to fail. For example, most counties already have different tax classifications for residential property, commercial property, hotel/resort, and agriculture, and they apply wildly different tax rates to those classifications. There are some classifications that are impermissible, however. Governments can’t discriminate based on race, sex, or religion. That comes at no surprise. They also can’t discriminate on nationality. So, a higher tax classification for foreigners wouldn’t fly.
Most jurisdictions that impose a real property tax give a break, typically a “home exemption,” to people whose primary residence is the property being taxed. So far, courts haven’t viewed that kind of classification as discrimination against those in other states and countries. The City & County if Honolulu then took this principle to the next level when it established its “Residential A” classification, which targets properties over a certain dollar value that are not registered for a home exemption. That classification was challenged in court and has survived, at least for now.
Just because a classification is constitutional, however, doesn’t mean that it does what it’s supposed to. Does Residential A hit speculators and the owners of vacation homes? Sure, but it also hits rental properties and properties where the owner wants to but can’t live there (for example, where the owner is of advanced age and needs to be in a nursing home; we wrote about that some time ago). Residential A also applies where the owner was eligible for a home exemption but, for whatever reason, didn’t apply for one — ouch. It turned out that there were quite a few people who fell into that category, prompting the City Council to enact relief measures.
To be administered properly, a tax classification should be simple and should be capable of verification with information that the tax agency has or can get without excessive additional cost. If a county wanted to tax homeowners with high incomes, for example, it would need access to Social Security numbers and income tax data. But what about the foreigners it might want to tax? Neither the State nor the IRS might have data on how much these people make, or what their net worth is.
So, how does a county zero in on foreign fat cats and speculators? It’s tough to find a classification that is constitutional, works correctly, and doesn’t create collateral damage. We wish the authorities good luck, because they are going to need it!
Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.
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