By Jonathan Helton and Mark Coleman
A constant refrain about property taxes in Hawaii is that they are low compared to the rest of the U.S., so most Hawaii property owners should have little to complain about.
But that doesn’t tell the whole story.
Hawaii’s property tax rates are low, but property values in the state are among the nation’s highest. So applying low rates to high property values means the actual amount property owners in Hawaii pay is near the national average.
Why do property tax rates in Hawaii seem so low?
Like all other states in the U.S., property taxes in Hawaii are collected by the counties, but due to historical considerations, Hawaii is the only state in which public education is funded almost wholly by the state.
Hawaii property tax rates thus can be low because the counties that assess and collect them do not have to cover the cost of public schools. Imagine how much more property owners would have to pay if the county governments were in charge of the schools.
How are Hawaii’s property taxes structured?
Each of Hawaii’s four counties tax properties at different rates, and each has varying property tax classifications as well.
For owner-occupied homes, the rates range from a low of $2 per $1,000 of valuation on Maui to a high of $6.15 per $1,000 of value on Hawaii Island.
For commercial properties — not counting hotels or industrial facilities — rates range from $6.05 per $1,000 on Maui to $12.40 per $1,000 on Oahu. Other property tax classifications include industrial, hotel and resort, agricultural and many more, depending on the county.
Some of the classifications have tiers, whereby the rate goes up depending on the value of the property. For example, the rates for Oahu’s “Residential A” homes — dwellings that are not owner-occupied and valued at $1 million or more — currently start at $4.50 per $1,000 for the first $1 million and go up to $10.50 per $1,000 on the value above $1 million.
How do property values affect property taxes?
Basing property taxes on property values is a common practice throughout the U.S. But the practice is not without its drawbacks.
Perhaps the main drawback is how the value of a property is determined. In Hawaii, the counties use “mass appraisal,” whereby they look at a group of properties within a certain area that were recently sold, then derive estimated changes in value within that group that can then be applied to other properties that did not sell.
If property prices in that area trend upward year after year — which in Hawaii is almost always the case — then the values of all the properties within that area are assumed to be increasing as well. Applying higher values to those properties increases property taxes accordingly, even if rates remain the same.
This can produce a windfall for the taxing authorities, but for many property owners, such as long-time residents on a fixed incomes or businesses operating on slim profit margins, budgeting for ever-increasing property taxes could be a challenge.
How can Hawaii’s counties provide property tax relief?
The simplest and most obvious way to combat property tax increases is for lawmakers to reduce property tax rates. Absent that, each county in Hawaii also has property tax-relief programs in place aimed at specific constituencies.
For example, all of the counties offer exemptions that deduct a certain dollar amount from the assessed value of owner-occupied homes. The amounts of those home exemptions vary by county, and each of the counties also provide additional exemptions for certain individuals, such as the elderly and those with certain disabilities.
For example, on Oahu, an owner-occupied home valued at $1 million would face a $3.50 per $1,000 rate equal to $3,500 in property taxes a year. But with the county’s $100,000 home exemption, the home would be taxed as if it were worth $900,000, reducing the tax bill to $3,150.
If the owner of the home were 65 years old or older, thus qualifying for the $140,000 “elderly” exemption, the tax bill could go down to $3,010.
Other types of relief include programs that ensure households below a certain income level do not pay more than a certain percentage of their income in property taxes. Honolulu, Kauai and Maui have these so-called circuit breakers in place.
Additional ways to reduce taxes to offset increased property values include:
>> Assessment caps, which limit how much assessed values can increase year over year.
>> One-time tax credits to certain property owners.
>> Tax deferrals, which allow older homeowners to defer their tax payments until they sell their homes or die.
In conclusion …
Yes, Hawaii property tax rates are low, and Hawaii residents don’t pay the highest property taxes in the country. But combined with all the other taxes levied in Hawaii, the “price of paradise” actually becomes very expensive, and Hawaii residents and businesses deserve all the tax relief they can get.
To read more information from the Grassroot Institute of Hawaii about property taxes, go here.
Jonathan Helton is a policy researcher and Mark Coleman is managing editor and communications director at the Grassroot Institute of Hawaii.