The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Honolulu County Council on July 12, 2023.
July 12, 2023
Honolulu City Council Chambers
To: Honolulu City and County Council
Councilmember Tommy Waters, Chair
Councilmember Esther Kiaʻāina, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: Bill 42 (2023) — RELATING TO REAL PROPERTY TAXATION
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on Bill 42 (2022), which would impose an 8% assessment cap on properties in the Residential tax class.
These assessment caps, also known as valuation caps, limit how much the assessed value of a parcel can change year-over-year. They are intended to blunt the effect of higher property assessments on the tax bills of the property owners.
Under Bill 24, a property once subject to a cap would be reassessed at full market value whenever it sold.
California’s Proposition 13 is one of the most famous examples of an assessment cap. Currently, Hawaii and Kauai counties impose 3% assessment caps on properties in their owner-occupied or homestead classes.
While assessment caps can be of some assistance, the Institute believes that they are not the most effective means of providing homeowners property tax relief when used across the board and set at low percentages.
The primary benefit is to shield property owners from unexpectedly large increases in their tax bills.
Under Bill 42, the owner of a property whose value increased by 20% in one year would not pay the entire 20% increase that year, but over a series of several years, since the bill provides that any increase above the 8% would be factored into the property’s assessments in future years. This would make the tax increase more gradual and lessen the possible negatives of a one-time shock from a large tax bill.
Assessment caps are an imperfect relief policy, however, since they can result in unequal tax bills for similar properties. A longtime homeowner might pay a much smaller tax bill than a new homeowner, no matter their age. Because an assessment cap limits the taxable value over time, the longtime homeowner will face a tax rate that is applied to a smaller portion of the market value of their home.
As a result of these unequal tax bills, assessment caps can create distortions in the housing market. Caps tend to result in more tax savings over time, so homeowners become hesitant to sell their homes and purchase other homes; they want to keep their tax benefits.
For example, research shows that under California’s Proposition 13 combination 2% assessment cap and 1% rate cap, homeowners tend to stay in their homes much longer. This is despite the fact that many individuals might want to downsize or move to another neighborhood or city. Basically, an assessment cap essentially disincentivizes homeowners from moving.
Economists Nada Wasi and Michelle White found in a paper for the National Bureau of Economic Research that “existing owner-occupiers move less often and therefore the supply of owner-occupied housing units offered for sale falls. … This forces renter households to delay their transition to owning.”
To be fair, the 8% cap proposed by Bill 42 would not likely distort the Honolulu housing market in the way that Proposition 13 affects California. That’s because over the past decade, from 2014 to 2023, the assessed value of properties in the Residential class increased by an average of 5.45% each year.
For fiscal 2024, the assessed value of Residential properties on Oahu increased by an average of 9.1%, but otherwise, the average increase exceeded 8% only twice during that 10-year period — by 8.9% in 2015 and 9.3% in 2023.
This is not to say that individual properties within the homeowner class did not increase by more than 8% each year. In fact, this bill could shield owners of such properties from unreasonably large tax increases, and on that metric the proposal has merit.
Should this bill move forward, the Institute would suggest the following:
>> Retain the provision that states, “If the property has an assessed value that will increase the assessed value in excess of eight percent over the preceding tax year, the director may apply the excess value to the subsequent tax year.”
This provision would help minimize the distortionary effect of the cap, since assessments higher than 8% would be factored into the assessed values for years in which a property’s value increases by less than 8%.
>> Insert a provision that guarantees that homeowners can keep part or all of their tax benefit if they sell their property and buy another property in Honolulu that they plan to use as a primary residence. This also would minimize the distortionary effect by removing the disincentive to sell.
Thank you for the opportunity to testify.
Director of Strategic Campaigns
Grassroot Institute of Hawaii