It appears that government officials in the City and County of Honolulu are squirming over what do to with a recommendation made by a commission it appointed to bring fairness and equity into the real property tax system.
This is because the commission put on the table the question who should pay for county services. The answer is plain and simple, if you benefit from a county service, you should pay something for that service. However, as the commission reported, there are many beneficiaries of broad health and safety services provided by the county, such as garbage disposal and police and fire protection, who do not participate in paying for those services because they are exempt from paying the real property tax.
Since the service is provided regardless of whether or not someone pays the property tax, the cost of providing those services is shifted to those taxpayers who are not exempt. The Honolulu commission started from the standpoint of asking the questions — who pays and who benefits. As the cost of providing these services soars, elected officials are finding it difficult to squeeze more blood out of the taxpayer turnip. For more than two decades counties found it convenient to shift the burden from residential to nonresidential property owners, i.e., businesses. Figuring the pool of voters represented by businesses is much smaller than their home-owning constituents, this made it easier to hide the rising cost of county government from the larger voting bloc.
But that sleight of hand has run its course as businesses struggle to make ends meet and still remain competitive. Although many argue that businesses can pass the cost of the increased tax burden on to their customers to whom do the businesses pass that cost on to, but their customers, who are residents. Sure, in many cases critics like to think the cost is being borne by Hawaii’s visitors, but they forget that it is our families who live and work here daily and purchase goods from those businesses. As a result, local officials can no longer use that shell game to hide the true cost of running government.
So, if elected officials follow the logic of the commission, they should, likewise, be asking the question why are there some beneficiaries of county services not paying for the services they use? The obvious answer is that local policymakers, and, before them, state policymakers who had previously had jurisdiction over the real property tax, granted certain individuals or organizations complete or partial exemptions from the tax. As a result, those taxpayers pay nothing for those services or receive a discount on their cost.
Since the cost of those services is no less for someone who is not fully or partially exempt, it means that person also has to shoulder the cost of those services for those taxpayers who are completely or partially exempt. The question is whether or not it is fair for taxpayers who receive no exemption or a partial exemption to shoulder the extra burden.
On the mainland some jurisdictions have gone to charging fees for various services used by these exempt taxpayers. An extreme example involved a homeowner who lived just outside the county jurisdiction and, therefore, technically was not a part of the county’s tax base. For people in that situation, the abutting county charges for services like police and fire protection. In one instance, a homeowner who had not paid the user fee for fire protection watched as the firefighters from the county stood by while his house burned to the ground.
While that is an extreme case in point, it underscores the fact that county services cost someone money. If a property is exempt from paying the property tax which funds the majority of county services, then someone else must pay for those services. As the cost of those services soars, those real property owners not so favored with an exemption will be asked to shoulder a greater burden for not only the services they enjoy, but also for the services enjoyed by those who don’t pay the real property tax.
It is for this reason local policy-makers need to re-examine whether or not complete exemptions enjoyed by nonprofit organizations such as schools, credit unions, human service and health organizations should be continued. It may not be politically popular, but it acknowledges that everyone in the community benefits from these services that protect the health and safety of the community.
Lowell Kalapa is president of the Tax Foundation of Hawaii.