HomeMy WebLinkAboutCOM 0217.001 2022-2024 OF H1
HEATHER L. KfMBALL MICHELLE GALIMBA
COUNCIL CHAIR Council District 6
Council District 1
Phone: (808) 961-8828 ',TE oF•;,,�* Phone: (808) 323-4277
heather,knaball(ohcn4laiicouLo ov miehelle_�alimba�iz?hawaiieounty.�av
HAWAPI COUNTY COUNCIL
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COUNTY OF HAWAII -®
25 Aupuni Street, Ste. 1402,Hilo, Hawai`i 96720
DATE: April 5, 2023 rr
TO: Members of the Hawaii County Council
FROM: Heather Kimball, Council Chair, District 1
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Michelle Galimba, Council District 6 SOY
SUBJECT: Supporting Documentation Relating to Bill No. 43
Attached please find the following for purposes of discussion in relation to Bill No. 43:
• September 20, 2019 Final Report from the Real Property Tax Review Working Group
and Agricultural Committee.
Thank you.
HLK1MG:dbk
Att.
Comm. No.
Ref.To:
Hawai'i County is an Equal Opportunity Provider and Employer Ref.'Date_ a-
Harry Kim Dearma S.Sake
Mayor Finance Director
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Steven A.Hunt
Deputy Director
County of Hawai i
DEPARTMENT OF FINANCE-REAL PROPERTY TAX
Aupuni Center • 101 Pauahi Street • .Suite No.4 - Hilo,Hawaii 96720 e Fax(808)961-8415
Appraisers(808)961-8354 - Clerical(808)961-8201 - Collections(808)961-8282
West Hawai'i Civic Center - 74-5044 Ane Keohokalole Hwy, - Bldg,D,2nd Mr. - Kailua Kona,Hawaii 96740
Fax(808)327-3538 - Appraisers(808)323-4881 - ClericaI(808)3234880
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FINAL REPORT TO HAWAI'ICOUNTY COUNCIL
FROM TBE REAL PROPERTY TAX REVIEW WORTUNG GROUP
4 AND AGRICULTURAL COMMITTEE
September 20, 2019
This is the final report to the Hawaii County Council from the Real Property Tax Review
Working Group (Review Group) which includes the Agricultural Committee (Ag
Committee). The Review Group held twenty-four meetings and the Ag Committee held
j twenty-three meetings.
The focus of the Review Group and Ag Committee was to review,and give policy driven
recommendations as needed on the following: Hawaii County Code Chapter 19, Finance
Director Rules and Regulations as it pertains to Real Property Tax, Agricultural
RatesNalues, 2011 International Association of Assessing Officers (IAAO) Audit and
review proposed changes or legislation which affects the Real Property Tax Division that is
referred by the Council or County. In addition the Real Property Tax Division has been
providing the Review Group and Ag Committee with complaints and concerns the Division
receives.
The group has met since August 2017,and had agreed to meet for a period of two years.
Reports were filed to provide County Council with updates of the group's progress.The goals
were collectively agreed upon:
• Increase the fairness of the County's Real Property Tax Program
• Identify and incorporate best property tax administrative practices
• Propose additional tax programs as appropriate
• Identify public policy goals and incorporate them into the County's
Real Property Tax Program
While tax rates were not part of the group's tasks,they were an integral part of discussion. The
group wishes to recognize that Council and Administration are not looking to the group to
provide insight into specific rates and tax rates are to be evaluated separately by Council and
Administration through the annual budget process. As such, we are not recommending any
changes to tax rates.
Going forward, the Review Group recommends the continuation of its participation as an
Advisory group to maintain the informal nature of the review of the Real Property Tax
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Hawaii County is an Equal Opportunity Provider and Employer
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Program and provide guidance to the Division. The Review Group fiu-ther recommends the
meetings to be held on a quarterly basis or as needed to ensure continuity and momentum.
In regard to the prior recommendations provided previously in reports to County Council,the
Review Group is aware Corporation Counsel has provided ordinance changes to the
Department of Finance Administration.With the busy fiscal year end and budget complete for
2019-2020,we are hopeful Administration will submit the recommended changes to the
County Council or County Council will introduce legislation in time to be effective within the
next tax year 2020-2021. _
The prior recommendations provided previously by the Review Group include the following:
1. The Veterans Disability Exemption annual real property tax to be $0. This
would require a change to the Hawa'i'i County Code.Recommendation is to change
for tax year 2018, however, it may be more realistic to have this done for tax year
2019 due to budget deadlines.To receive this benefit,the current program requires
the Veteran be 100%disabled due to a service related injury and the property needs
to be the Veteran's primary residence. This program currently has 609 parcels and
At the current $200 minimum tax, the County receives $121,800 in revenue
annually. There was much discussion regarding the value of the properties in this
category, the potential increase in properties that could end up qualifying for this
substantial discount and the concern with the loss of revenue during a time when
the County is having difficulty balancing the budget. The consensus is these are
100% disabled Veterans due to a service related injury and they have already paid
the ultimate price.
Update: Bill No. 165 introduced by CM Dru Kanuha was passed, Ordinance 18-
88 became effective July 1, 2019 resulting in the reduction of the minimum tax to
fifty percent for the Veteran's Disability Exemption.
2. Repeal the Non Speculative Residential Use program. Recommendation for
Administration or County Council to look into an ordinance to change the Hawaii
County Code. Recommended steps include informing all owners .currently with
parcels in this program of the repeal for tax year 2019, allow all parcels currently
in this program to automatically convert these parcels to the Homeowner
Exemption program (by virtue of the program they already technically are part of
the Homeowner class) at the 2019 frozen value and explain the 3% CAP would
then be applied to the tax year 2020 (first year they would see the increase). This
has been a recommendation the Real Property Tax Board of Review has reported
for several years as this program does not allow new applicants into this program
therefore it is not considered to be fair and equitable. It is our understanding when
the County Council approved the 3% CAP and the additional 20% homeowner
exemption (up to $80,400) there was discussion to have this program completely
repealed however it ended up being an "optional out" for those in the program.
There are currently 483 parcels in this program. The impact to the real property tax
revenue in tax year 2020 based on the current frozen non spec values would be
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$23,000 total. In addition, the County will save approximately$4,400 per year in
staff time which was allocated to the administering of this program.
Update: 'Corporation Counsel provided ordinance changes to the Department of
Finance Administration. Currently pending administrative review and submission
to County Council.
3. Repeal Solar Water Heater Tax Credit. This would require a change to the
Hawaii County Code.Recommendation is to completely repeal Section 19-104 of
the Hawaii County Code.In 2008 when this credit was established,the County of
Hawai'i Building Code did not require solar water heaters,however, since 2012 it
has been a requirement for all new construction. The group researched the
possibility of creating a photovoltaic credit.As the Real Property Tax Division does
not assess for solar and photovoltaic for residential use,there is no recommendation
to create another program in the place of ending the solar water heater tax credit.
Update: Corporation Counsel provided ordinance changes to the Department of
Finance Administration. Currently pending administrative review and submission
to County Council.
4. Procedural change to Real Property Tax classification. This would not require
a change to the Hawaii County Code,however,the.group was approached by the
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Real Property Tax Division for guidance'regarding a portion of the Hawai'i County
Code that was not consistently applied on the island.There are properties under one
acre of land that have been receiving the agricultural class tax rate when the highest
and best use is residential. Three meetings were held regarding discussion of what
would be the-most fair and equitable way to tax these parcels as the underlying
zoning is agricultural which 'included reviewing properties up to five acres in size.
The recommendation to the Real Property Tax Division is all properties less than
one acre in size which are not part of an agricultural use or dedicated agricultural
use program should be taxed at the residential class tax rate to be consistent with
the County Code island-wide. This is consistent with State Land Use Commission
statute which provides for the construction of single-family dwellings on lots
existing before June 4, 1976.
There are currently 19,604 parcels which will experience a tax class rate change.
6,665 will experience an increase in taxes with the remaining parcels not anticipated
to be impacted by the recommendation. The impact to the real property tax revenue
in tax year 2019 based on the current assessed values and tax rates would be an
estimated $1.3 million increase. Taxpayers still retain the option to apply for an
agricultural use program to receive the agricultural tax classification in future years.
Update: Real Property Tax Division implemented the procedural changes for Tax
Year 2019 with notification issued to the owners of affected properties.
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In addition to the prior recommendations,the Review Group is also recommending the
following:
1. Recommendation to maintain the current tax classifications based on highest
and best use.After many meetings, 'including presentations from the County of
Hawaii Planning Department and review of other local government tax codes,the
Review Group is recommending to maintain the current tax classifications at this
time. This decision,in the context of Short Term Vacation Rentals (STVR)and the
apartment classification,was not made lightly and is based on several important
factors including:
a. The current Hawaii County Code tax classifications are based on highest and
best use.
b. The County of Hawaii Planning Department only requires certificates for
STVRs which are non-hosted properties for rentals under thirty days. This
differs from the State of Hawai'i and County of Hawaii Real Property Tax
Division as both reflect vacation rentals as anything under six months(or 180
days)whether it is hosted or not.
c. There are additional burdens this Division would incur. The management of
constant changes in actual use with no additional support staff would likely
result in greater levels of inequity in assessments. An example would'be the
evolution of an STVR which can change within a relatively short period-of
time from hotel/resort classificationinto a proposed vacation rental tax
classification,and back to hotel/resort classification. In addition,there is no
reliable mechanism in place to provide data on these changes as they occur
which would present administrative challenges.
d. With the exception of County of Kauai and County of Maui,the County of
Hawaii Real Property Tax Division staff were unable to locate another
jurisdiction within the country which had a vacation rental tax
cl assification/rate*for real property taxes.
e. There are implications.of moving STVRs to the hotel/resort classification
from the apartment classification. During the analysis, it should be noted that
based on current tax rates the hotel/resort classification is often lower than the
current apartment classification based on highest and best use.
f. Upon review of the apartment classification,which includes condominiums
and apartments,the group identified the Affordable Rental Housing Program
as an alternative mechanism to separate apartments from condominiums. The
Affordable Rental Housing Program provides for a preferential tax rate upon
affirmation of rental rates at affordable levels. Changes are to occur to allow
for a focused communication to educate apartment owners of the Affordable
Rental Housing Program in an effort to change this through internal
procedure.
2. Update the Affordable Rental Housing Program.Update the portion of the
Hawai'i County Code to reflect requested changes discussed in 2015 and 2016.
During that period there were five meetings between County staff and local property
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management companies which took into account requests from the public. These
changes include:
a. Adding flexibility to allow for the use of a certification of rental rate in lieu of
a current rental agreement.
b. Allowing a licensed property manager or authorized representative to sign the
affordable rental housing claim form in lieu of an owner's signature,
c. General housekeeping of the County Code to provide for the consolidation or
change to the placement of existing language.
These changes do not reflect the inequity between West Hawai'i and East Hawai'i rental
amounts as this group understands this has to be handled at the Office of Housing and
Community Development level due to their relationship with the U.S. Department of
Housing and Urban Development(HUD).
In addition,the group is recommending a change.to Section 19-2 of the Hawaii
County Code to remove the specified seventy-five percent of the payment standards
as established by the Office of Housing and Community Development and replace
with broader language to allow for flexibility to change the percentage through an
administrative review process. Working in consort with other agencies,including the
Office of Housing and Community Development, an administrative review of the
percentage on a regular basis would provide for greater flexibility to react to changing
market conditions. This recommendation is provided with the understanding that the
Affordable Rental Housing Program is not a significant driver of encouraging
affordable rentals alone,but is complimentary to other programs and should not be
considered a stand-alone program.
3. Update the.Hawaii County Code to appeal on total value for condominium
properties only.The assessment notice can continue to reflect land and building
values separately.
The Review Group did consider the request for all property types to appeal on total
value only,however, the Review Group as a whole decided against this
recommendation as it could cause more confusion and create more inconsistency.
There was not enough data provided to the Review Group to change anything more
than the condominium properties only.
4. Allow for the use of Electronic Signatures. In recognition of advancements in "
technology and opportunities to improve filing options for taxpayers, streamlining
processes and recordkeeping,the Review Group is recommending a change in
practice to allow for the use of electronic signatures in addition to the current process
of filing for exemptions and program applications. The current process requires a
hard copy,weft-signature for all exemption and program applications, The Division is
currently in the process of converting forms into fillable pdfs and this
recommendation is an extension of the Division's efforts to modernize its processes.
Some of these processes would require corporation counsel consult or in the case of
distributing assessment notices electronically, a change to the Hawaii County Code.
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The Review Group has also reviewed)and affirmed the following items throughout the course
of the last two years:
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1. The proactive communication established by the Division notifying owners of
agricultural to residential classification changes in February 2019. The Division
issued more than 6,800 letters prior to the 201.9 assessment notice notifying taxpayers
of a change to their tax classification from agricultural to residential. This resulted in
a greater level of communication between taxpayers and the Division to ensure all
parties understood the reasoning and impacts of the change.
2. The Division's swift response to the,Lower East Rift Zone Eruption which started in
May 2018. The Division issued a significant number of damage assessment letters;
coordinated assessments with Civil Defense,Office of Housing and Community
Development; adjusted taxes as a result of the Mayor's emergency declaration; and
revaluated the market's response and recovery in a very short period of time,
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3. A continuous review of State and County legislation impacting real property taxation.
4. The evaluation of the Tax Board of Review's annual report and recommendations
with some of these recommendations also being affirmed by the Review Working
Group. An example was the affirmation and recommendation by the Review
Working Group to repeal the Non Speculative Residential Use Program.
5. A review of 2012 IAAO Audit action items which the Division has implemented and
others which require Council action.
Interim recommendations made by the group to Real Property Tax Division included
presentations to the entire group by the Planning Department of the STVR bill and program,
overall review of recent Legislative actions and a review of the County of Hawai'i budget
cycle(see Appendix A) in relation to the Real Property Tax Division's tax cycle and various
deadlines.
Accompanying this report; the Ag Committee is submitting a comprehensive
recommendation to.update the agricultural programs including updating agricultural values.
The earliest these changes could have an impact on real property tax revenues is tax year
2021,if County Council is able to approve in a timely fashion, We realize these changes are
substantial, however, the agricultural programs should provide considerable incentive to
farm production at.a community level and go beyond a personal sustainable level.
The current Agricultural Programs were developed at a time where there were large
landowners with a single crop/agricultural activity such as ranching or sugar cultivation. The
Dedicated Agricultural program was very effective in working within this set of
circumstances. In addition, the Non-Dedicated Program supported small scale agricultural
activities in the rural environment.
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However, since the origination of these program, there has been structural changes within
the agricultural industry and land development activities within the County. With the closing
of the sugar plantations, large landowners have been seeking diversified agricultural
activities on their lands. This has led to a program of leasing/licensing portions of properties ,
to various farms;with the fanning activities changing through time as markets change.
In addition, there has been a "gentrification" of the rural areas with the creation of
"gentleperson"ranches. While supporting agricultural activities, the general tax breaks for
non-dedicated agricultural activities has created an impression that the Agricultural
Programs can be abused.
In order to support'commercial agricultural activities as well as to continue encouraging
reasonable agricultural uses within the rural areas,the Real Property Agricultural Committee
has concluded that the overall agricultural tax program should be restructured with the
creation of a three(3)tiered system. This proposed system would include:
•. Revision of the existing Dedicated Agricultural Program to encourage its use by
landowners within diversified agricultural activities;
• Creation of a new Short-Term Agricultural Dedication Program to encourage commercial
agricultural activities where a farmer is just starting out or where the landowner is not
willing/able to make a long term commitment for agricultural uses; and
• Revision of the Non-Dedicated Agricultural Program to continue to encourage
agricultural activities in the rural areas while reducing the opportunities for and
perceptions of abuse of the system.
These following recommendations must be considered in combination with each other as they
would not achieve the appropriate goal without the other changes.
1. Revise the 10 Year Dedicated Agricultural Program. There are a number of
reasons why the Dedicated Agricultural Program is not as effective as it can be in
supporting commercial agricultural activities. A significant portion of these reasons
will be addressed with the acceptance of the recommendations below. However,the
program will also need to be revised to allow for diversified agricultural activities
areas,recognizing that farmers and crops will change over time so area may be fallow
while crops and/or farmers change. The potential for abuse of this program is
proposed to be addressed with the requirement for a detailed farm plan that would
identify the potential areas and types of uses as well as a requirement that any vacant
areas be actively marketed during the dedication period. The program would also
allow for blended agricultural values based on a potential range of uses. This would
eliminate the need to continually monitor specific agricultural activities as long as the
overall farm program is being followed. The valuation for this program would be the
lower of 10% of market value or the dedicated value.
2. Create a Short Term Dedicated AG program, This would require a change to the
Hawai'i County Code. The change would create a program similar to the 14 year
i dedicated program with a shorter term of 3 years. The requirements would be
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identical to the 10 year program with the exception of it not being recorded with the
Bureau of Conveyances. The program would be established to allow for diversified
agricultural activities as provided in the Dedicated Agricultural Program. The
valuation for this program would*be the lower of 20%of market value or 3X the 10
year dedicated value. This program would be focused on start up operations or where
there is uncertainty with respect to the long-term viability of a commercial
agricultural program.
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3. Revise the Non-Dedicated Agricultural Program. The Non-Dedicated Agricultural
Program would be revised to require a minimum lot size for agricultural uses as set
by the Dedicated and Short Term Dedicated Programs. In addition, in order to
qualify for this program, a Farm Plan would be required to ensure there is a viable
agricultural activity being undertaken. Another recommendation is that the Non-
Dedicated property agricultural value would be based on a percentage of the Fair
Market Value of the property and not as multiple of the Dedicated Agricultural rate.
The agricultural value for this program would have an assessed land value of 30%of
market value.
4. Native Forest program. Further review of the Native Forest program is
recommended with input from local native forest practitioners,United States
Department of Agriculture Forest Service Division,University of Hawaii -Tropical
Conservation Biology&Environmental Science and Tropical Ecosystem&
Agroforestry Management staff. An updated value of the Native Forest program is
suggested at '1i the current dedicated value per acre for pasture. .
In addition to the recommendations above,the Real Property Agricultural Committee
recommends to the County Council and Administration the following changes which are
located in the Hawaii County Code,Finance Director's Rules and Regulations as well as Real
Property Tax office procedures and guidelines:
5. Add a minimum size requirement for Non-Dedicated AG use parcels. This
would match the current minimum size requirements in place for the Dedicated AG
program. There are approximately 3,000 of the 8,400 parcels currently enrolled in a
Non-Dedicated AG program that would not meet the minimum size requirements.
The county receives approximately$580,000 in revenue annually from these parcels
and could gain approximately$6.5M by implementing an absolute minimum size
requirement.
The current minimum size levels are .25 acres (intensive AG), 1 acre(orchard), 5
acres (feed crops), and 10 acres (pasture). Parcels that fall below the minimum size
may still be eligible to receive the Non-Dedicated AG benefit if they can prove they
are part of a larger AG operation that in total meets the minimum size requirements or
they provide additional documentation(i.e.Farm plan and/or schedule F, G-49).
6. Reduce number of required signatures on AG applications. The current county
code requires all owners on title sign the application to receive the AG benefit. The
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change would require at least 51%of the owners' signatures on each application
including an affidavit of responsibility for any rollback taxes incurred. The group
feels that requiring all signatures is prohibitive in some cases and should not be an
excluding factor in the application process.
7. Require specific documentation of commercial operations for Dedicated AG.
The change would require the submission of either the prior year IRS Schedule F or
the State Department of Taxation Form G-49 upon application for the dedicated AG
program. The group feels the current proof of commercial operations is not
substantial enough to validate actual commercial operations.
8. Create a blended AG value for Diversified Use. This type of AG use will allow for
a seamless transition between intensive agriculture and orchard without requiring a
new application. The assessed value of this category would be midway between the
intensive and orchard categories.
9. Consolidate the pasture quality ratings to one value. The current valuation for
pasture is split between three categories. The current dedicated value for"good"
pasture is$210 per acre, "average"pasture is$60 per acre, and"poor"pasture is$14
per acre. The group feels the variability of the carrying capacity is inconsistent to
accurately assess pasture quality on an annual basis and would like to set one pasture
value of$14 per acre for dedicated pasture lands.
10.Require a farm plan with all AG applications. The group feels the current
application process does not adequately identify legitimate farming activities.
The current committee members for the Real Property Tax Review Working Group are:
Members from the general public:
Mary Begier,Mary Begier Realty(Hamakua,Hilo)
William Moore,William.L Moore Planning(Islandwide)
Marissa Harman,Kamehameha Schools(Islandwide)
Nahua Guilloz,Parker Ranch(South Kohala,North Kohala,Hamakua,Kona)
Riley Smith, Lanihau Properties(South Kohala,Kona)
Shannon Matson,Hot Yoga Hilo (Hilo,Puna) j
Stephanie Donoho,Kohala Coast Resort Association(South Kohala,Hamakua)
Peggy Farias,W.H. Shipman(Puna,Hilo)
Jaime Ortiz-Nava,Ortiz Hawaii Real Estate Solutions LLC(Islandwide)
The Agricultural committee members for the Real Property Tax Review Working Group are:
Members from the general.public:
Mary.Begi-er,Mary Begier Realty(Hamakua,Hilo)
Chris English,Ponoholo Ranch(South Kohala,North Kohala,Hilo,Puna)
William Moore,William L Moore Planning(Islandwide)
Marissa Harman,Kasnehameha Schools(Islandwide)
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Nahua Guilloz,Parker Ranch(South Kohala,North Kohala,Hamakua,Kona)
Riley Smith,Lanihau Properties(South Kohala,Kona)
Peggy Farias,W.H. Shipman(Puna,Hilo)
Jaime Ortiz-Nava, Ortiz Hawaii Real Estate Solutions LLC (Islandwide)
The following members from the County of Hawaii support the efforts of the Real Property
Tax Review Working Group and the Agricultural Committee:
Deanna Sako, Finance Director
Glenn Sako,Research&Development Ag Specialist*
Lisa Miura,Real Property Tax Administrator
Keita Jo,Acting Assistant Real Property Tax Administrator
Brandon Cain,Valuation Analyst
*Agricultural Committee only
Sincerely,
Real Property Tax Review Working Group and Agricultural Committee
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APPENDIX
BUDGET CYCLE
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APPENDIX A
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