HomeMy WebLinkAboutCOM 0118.029 2002-2004 ~
LAND USE RESEARCH r ~
~
FOUNDATION OF HAWAII _
70o Rishop Street, Ste. tg28
Honolnla, Hawaii g6St3 _ _
Phone5u-4717 ^ i
Fax 536-ot3z
September 30, 2004
The Honorable Aaron S.Y. Chung, Chair, and Members
Committee on Finance
Hawaii County Council
County of Hawai' i
25 Aupuni Street
Hilo, Hawaii 96720 BY FACSIMILE• (8081 96 1-89 1 2
Dear Chair Chung and Committee Members:
RE: BILL NO. 49 DRAFT 3 FOR AN ORDINANCE AMENDING CHAPTER 19,
ARTICLES 1, 7, AND 8 OF THE HAWATI COUNTY CODE 1983 (1995
EDITION), RELATING TO REAL PROPERTY TAX DEFINITIONS; NON-
DEDICATED AGRICULTURAL USE ASSESSMENT AND AGRICULTURAL
USE DEDICATION
My name is Dean Uchida, Executive Director of the Land Use Research Foundation of Hawaii
(LURF), testifying in regard to Bi1149 Draft 3, Relating to Real Property Tax Definitions; Non-
Dedicated Agricultural Use Assessment and Agricultural Use Dedication.
The main provisions of Bill 49 Draft 3 are as follows:
• Defines and distinguishes Non-Dedicated Agricultural Use Assessment and Commercial
Agricultural Use Dedication [minimum $2,000 gross income per year].
• Provides for assessment ofnon-dedicated lands in agricultural use on a continuous and
regular basis at hvice the dedicated agricultural productivity values. Home sites,
setbacks, and open landscape associated with residential use would be excluded from the
agricultural area for assessment purposes.
• Provides that all portions of land not committed or used for a specific agricultural use (i.e.
vacant and unusable/waste lands) would be assessed at full market value based nn
comparable sales.
Comm. No. Z9
Ref. To: _
Ref. L`ate~
Honorable Aaron S.Y. Chung, Chair, and Members
Finance Committee
September 3Q 2004
Page 2
• Provides that an owner or recorded lessee may petition to dedicate land for specific
commercial agricultural use for 10 years or the unexpired term of the lease if a minimum
of 5 years remain. Home sites, setbacks, and open landscape associated with residential
use [orj planted with crops primarily for home use would be excluded from the area
dedicated for commercial agricultural use. Land not so dedicated would be assessed at
market value. The minimum lot size for feed crops, pasture, and fast and slow rotation
forestry would be provided by administrative rule [current]y10 acres].
• Eliminates the 20-year dedication period with assessment at 50 percent of productivity
value, although the 10-year dedication period remains. Lands under existing 20-year
dedication may continue to be assessed at 50 percent of agricultural use value, subject to
the conditions and provisions of commercial agricultural use dedication.
• Reduces the rollback tax look-back period for breach of agricultural use to 2 years plus
current year, scaled up to 5 years for dedicated lands, depending on how long the
dedication has been in effect [if less than 8 years]. The period of breach reduced from 12
to 6 consecutive months, unless non-use is part of an approved farm plan.
Coincidently, the City and County of Honolulu is also reviewing the agricultural real property
tax system for Oahu. They created a Task Force to prepare a "workable" agricultural real
property tax system. The members of the Task Force were:
1. Chair Yukio Kitagwa, former Director of the Department of Agriculture;
2. Vice Chair Calvin Lum, former State Veterinarian and current rancher;
3. Dean Okimoto, President Nalo Farms;
4. Lowell Kalapa, Director of the Tax Foundation of Hawaii;
5. James Nakatani, former Director of the Department of Agriculture;
6. Kapu Smith, Kamehameha Schools and Manager of the Kawailoa Plantation;
7. Amy Hirano, Private Consultant;
8. Alternate: Alec Sou, President Aloun Farms;
9. Alternate: Jeff Peterson, Land-O-Lakes.
The Task Force's proposed Agricultural Rea] Property Tax bill was approved by the City
Council of Honolulu and is now before Mayor Harris for his signature. A copy of the bill (Bill
No. 49 (2004) CD 1 FD2) is provided with this testimony.
There are a lot of similarities between what the Task Force came up with and what the County of
Hawaii is considering under its Bill No. 49. The Task Force bill provided for:
(I) One-year dedication at five percent, five-year dedication at three percent, and ten-
Honorable Aaron S.Y. Chung, Chair, and Members
Finance Committee
September 3Q 2004
Page 3
year dedication at one percent of fair market value;
(2) "Circuit Breakers" not to exceed agricultural production value for five-year
dedicated ]ands, and nat to exceed five times that value for one-year dedicated
lands;
(3) Assessment of vacant lands dedicated for ten years at 50 percent of fair market
value;
(4) A schedule of declining rollback tax periods depending on the year the dedication
is cancelled; and
(5) Anew Section 8-10 providing an exemption for the value of qualifying
agricultural irrigation and drainage systems and land improvements on dedicated
vacant lands.
What we learned through this process was that the Counties all start from a basis of using "fair
market value," determined either through fee simple sales or replacement costs, as a means of
determining the tax assessed value of property in all land use categories. While appraisal
methodology recognizes the income approach as a means to determine fair market value, the
Counties are hesitant to use the income approach for agricultural assessments. We could find no
provision in the County Charter that prohibits the use of the income approach; however, it
appears that the Real Property Tax Office wanted to create a "uniform" assessment methodology
for assessment purposes. This created a problem because agricultural yield or productivity is
viewed as an "income approach" in determining the land values.
Using comparable sales data to determine the fair market value for agricultural lands on Oahu
resulted in significantly higher values for agricultural lands on Oahu from previous years.
Ironically, although the changes to the real property tax system were initially intended to close
the "loop hole" that allowed for "`gentlemen estates" to pay the agricultural rate, the fee simple
sales of "gentlemen estates" are being used as comparable sales to determine the tax assessed
values for agricultural lands on Oahu. For example, on lots less than 20 acres in size, the fair
market value for Waimanalo was $310,000 per acre; for Kahuku it was $250,000 per acre. Based
on lots being advertised for sale now, Mokuleia could be in the range of $1,000,000 per acre.
From the discussions at the Task Force, the City Administration's position, supported by
Corporation Counsel and the Real Property Assessment Division staff, was that the
Administration must use comparable sales or replacement cost to determine the fair market
assessed values. The only flexibility or discretion the Administration has is based on having
Honorable Aaron S.Y. Chung, Chair, and Members
Finance Committee
September 30, 2004
Page 4
lands dedicated. When lands are dedicated, the Administration has some flexibility to adjust the
fair market values. Also, and just as significant, is the fact that the Council is solely responsible
for setting the "tax rates" for the different categories of land on Oahu for tax purposes.
In cooperation with the City Administration, the Task Force allowed for the fair market values to
be determined by using fee simple sales. Based on dedication periods, the assessed values were
adjusted by 95 percent, 97 percent, or 99 percent; however, the bill provides fora "cap" on the
assessed values by comparing the adjusted assessed values based on fee simple sales against the
agricultural yields for the property. If the fee simple sales-adjusted assessments exceed the value
of the agricultural yields, the bill provides for automatic lowering of the percentage adjustment
such that the tax assessed values do not exceed the agricultural yields. (See attached
Spreadsheet.)
The County of Hawaii's Bill No. 49 provides for agricultural real property tax assessments to be
determined by the agricultural productivity values for dedicated and non-dedicated lands. We
understand this to mean that for lands in active agricultural use, whether the lands are dedicated
or not, the maximum tax liability will be twice the agricultural productivity value for the
property. Similar to the City and County of Honolulu, this provides fora "cap" on the assessed
values for agricultural lands and provides for some stability for farmers from the fluctuations in
the real estate market. We believe that using agricultural productivity values or agricultural
yields provides a fair basis to assess agricultural lands.
With respect to vacant and unusable/waste lands, in both Che City and County of Honolulu and
the County of Hawaii, the fair market value based on comparable sales will be used to determine
the tax assessed values for vacant and unusable/waste lands. Recognizing the tact that this
"surplus" of agricultural lands may be attributed to the limited amount of qualified farmers in
Hawaii, the City and County of Honolulu allows for property owners who dedicate "vacant"
lands for 10 years a 50 percent reduction in their assessed valuations. This would allow owners
to invest in infrastructure or improvements to the lands and keep the lands available for qualified
farmers in the future. It also attempts to address the situation where owners of agricultural lands
that are vacant because of market conditions (i.e. limited amount of farmers) are provided with
some tax relief as long as the property remains zoned for agriculture.
Throughout the discussions on agricultural real property taxes, it is important to understand that
real property taxes are intended to pay for municipal services, These services include police,
fire, sewer, water, etc., that are provided by the County. There needs to be a nexus between the
taxes being paid and the services being received for the property being taxed. For example,
residential properties should be taxed at a level proportionate to the demands they place on the
municipal services. In the case of agricultural ]ands, it is difficult to find that rational nexus to
Honorable Aaron S.Y. Chung, Chair, and Members
Finance Committee
September 30, 2004
Page 5
justify a large tax base, as agricultural users usually have little or no impact on municipal
services.
In addition, historically, the real property tax system was used as an "enforcement tool" to make
landowners comply with agricultural uses. However, in today's world, the real property tax
system should not be used as an enforcement tool for land use. If the land is zoned for
agriculture but is not being used for agriculture, then the remedy is to pursue the matter as a
zoning violation, not through some type of punitive taxation policy. Allowing agricultural land
to lie fallow, particularly after scores of years of intensive plantation cultivation, is not
necessarily a bad thing. The federal government pays farmers across the Midwest and elsewhere
under multi-year contracts not to grow crops.
Finally, when I appeared before this Council's Finance Committee in August, the question was
posed regarding how best to create a tax system that addresses the problem of gentlemen estates
in the agricultural district. The focus historically has been on attempting to define "farming,"
and if "gentlemen estates" were not farming, they would be assessed accordingly. A different
approach maybe to focus on improved value on the property rather than the agricultural use of
the property. Much of the concern we have heard deals with the large and expensive homes
being constructed on the agricultural zoned lands. The County may consider setting some
threshold based on the value of the improvements made on the property that is reasonable to
allow for active agricultural users who have a residence on their property. However, as home
improvement values exceed this threshold, the homeowner would be taxed at a higher rate.
As a suggestion, we propose that the Council consider the following:
1. Add two new classes of lands (Section 19-53 (e)) under agriculture called unusable or
waste lands and vacant lands. Allow the Council to set a special rate for waste or
unusable and vacant agricultural lands.
2. Allow for Exemptions for Agricultural Improvements to encourage investment in
maintaining and improving infrastructure and best management practices for agricultural
lands.
3. Agricultural Tax Rate. The Task Force proposed that the tax rate for agricultural zoned
lands be set annually by the Council at a rate that is equal to or less than the rate for
properties classified improved residential."
4. The tax assessment system needs to allow for multiple uses on a single parcel The taxes
should reflect the actual use of lands on the parcel, not generalize or blend the
Honorable Aaron S.Y. Chung, Chair, and Members
Finance Committee
September 3Q, 2004
Page 6
assessment. In particular, waste or unusable lands should not be taxed as if they are
usable.
We appreciate the opportunity to express our views on this matter, and look forward to further
discussions with the Council to address the issue of long-term agricultural real property tax
reform for the County of Hawaii.
Attachment