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The Honolulu Advertiser
Posted on: Wednesday, February 17, 2010

Honolulu council may change property tax break for nonprofits

By Gordon Y.K. Pang
Advertiser Staff Writer

While homeowners and businesses have felt the sting of real property tax rate increases in recent years, hundreds of private schools, churches, social service agencies and other organizations have continued to benefit from the city's $100 minimum tax for nonprofits.

The deeply discounted tax rate has been extended to nonprofits regardless of their wealth, and beneficiaries include long-established institutions such as Kamehameha Schools and The Queen's Medical Center.

Nonprofit executives already struggling to raise funds in a recession defend the tax break, saying cuts in vital services would likely be necessary if they are forced to pay higher property taxes.

Given that the city is dealing with its own financial woes that include an anticipated $140 million budget shortfall for the coming fiscal year, City Council Budget Committee chairman Nestor Garcia said the $100 minimum tax is becoming more difficult to justify.

Typical O'ahu homeowners are paying $1,700 a year in property taxes, following a 4 percent rate increase last year.

"When they see certain people in this community paying much less than that, I need to explain why," Garcia said at a Budget Committee meeting last week.

The committee deferred two proposals that would either raise or eliminate the minimum tax, but Garcia made it clear the measures could be revived during budget deliberations set to begin next month.

Honolulu real property tax records show that 843 church properties with a total assessed value of $1.82 billion are being charged the $100 annual minimum tax.

There are 881 properties classified as "charitable organizations" with a total assessed value of $1.7 billion also receiving the tax break, as are 257 nonprofit "low-moderate income housing" properties with a total assessed value of $1.4 billion.

There are 121 school properties with a total assessed value of $738 million qualified for the minimum tax and 70 hospital properties with a total assessed value of $626 million.

The $100 minimum tax also is offered to credit unions, disabled veterans, Hawaiian Home Lands beneficiaries and properties designated for historic preservation.

Just how much the $100 minimum tax is costing the city was not immediately available, and the calculations are complicated since tax rates vary depending on zoning.

But it's likely a substantial amount. At last week's Budget Committee meeting, Waldorf Schools sought an exemption from regular real property tax rates for an 'Āina Haina property with an assessed value of $3.8 million.

City tax officials said that without the exemption, Waldorf would have to pay $13,000 in annual property taxes.


The minimum real property tax is $150 in Maui County, $100 in Hawai'i County and $25 in Kaua'i County.

In Honolulu, the minimum real property tax was last increased by $7 in 1993, according to city budget director Rix Maurer III.

While eliminating the $100 minimum tax probably isn't likely, Garcia said he may recommend upping the amount if the budget picture takes a turn for the worse.

One option for council members to consider is a "tiered system" based on land-use categories, with separate rates for churches, hospitals, social service agencies, schools and other entities. Another option is a system based on the ability to pay.

Councilman Ikaika Anderson indicated at last week's meeting that he would prefer a tiered system of some sort.

"I venture to say the credit union has a higher level of resources available to them than any residential individual," he said.

Mayor Mufi Hannemann opposes any change in the minimum tax, despite the concerns of his budget chief.

"Given that it's been 17 years ... I think that it is, in general, time to again consider moving the minimum tax," Maurer said.

"That said, I think that it's also a difficult time for the tax-exempt and other charitable organizations that currently pay the minimum property tax," because they are facing funding cuts while also experiencing increased demand for services.

Those organizations turned out in force last week to oppose changing the minimum tax. Agency leaders described their current economic hardships and reminded council members that nonprofits exist primarily to provide services to the community and, by doing so, lessen the burden on government.

"Nonprofits are tax-exempt because they provide a social good in education, health and human services, housing, support to the elderly and other critical services that government would otherwise have to furnish," said Lisa Maruyama, president and chief executive officer of the Hawai'i Alliance of Nonprofit Organizations, in written testimony.

"Nonprofits are able to provide these services more cost-effectively, but decreasing their tax exemptions would add tremendously to their costs and hinder their ability to serve the community."


Health insurance provider HMSA warned of the cost to consumers if nonprofits lose the tax break.

"Requiring HMSA to pay real property taxes would add to the cost of providing health-care coverage and ultimately translate to an increase in premium cost," the company said in its testimony.

Kevin Carney, vice president of EAH Housing, said the result to his constituency would be higher rents and fewer low-income housing projects.

"There are properties out there right now that were underwritten based on not paying real property taxes that could collapse if there's a real property tax imposed on those properties," Carney told committee members.

Also raising objections were the Hawaii Association of Independent Schools, Queen's Health Systems, Aloha United Way, the Healthcare Association of Hawaii, Hawaii Theater Center, Goodwill Industries of Hawaii and the Hawaii Credit Union League.

For-profit properties owned by nonprofit organizations are not eligible for the tax break. So, for example, Kamehameha Schools pays the $100 minimum tax for each of its school campuses, but is charged the full commercial tax rate for its Royal Hawaiian Shopping Center, according to Gary Kurokawa, the city's Real Property Tax Division administrator.

Likewise, The Queen's Medical Center pays the minimum tax on much of its property, but is charged the commercial tax rate on the three professional buildings on its campus, Kurokawa said.