WAILUKU - On a quiet stretch of South Makena Road, a stone's throw from the ocean, two nearly identical, undeveloped properties sit side by side. Both are exactly 2.8 acres. Both are covered in kiawe trees and other scrub. Both are worth millions.
Yet while one landowner paid $20,000 in property taxes last year, the other paid just $150.
What's the difference? The second lot includes a small round pen for horseback riding. That was enough to qualify the parcel for the county's agricultural assessment - an adjustment in the county's estimate of what the land is worth for tax purposes. In this case, it reduced the second lot's taxable value from $5.3 million to just $100.
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Source: Maui County Finance Department
Yes, $100.
"My head just starts exploding," said Council Member Mike White.
After spending hours exploring the county's property tax records online, White said he's developed something of an obsession with the unexplainable inequities and extreme disparities in a system he says is out-of-whack. He sent a letter to colleagues on the council last month highlighting numerous real-life examples, and calling for the establishment of an investigative group to study the issue and propose reforms.
White said he first became aware of the issue when he bought his own house lot in Olinda several years ago. While he paid more than $400,000 for the land, he was shocked when he received his first property tax assessment and saw that the county had valued it at only $8,800.
He said that when he began to look into the issue more deeply after being elected to the council, he found the disparities in the system were far more significant and widespread than he had ever imagined. He found sprawling estates bought for millions of dollars, which, because of low agricultural assessments, were paying less in land taxes than cramped Dream City cottages.
"The more I looked, the more I found, and the more I found, the more amazed I was," he said.
The result is that modest residential landowners are "subsidizing" property taxes for the owners of multimillion-dollar estates, he said.
Real Property Tax Administrator Scott Teruya said his division has struggled with the issue for years.
"The problem right now is there's some glaring issues of total inequity - where there's someone on an estate paying less than on a minimum, affordable lot in Kahului," he said.
And the impact of those disparities goes beyond issues of fairness. Teruya noted that discounts given to taxpayers receiving the lower agricultural assessment cost the county around $27 million in revenues each year. Other types of landowners are picking up the slack, he said.
"Rob Peter to pay Paul," he said. "You're just squeezing the bubble."
Currently, anyone who owns land zoned for agricultural use can qualify for the lower property tax assessment, while people with land in other zoning districts can apply for the assessment by submitting a farm plan.
To assess a property's value as agricultural land, the county doesn't look at what the owner paid for it, or even at its market value. Instead, assessors rely on agricultural productivity codes - a listing of the estimated rental value of agricultural lands, based on surveys of soil quality in the property's specific area. The system was set up by University of Hawaii agronomists - in the 1950s.
In other words, that 2.8-acre lot in Makena is valued at $100, because that's what researchers determined it could be rented for as farmland 60 years ago.
The system dates back to the days when property tax assessments were handled by the state government, and it was carried over by the county when local officials took over those duties in 1981, Teruya said.
Oahu abandoned the codes several years ago in favor of a system in which landowners who dedicate part of their property to commercial agriculture simply see their regular assessment reduced by a set percentage. The City & County of Honolulu also added a requirement that property owners had to show actual revenue from their farming operations, to prove they weren't just using their land for a personal garden or to graze a pet horse.
White said he believed that Maui's assessment system had been set up to protect and encourage agriculture but that disparities in the system had widened over time.
He pointed to one Haiku property, 73 acres of oceanfront land purchased 11 years ago for $1.8 million, that saw its land assessed at $224,500. That's less than the valuation for a 7,240-square-foot lot in Skill Village.
Because the agricultural assessment does not apply to buildings or other structures, the Haiku landowner still ended up paying more in taxes, mostly on the 5,940-square-foot mansion he built on the property. But White said he believed that the parcel's sprawling open land, affording the owner a sweeping view of Maui's north shore, should have been taxed on more than its value as pasture.
In addition to the issue of inequity, White said he was concerned the county's agricultural assessment system was being used to "subsidize speculation," sometimes allowing landowners to continue receiving an agricultural assessment - and minimal property tax bill - even as they actively pursue development entitlements or subdivision approvals.
As an example, he pointed out a 149-acre parcel in Pukalani that was purchased by developers for $4.75 million. Because the parcel had a pre-existing agricultural assessment, the new landowners pay just $275 in annual property taxes, even though they've made clear their plans to eventually develop the property.
"Is it right for someone who, in my view, is speculating on a land purchase, to be taxed the same as our lowest-taxed homeowner - when one investment is way above the other investment," he said.
In another example, White noted that international agri-business Monsanto was paying just $275 in annual property taxes on a 310-acre South Maui parcel the company purchased in 2009 for $20 million, although it paid more in taxes on the buildings on the property.
While he acknowledged that Monsanto was actually using the parcel for commercial agriculture, he questioned whether it was appropriate for the county to value the land at less than 1 percent of what the company agreed to pay for it just two years ago.
He also questioned the fairness of charging a multibillion-dollar international company less in property taxes than even the smallest mom-and-pop businesses in the county.
He said the issues needed more thought.
"I don't know what the answer is, but it's a question we've got to ask ourselves," he said.
* Ilima Loomis can be reached at iloomis@mauinews.com.
