WAILUKU - The Maui County Council unanimously voted on Tuesday to override Mayor Alan Arakawa's veto of a County Council bill that would target abuse in the "circuit breaker" property tax program developed to help those with limited incomes from being taxed out of their homes due to rising assessments beyond their control.
The circuit breaker program allows those who qualify for a homeowner exemption and whose real property taxes exceed 2 percent of their adjusted gross income to apply for the tax credit. For fiscal year 2014, which begins July 1, 1,039 people will qualify for the credit with an average savings to them of $1,255 each, according to county statistics. The circuit breaker will cost the county an estimated $1.3 million in lost revenue.
Concerned about the abuse of the program by wealthier residents, the council revised the way adjusted gross income would be determined in a bill approved earlier this year. That amount would now include all titleholders. Under the old terms, it was possible for only one titleholder and his or her income to apply to the circuit breaker.
Council Member Don Couch worried that new “circuit breaker” property tax provisions, which the County Council approved by overriding Mayor Alan Arakawa’s veto Tuesday, might catch “the noncheaters” as well. He wondered how the bill would affect a retired couple in old Wailuku Heights whose gross building value is more than the $400,000 limit for qualifying for the circuit breaker but who may not have the income to pay a higher property tax bill.
The Maui News / MATTHEW THAYER photo
Households with combined incomes of $100,000 or more would not qualify. Those that have homes with building values of more than $400,000 also will not qualify.
Concerned about unintended consequences of the bill, Arakawa vetoed it April 19, noting that he understood the intent was to eliminate abuse of the tax credit. But the mayor shared some of the bill's problems by citing examples, such as how an elderly couple could have their son's name on their deed for estate planning but now would not qualify for the credit. The same could happen to an elderly individual with nurse live-in care who would need to add the nurse's income to his or her own, which also could disqualify the person for the credit.
While noting potential problems, council members voted unanimously to override the mayor's veto.
Council Budget and Finance Chairman Mike White, who drafted the bill, said during the meeting that he would be open to re-examining the bill if flaws were found.
However, time was of the essence, and the council needed to act immediately to allow county staff members enough time to make changes in the program because applications for circuit breaker credits in fiscal year 2015 will be accepted beginning in August, White said.
Members of the public will see the impacts of the bill when provisions of the revamped program are implemented beginning July 1, 2014. Although the ordinance will take effect July 1, applications for the tax credit are accepted from August to December for the following fiscal year, so circuit breaker applications for the next fiscal year that begins July 1 are already set.
White reminded his fellow members that they previously unanimously voted to approve the measure and should do so again. The council needed at least six votes to override the veto.
The council budget committee chairman said the bill attempted to preserve the circuit breaker program for those who needed it and that the committee did thoroughly review issues raised by Arakawa.
In a news release late Tuesday afternoon, Arakawa commended the council and its staff for the hard work they put into the bill.
"Both this administration and the council want to catch those abusing our circuit breaker tax credit, but this piece of legislation includes some language that could be inadvertently hurtful to those who are deserving of the credit," he said. "We must be fiscally responsible in ensuring real property tax revenues are maximized and that the system of taxation that we utilize maintains the highest integrity and fairness."
Rod Antone, county communications director in the mayor's office, added that the administration in April sent two letters to the council with suggested changes that the administration believed could have addressed the concerns.
The changes were not included in the bill, he said.
"We just hope that this doesn't hurt the same people it was designed to help," Antone said.
Designed to protect those with limited incomes from being impacted by skyrocketing land values and property tax bills during the boom times, the circuit breaker tax credit program was a product of a grass-roots citizens' lobbying effort. The group, Committee for Equitable Taxation or COMET, was formed in 1988 to protect property owners, especially longtime residents on fixed incomes who had no plans to sell their homes, from rapidly rising property values used to set their tax bills.
It was unclear how many people would be disqualified under the new changes. There were 225 circuit breaker applicants for the current year with homes with gross building values of more than $400,000 - which would not qualify for the tax credit under the new program, according information from the county Department of Finance.
Council Chairwoman Gladys Baisa said she was in favor of overriding the veto with reservations. She said she would have preferred to be able to discuss Arakawa's concerns more in depth and was worried about the public's lack of understanding of the changes.
On the other hand, she understood the time sensitive nature of the decision in order to get the measure ready for fiscal year 2015.
Council Member Don Couch also expressed some concerns about the bill's effects.
"Yes, it's going to catch the cheaters, (but) we have to be careful of the noncheaters it's going to affect," he said.
For example, Couch wondered how the bill would affect a retired couple in old Wailuku Heights whose gross building value is more than $400,000 but who may not have the income to pay a higher property tax when they do not qualify under the new circuit breaker.
Council Member Riki Hokama said he understood the concerns but said that these changes would improve current laws, give the Department of Finance more guidelines and help the council make better decisions on whom to give credits.
Lowell Kalapa, president of the nonprofit Tax Foundation of Hawaii on Oahu, sided with the council's bill. He said the measure is similar to Honolulu's, which considers all titleholders on a property when assessing property tax credits.
Kalapa contended that if a child of an older couple is on the title of the property and he or she is capable of paying the property tax, then that child should pay the tax because the asset will eventually be a "windfall" to the child.
In response to Arakawa's concern that children may be listed on the title for estate planning, Kalapa said: "Hey guy, when your parents 'make' (pass away) you going get this huge house. At least you can pay off their obligations when they are still living."
As for restricting circuit breaker credits for those homes that have gross assessed building values of more than $400,000, Kalapa pointed out that property tax assessments are divided into values for the land and the buildings. The $400,000 for the building alone is for a "huge house" and that a small house on 5 acres of land may still might qualify for the circuit breaker.
He said insurance agencies use the value of $200 per square foot to figure out the value of a home for replacement purposes, so a $400,000 gross valued home is indeed a large one.
* Melissa Tanji can be reached at firstname.lastname@example.org.