March 2005

Mayor's Budget Message unbalanced and unfair

The Mayor’s budget message presented on March 15th failed to provide a fair and balanced statement of the County’s spending and property tax revenues to be expected for the fiscal year beginning this July.

The message showed a total budget of nearly $125 million including a line item for “Projects and Real Property Tax Reform” of $10.5 million (which in substance would create an unaccountable slush fund in that amount). The actual spending planned totaled about $114 million, or $11 million higher than the current year’s budget of the $103 million.

Regarding taxes, the Mayor misleadingly stated that assessment rose 48% and “resulted in a $17.1 million increase in tax revenues”. Tax increases do not result from increased assessments, they occur to pay for greater government spending. For this year property tax revenues provide about $53.5 million of revenue to support a $103 million budget. For the coming year the Mayor is seeking about $70.5 million in property taxes to support a budget from $114 million to $125 million. This means that the Mayor is asking for $17 million more in property taxes for a $11 to $22 million increase in the budget. This year property taxes comprise about 52% of the funding for government spending; in the coming year it will be from 56.5% to 62%.

The Mayor does not mention anything about the allocation of the burden among taxpayer classes of the $70.5 million he plans to collect. This year of the $53.5 million levied, taxpayers with homestead exemptions paid about $8.5 million and all other taxpayers paid about $45 million. With the 6% cap under the Permanent Home Use Exemption, taxpayers with homeowner exemptions will pay about $9 million in the coming year (or a little less if the Mayor‘s suggested change in the cap to 2% is adopted) and the other taxpayers will pay about $61.5 million. On average that is about a 37% increase for properties without a homeowners exemption. It could be higher than 37% if the Council finds it necessary to have more revenues to achieve a balanced budget.

Our government officials persist in their spiraling spending increases and providing incomplete, misleading and sugarcoated messages seeking to justify them because of their arrogant view that they can deceive the people they represent. It is time for these abuses to end.

County officials spin soaring assessments

The County continues to offer spin rather than facts about County real property taxes. On March 15th the Mayor submitted to the Council his proposed annual budget for the year beginning July 1st and announced that real property taxes would rise by $17 million. He also noted that property assessments had increased as of January 1, 2005 48% from levels a year earlier. Evidently feeling some explanation was in order he later reminded residents who own and occupy their homes that the new assessments are not tax bills, and that those with homeowner exemptions would be protected “from increased taxes as a result of the escalated valuations”.

As is too often the case the Mayor’s remarks are only partially correct and are highly misleading. For those taxpayers with a homeowners exemption, any tax increase will be limited by the 6% cap provided in the existing permanent home use ordinance or, perhaps a lower cap suggested by the Mayor. But the great majority of those taxpayers will pay “increased taxes”. However, the Mayor ignores the effect of the 48% average assessment increase will have on all other taxpayers. Given that those with homeowner exemptions pay less than 20% of the property taxes, it is obvious that his honor is evading the principal impact that the soaring assessments will have.

The County officials then launch an unbalanced commentary about recent measures that provide tax relief to certain taxpayers. They disregard exemptions and rate patterns that have been embedded in the tax system and exaggerate the impact of the newer measures. They mention four ordinances that have been enacted by the last Council, but only one, the 6% cap, has any significant revenue impact. In an extraordinary statement, without any analytic documentation, they declare that if the cap were reduced to 2% as proposed, taxes payable by homeowners would be reduced by $7.3 million “this year”. Presumably, they are referring to the fiscal year beginning in July. Since the change from 6% to 2% will only create about $400,000 of tax savings and the County reported that the impact of the 6% cap would impact the current year’s revenue only about $2 million, the accuracy of the $7.3 million claimed seems in serious doubt. But the spin must go on.

The Mayor argues that tax relief is necessary for Kauai citizens, but demeans the four ordinances as “temporary tax relief measures… while long term and comprehensive real property tax reform is completed.” He seems oblivious to the difference between tax relief and tax reform and that tax relief can be provided without tax reform and conversely. His reference to tax reform completion is absurd, because the tax task force recommendations now over one year old have been disregarded and no steps have been initiated to put the reforms they proposed into effect. Mayor, you don’t complete something you haven’t even started.

The failure of our officials to give us straight information about our tax obligations is deplorable and unforgivable.

Day of Infamy

Day of Infamy March 16, 2005 will go down in Kauai history as Black Wednesday, or Day of Infamy. I began receiving first-time calls from people in panic that very day; and the calls haven&rsquot stopped. In fact, I am having trouble writing this message.

Let me skip to the end of this message first by announcing that, with a small number of friends, I have decided the only relief the taxpayers can hope for is a CLASS ACTION LAWSUIT AGAINST THE COUNTY OF KAUAI. I have no doubt the ranks of victims who have been injured by the willful violations of their own tax laws by the elected officials of the County of Kauai will swell exponentially once the word gets out.

But I have to warn you of the ultimate irony and insult that will accompany this lawsuit. Our money extracted from us by these crooked officials will pay for high-priced lawyers from Honolulu to defend the County!

There is perhaps no better way to start this message of awakening by quoting from a letter in today&rsquos Garden Island by someone unknown to me but about whom I have received a couple of calls extolling this person&rsquos credentials. Here is Steve Faunce's column:

KAUAI Opinion Viewpoint for Monday - March 21, 2005 Letter to the mayor on budget By Steve Faunce If one can believe the article in yesterday's issue of The Garden Island (Wednesday, March 16), the budget increase for the coming year "stems from a significant increase in projected real-property-tax revenues generated by a 48-percent increase in real-property assessments of Kaua&lsquoi properties this year." I don't know whether the article's an accurate reflection of the mayor's presentation or not. If it is, I'm appalled at the lack of logic that has our county's budget being driven by increases in property values. I would have assumed that the county would start by determining how much it will cost to provide needed services to our residents this year and submit a budget that reflects that level of spending. That number would then be divided by the total of all of the current real-property assessed values for the County of Kaua&lsquoi (i.e. the "tax base"), and the result would be the real-property tax rate applied to the our assessed valuations to determine the taxes due for next year. I've observed over a period of many years that the assessed valuations for properties all over the island were typically well below their market values (as indicated by the sales prices whenever the properties actually sold). It makes perfect sense to me that, if the adjustments have been made equitably, we should begin to see assessed valuations that are more in line with market values. What doesn't make sense at all is that the budget for providing county services would magically rise by $22,400,000 next year (including a $10,500,000 line item in the budget which may or may not be returned to the taxpayers as "tax relief" in the future). The budget process must begin to separate the issue of how to equitably assess the market values of individual properties from the issue of how much it costs to provide the services needed by Kaua&lsquoi residents. Do the budget first, then figure out what tax rate will be needed to pay the bills with the current tax base. If you continue building the budget based on fixed rates and increasing property valuations, we may find ourselves on very "slippery slope." It undoubtedly looks like a great idea now with property values rising each year. However, I suspect it will look a lot less attractive when we hit one of our inevitable market slumps and the property values stay the same (or even decline) from one year to the next. Will it suddenly cost any less to run the county than it does now? Will the assessed valuations be reduced? Where will salary and collective-bargaining increases come from? When the voters approved the amendment to the county charter in the last election, I was opposed to it because it seemed to take care of those of us who've lived in our homes for many years at the expense of those purchasing after a certain date. I was sure that the reasoned judgment of our elected officials together with the recommendations from their key staff members would come up with a more equitable solution. As of today, I am not as confident that this is likely to be the case. The county cannot continue to base its spending plan on the increases (or decreases) in property values. Every office holder must understand that a change in the size of the tax base is a totally separate issue from the amount needed to provide county services. If that difference isn't clear, that person shouldn't be involved in our budgeting process. The tax rates for our properties should probably change (both up and down) from time to time to reflect changes in the relationship between the tax base and the cost of providing needed services. For example, with the huge (48-percent) increase in the tax base this year, I would assume that the tax rates should probably be reduced. Please take the time to consider making this basic change and do not assume that, just because the market values of all of our properties go up, you have a mandate to spend more. Steve Faunce is a resident of Koloa

With that letter as an introduction I immediately fired off a response to the Garden Island:

Ray Chuan letter to TGI (Don't know if it will be published)

It's interesting how reader Steve Faunce described as a sensible and logical way to raise property tax revenues to support the services provided by the County of Kauai is precisely what is mandated in Chapter 5A, Kauai County Tax Code: Figure out how much you need, then figure out a tax rate to apply to the assessed value of real property (whatever that may be, depending on the real estate market)to yield the necessary revenue. Clearly, the County government has been doing it backwards!

Figure out the assessed value first. Then, without changing the rate, come out with the revenue. In a rising real estate market that calculated value will, of course, keep rising. The incredibly candid words of Mayor Baptiste, as reported in the Garden Island on March 16, descbribed precisely how the County has been violating its own Tax Code all these years!!

Our county government is the only one in the nation that DOES NOT explain on the property tax statement it sends out to the property owner how that number is arrived at. The latter just says "This is how much you owe." What is hidden, of course, is the TAX RATE, which magically does not change by more than a few insignificant percentage points, when the assessment could increase by as much as three hundred percent, as has been happening around the island.

To add insult to injury, both the Council Chair and the Mayor boastfully announce every year near the beginning of the new Fiscal Year: "We have again not raised the TAX!" Carefully left out, and apparently with the desired result of keeping the taxpayers in the dark, is the little word RATE! This deception has been used so many times that our officials are obviously starting to believe in it themselves, as was apparently revealed by His Honor the Mayor himself on the front page of the Garden Island.

A good example of this deception on the part of the Council was revealed during the well attended meeting at the Convention Center when Chair Kaipo Asing, with his slide show, told the audience how he had actually reduced the TAX by showing a bunch of new TAX RATES that differed from their previous values by maybe three or four percent. What he did not point out on the same slides was that the assessment had gone up 61%!!

Since the County government has, in effect, boasted how it has been violating its own tax code all these years, the logical solution would be for all the elected officials - the seven members of the Council and the Mayor- to resign immediately. The only effective alternative to this would have to be a taxpayers revolt through a class action lawsuit against the County of Kauai.

The final irony in this drama is that the County government will be using, guess what, our money to hire high-priced lawyers to defend itself. If these officials have any conscience at all at this point, they should resign and not squander any more of our money!

The reason for the shock delivered to the taxpayers this year may well be that the Assessor&rsquos Office no longer has over it an experienced and dedicated Deputy Finance Director. In essence, the Assessors now think they can go all the way to maximize the real property tax revenue for the coming year. And the Mayor was proud to announce that to the public in his Wednesday, March 16 pronouncement in the Garden Island.

I have a feeling this county government has opened the gate, inadvertently of course, to a torrent of outrage on the part of the taxpayers. Please pass this message to everyone you know. We will do whatever we can to get the message out to the general public as soon as possible.

In the mean time I will prepare another message that will try to explain why we think the County has been violating its own Tax Code all these years, by quoting for you appropriate passages in this 75-page document.

What we will need the most in preparing this lawsuit are examples of serious injuries being done to property owners, especially modest income locals and Native Hawaiians who, by their cultural background, are not prone to complain to the government, but more often than not, suffer in silence, as they give up their homes and move in with relatives or move to Las Vegas.

Just to keep you awake let me close by citing a case to show how crazy this tax scheme can be. The assessment of land along the shore of Hanalei Bay is somewhere around $12 million an acre. At a tax rate of, say, $4.50 per thousand, the tax on the land alone for this parcel of around half an acre would be $27,000! What is the tax bill on this property? $25.00. Twenty-five dollars, that is. You figure it out!

Mayor's mistaken remarks

According to The Garden Island report announcing his soaring $125 million proposed budget the Mayor declared that the increase stemmed from “a significant increase in projected real property tax revenues that have been generated by a 48% increase in real property assessments”.

If the Mayor had been honest with us he would have told us that there is no necessary relationship between property tax assessments and county spending. Rising assessments are an excuse for rising taxes, not a reason for them. As we all know, if government spending remains constant there would be no need for increased taxes whether or not assessments went up. It is the skyrocketing spending that mandates tax increases.

The Mayor blithely downplays the huge 48% increase in property assessments in the current year which brings the assessed value of taxable properties in the county to over $15 billion. Instead he tells us that they will be responsible for a $17 million rise in tax revenues. Apparently he does not realize that greater assessments could be offset by lower rates. Our government officials just don’t think that way.

His honor also got tangled up in his comment that up to $10.5 million of the budget “could be returned to residents in the form of more tax relief programs”. Setting aside the fact that the County is seeking to invalidate the Ohana Kauai charter amendment which is by far the most meaningful tax relief program that has occurred, resident homeowners only paid $7.5 million in property taxes this year. How does our honorable Mayor explain how over $10 million can be returned to a group that only paid $7.5 million? And isn’t a budget to identify expenditures planned to be made, not moneys planned to be returned to taxpayers?

Then Mr. Baptiste plays games with us about changes in the 6% cap on tax increases for resident homeowners. He says he wants “for the next fiscal year” to change the cap to 2%. Evidently he is unaware that well considered tax legislation should extend indefinitely and not just year to year. How Mr. Tresler and his staff conjure up the notion that the caps would “save” taxpayers over $7 million “this” year is unexplained. If adopted, the Mayor’s proposals would relate to the coming year, not this one.

The Mayor concluded his mistaken remarks with the observation that the assessment notices recently mailed “reflect only a fair market value of properties”. In fact, although by law properties are to be assessed at 100% of market value, the faltering assessment process has averaged assessment amounts at only about 75% of market value and wide discrepancies have existed in the valuation of comparable properties.

It was a memorably disconcerting day for Kauai citizens and taxpayers to observe the irresponsibility of our County officials in presenting and trying to justify the administration’s budget proposals.

Fuzzy Math?

According to the Garden Island article of March 6, 2005 Kaipo Asing spent only $200 to be elected last year for another Council term. Perhaps that was because his proficiency with larger numbers is not outstanding.

The article reports Asing is proud of legislation enacted that in the current year provided $5.48 million in real property tax relief for island homeowners. Let’s check this out.

In recent years the Council has enacted only two significant tax relief measures for resident homeowners. Neither of these ordinances was introduced by Mr. Asing. One is the 6% tax cap and the other is the socalled circuit breaker which sets a 3% of adjusted gross income tax cap. According to data furnished by the Real Property Tax Department for the current year (July 1, 2004 to June 30, 2005) property taxes payable by taxpayers in the Homestead class were $7.502 million. This amount would have been $9.407 or $1.905 million higher except for the two ordinances. Where Asing found the remainder of his claimed savings is a mystery.

Perhaps his misguided analysis includes some lowering of tax rates. This action, though, is only a mathematical correction to adjust the tax amounts to conform the budgeted tax revenues and the assessments and could not reasonably be considered tax relief.

Politicians like to claim that they are helping taxpayers. Our Kauai taxpayers would much prefer if our County government controlled its spending appetite so that property taxes could be meaningfully reduced. Over 13,000 of them voted to see the tax relief provided by the Ohana Charter amendment, but Mr. Asing wants to preserve the exclusive power to enact taxes for the Council. Perhaps the Supreme Court will uphold citizens rights to provide needed laws and we won’t have to strain Mr. Asing’s ability with numbers.

Shameful Deception?

The recent announcement by The Garden Island that it intends to examine the operations of our County government is warmly welcomed. That review should include the real property taxation as it surely one of the most inefficient and inequitable County functions.

Under the tax code all properties are to be assessed at 100% of their market value. Not only is this requirement almost totally disregarded, the actual assessments range from as low as 30% of value to around 90%, resulting in an arbitrary and unfair base for taxation. In the current year the total value of assessable properties was computed at $10.5 billion up about 100% from a decade earlier. The actual value of these properties is closer to $15 billion and the over $4 billion disparity and chaotic valuations offer undue opportunity for government manipulation in its annual quest for over $50 million from taxpayers to fund its excessive spending.

Both public and private efforts have sought to make County property taxation more equitable. The Ohana Kauai Charter amendment is a popular and reasonable measure providing tax relief for resident homeowners. By opposing this measure despite its adoption by voters the County is perceived as abandoning the public interest and seeking instead to protect its taxing powers. Since this posture is not politically attractive County officials are trying to portray themselves as having been diligent in adopting tax relief ordinances and anxious to continue on this path.

Our County officials are resorting to shameful deception of our citizens

Despite the near doubling of County spending and property taxation in recent years only two tax reduction measures of significance have been enacted. Both relate to taxpayers with homestead exemptions. One limits property taxes to 3% of the taxpayer’s adjusted gross income. Its concept has merit, but because of a built in limitation it aids only a small number of taxpayers with modest benefits. The other offers a 6% limit on tax increases from year to year. With inflation running at about 2% over the past decade, it allows government to increase its spending at triple the inflation rate. In the current year assessments were up over 20%, and taxpayers enjoyed tax reductions of over $2 million from this measure. This year’s saving will have a continuing effect, but much new impact is unlikely. It should be noted that the Ohana amendment allows only a 2% annual tax increase to apply to resident homeowners.

Desperate to show government concern about taxes, a real property tax task force was appointed. When its recommendations were issued over a year ago it was apparent to our Council they had three fatal defects – (1) the stabilization of assessments they provided would force the Council to raise rates if tax revenue increases greater than inflation rates were desired. This spotlight on the role of the Council in raising taxes was anathema to Council members.(2) the reduction in the number of tax classifications from eight to two would impair the Council’s ability to shift taxes between classes and (3) the triple weighting of improvement values would significantly alter tax liabilities. These factors remain and it is highly improbable that the recommendations (or even part of them) will be enacted.

The pattern of government spending increases is unbroken which precludes any broad based tax relief, but promises by our government officials are not deterred by reality.

The failures by our County government to control its spendings, to have a fair property tax system and to assure its sound administration are of great concern. The need for reform is critical, but its likelihood of occurrence is remote, in common with remedial actions in other areas such as solid waste disposal, traffic problems, infrastructure deficiencies and sewage spills. The focus indicated by the Garden Island paper on government efficiency or lack of it should help. Is it too much to hope that enough of our citizens will sufficiently care about the consequences to them of our County government failures to bring about the fundamental changes that are required?