Property taxes in Honolulu would adjust each year based on inflation instead of assessed value under a bill the City Council is scheduled to consider today.

The bill is intended to make property taxes more manageable and to avoid tremendous spikes caused by surges in the real-estate market. Fixed-income households, the elderly and others have difficulty adjusting to sudden increases in property tax assessments.

Property taxes currently are determined by multiplying the assessed value of a home by the tax rate, which is set each year by the city. The council last year lowered tax rates for homes and apartments from $3.59 to $3.29 per $1,000 of assessed value.

"This proposal is based on fairness to the taxpayer," said councilmember Rod Tam, who has long advocated for a nonmarket-based property tax formula.

"The devil is the market value," Tam said. "Eliminate the market value and replace it with the rate of inflation. That's what the (state) Legislature does with the budget."

Under the proposal, the assessed value of taxable residential real property would be determined each year by adjusting the previous tax year's assessment for the property by the most recent change in Honolulu's consumer price index.

Gary Kurokawa, who heads the city's Real Property Assessment Division, said the administration is willing to discuss the issue but finds the proposal flawed and would oppose it.

"It doesn't address (what happens) when the values go down and it creates inequities in every way I see. The fairest method is a market valuation because it takes all things into consideration," said Kurokawa.

Under the proposed change, real property that is sold would be assessed at fair market valuation.

"We don't like acquisition-based assessments," Kurokawa said. "If you buy a house you'll be subject to market value, so it will always be penalizing new homeowners, and the longtime owners won't be carrying a fair burden."

PROS AND CONS

If adopted the new rules would take effect July 1.

Support for the proposal is mixed, with some calling it a good idea while others say it could put the city in a precarious position should the real estate market tank.

"For the average family, the growth in real property taxes has been astronomical and has created a real burden," said councilmember Charles Djou. "This could be a bad thing if you're in a negative real estate market, but I think it's more reasonable and it's something that people can plan for. ... (The current system) is especially hard on fixed-income families."

Councilmember Todd Apo is against the idea and said it would lead to revenue-based budgeting for the city and would negate the need to seriously look at essential municipal expenditures.

Apo said cities should look at exactly what they need to pay for and adjust property tax rates to reflect need, rather than doling out portions of revenue and allowing departments to spend as they see fit.

"It's not a good idea. I understand the issue coming up and the desire to limit an increase in property taxes, but that needs to be done based on how much you need to spend and adjusting rates every year based on that," Apo said. "If you're in a down real estate market and stuck with a limited multiplier like the CPI, that's how county governments end up having to file for bankruptcy."

The median price paid for a single-family home on O'ahu in February was $599,000, down 2.5 percent from February 2007, according to the Honolulu Board of Realtors.

The total assessed value of residential property on O'ahu decreased for the first time in six years last year, falling 2.7 percent.

The total gross assessed value of all property on the island slid from $191.5 billion to $190.7 billion, or 0.4 percent. Hotel and resort property values went down by an average of 4.9 percent.

About 7,000 owners appealed their assessments in 2006, according to the city.

Reach Peter Boylan at pboylan@honoluluadvertiser.com.