Critics of a new property tax category for owner-occupants said yesterday that while it may benefit the typical O'ahu homeowner, the change could ultimately harm everyone.

With the City Council's passage Tuesday of Bill 09-51, owners of property on O'ahu who don't live on their land — including most residential and commercial landlords — are probably in for some major tax hikes. Those increases, the critics say, will be passed on to everyone.

"Everybody should be putting a lock box on their wallets," said Councilman Charles Djou.

Deputy Budget Director Mark Oto said it's premature to say whether Mayor Mufi Hannemann will need to ask any property owners to pay more in taxes when he unveils a budget package next March. But, Oto added, indications are that unless taxes are raised, the city will face a $140 million shortfall in tax collections next fiscal year.

If there are to be tax hikes, "the mayor's commitment when he introduced the (owner-occupant) bill is he would like to see the tax liability not increase for the average homeowner," Oto said.

Hannemann is expected to sign the bill, for which his administration introduced and lobbied heavily.

Property taxes are the city's main source of revenue for its $1.8 billion operating budget.

About $85 million of the projected $140 million revenue shortfall next fiscal year is the result of a steep drop in property assessments. Gary Kurokawa, head of the Budget & Fiscal Services Department's Real Property Assessment Division, said that over all classes, assessments are down about 10 percent from the previous year.

A property owner's tax bill is determined by multiplying the assessed value of the property by a tax rate that's applied to different classifications, or categories, such as residential, commercial, hotel/resort, agriculture and conservation.

Recognizing that "adjustments" may be needed in the tax rate, creating a new owner-occupant classification gives the administration and the council an additional tool to shield those who own their homes from a sharp increase, Oto said.

"We recognize that we do have a financial problem that needs to be addressed that will probably result in us having to deal with an adjustment in real property taxes," Oto said. "As much as possible, yeah, we want to help the homeowners."

The city administration, during the past two years, has been belt-tightening through hiring freezes, increasing fees and other measures, Oto said. Agencies are being asked to trim 4.5 percent off their budgeted amounts for the fiscal year that began July 1, and that's on top of what was a 2 percent to 3 percent cut from last year's budget, he said.

"Really, the last resort is raising taxes," Oto said.

City officials say residential properties constitute 82 percent of the assessment pie, and more than half of that comes from owner-occupants.

With more than 80 percent of all property value coming from residential properties, "if you don't touch residential, who are you going to touch?" Oto said. "In the past, the council has touched commercial and hotel/resort. And the concern there is, given the economy, how much (more of) a burden can these classes really take?"

TAX HIKES PREDICTED

Critics of the new tax category say they have no doubt there will be property tax increases next March, when the mayor introduces the new budget, and that the bulk of them will fall on people who don't live in residential properties that they own.

Djou said he believes that in the end, everyone will need to pay more.

Owner-occupants are going to see a nominal tax rate hike while "every other classification is going to go through the roof," Djou said. "And everybody is going to pay for it."

Renters live in homes that aren't occupied by their owners, and all residents will be affected if commercial property taxes are hiked, Djou said.

"Only if you are a person who does not buy any goods or purchase any services or work on O'ahu, then and only then could you make an argument that you wouldn't pay more in taxes," he said. "It's going to increase the cost of doing business in Hawai'i."

Lowell Kalapa, president of the Tax Foundation of Hawaii, echoed Djou's concerns.

Kalapa said he's certain the intent of the administration is to jack up taxes on residential property owners who don't live in their properties.

"And the more they shift to non-residential, it'll make it more difficult to do business in this state," he said. "The net effect is people are going to lose jobs."

The administration has presented studies showing that higher taxes on rental properties have not resulted in higher rental rates, but Kalapa said those studies reflect conditions on the Mainland and not the situation in Hawai'i.

"The landlords are not going to take a negative cash flow, especially in these economic times," he said.

OTHER METHODS

Kalapa said the way to help those owner-occupants most in need is to expand the existing low-income property tax credit, which caps a property owner's tax bill at no more than 3 percent of household income.

The so-called "circuit breaker" tax credit is only available to families with a total income of $50,000 or less. Kalapa said it should be made available to everyone. Council members are looking at a separate bill that would make the program available to more homeowners.

Djou said he would prefer that the city increase the existing tax deduction given to owner-occupants. That deduction — a reduction of the home's assessed value by a fixed amount — would mean a bigger benefit for those in lower-valued properties, he said.

Adjusting the rate of the owner-occupant would disproportionately benefit those with more expensive homes, he said.

Oto said exemptions need to be determined by December, when tax bills are mailed out to property owners whereas adjustments in tax rates can be done by the council as late as June.