8/20/04 - Weekly Report - Proposed Agricultural Tax Revisions

Over the last four years, a major goal has been to ensure that the real property tax laws and procedures in Hawaii County are fair, appropriate, and up-to-date. The first major task in September 2001 was to review the county’s agriculture tax program. With input from members of various ranching and farming organizations, guiding principles were established:

Keep prime agriculture land in agriculture;

Return agriculture land to agriculture use;

Promote the agriculture industry and employment; and

Promote equitable taxation.

Following these principles, it is fully supported that the County continue assessing land dedicated to commercial agriculture at its agriculture use values, such as pasture use at $210 per acre, forestry at $500 per acre, orchards at $1,500 per acre, and truck crops at $2,000 per acre. This helps the industry, and helps keep prime agriculture land in agriculture. But for this and other reasons, the County of Hawaii currently receives taxes on just 10.5% of the actual market value of agriculture lands.

To make the real property tax system fairer, to support the agriculture industry through property tax incentives, and to close loopholes that enable some non-farmers to take advantage of tax provision intended to help the agriculture industry are three goals of proposed revisions to the property tax provisions regarding land in agriculture. These goals will be achieved through changes in administrative rules by the Finance Department and by County Council action to amend the tax provisions of the County Code.

Homesite Valuation

Because land dedicated to agriculture is valued so low, it is felt that the portion of land not put to any agricultural use, such as homesites, should be valued according to its actual use. This change in valuation was made through amendment of administrative rules which have the force and effect of law.

The Finance Director’s rules pertaining to the assessment of homesites (Rules 7 & 8) have been in existence since November 1975 when the real property tax program was administered by the State of Hawaii. These rules state that "When lands within an agricultural district are not put to any agricultural use, including any portion of the land being used as a homesite, such lands shall be assessed at their highest and best use based upon comparable values of similar lands being put to similar uses as reflected in the market."

In previous years, the County did not assess homesites in this manner, resulting in inaccurate and unfair assessments that did not follow the law. In December 2002, Rules 7 & 8 were amended to explain how the fair market value for the homesite would be determined. The following statements were added: "The director shall apply standard appraisal principles and theories in valuing portions of a property used as a homesite. In determining the market value of a homesite, the director shall give consideration to:

The selling prices of comparable sites with similar use and utility;

The advantage or disadvantage of factors such as location, accessibility, size, shape, and topography; the availability of water, easements, and appurtenances; and

All other influences, whether similar to those listed or not, which fairly and reasonably bear upon the question of value."

This tax year (2004) is the first that homesites are valued at their market value. Since this means higher values for most farmers, the County also passed an amendment to the County Code that allows these homesites to be placed in the homeowner class if they otherwise qualify. Many farmers who were concerned when their assessed value increased on their assessment notices were pleased when they received their tax bill last month and found that being in the homeowner class allows them to take advantage of the lower tax rates for that class, and offset the increase in value.

Proposed Bill No. 49, Draft 3

The County Council is currently considering Bill No. 49, which was introduced about 18 months ago and recently brought back from deferral. This is a lengthy and complex bill. Highlights of the changes proposed are:

Definitions Bill No. 49 includes additional definitions that will remove confusion and allow easier enforcement of the rules to insure benefits are awarded appropriately. This includes a requirement that a farmer/rancher must have $2,000 gross income or be following recognized agricultural practices to receive maximum benefits, and the additional requirement that agricultural use must be on agricultural-zoned land to receive non-dedicated benefits.

Dedication requirements Property must be in commercial agricultural use to receive dedication benefits. The dedication period will be ten years.

Dedication of leased land Although the dedication period is ten years, farmers/ranchers who lease their land will be allowed to dedicate it for the period of their lease if that period is at least five years.

Breach of dedication Tax rollback for breach of dedication or breach of non-dedicated use will be reduced. Sale of dedicated land will cause a breach unless the buyer assumes the dedication in writing. It also establishes certain exceptions to the breach rules for dedication; currently there are no exceptions.

Non-dedicated values For farmers/ranchers who do not or cannot dedicate their land, the value of their property will be set at twice the dedicated productivity values. While this is more than the value of dedicated land, it is still far below market value in most cases.

Unresolved Issues

There are two major issues that remain unresolved, and will be discussed as the Council deliberates on Bill 49 Draft 3.

Subsistence vs. commercial use This bill as proposed restricts the maximum benefits to commercial agricultural operations on agricultural-zoned land, demonstrated by $2,000 gross income or following recognized agricultural practices. Those who farm for subsistence will not qualify for maximum benefits, and those whose activities are not on agricultural-zoned land will not qualify for any benefits. Whether subsistence farmers should be eligible for maximum benefits, and whether agricultural activity on non-agricultural zoned land should receive benefits are policy issues that need to be discussed.

Farm dwellings rented to farm workers As mentioned above, homesites on agricultural land are now valued at market value, but in many cases qualify for the homeowners class and its lower tax rate. However, farmers who rent a farm dwelling to persons who work on the farm have the farm dwelling valued at market but cannot be taxed at the homeowners rate because the dwelling is rented out. This is a situation that exists especially (but not exclusively) in Kona on coffee farms. This must be discussed further to arrive at what is fair and equitable.

Where We Are Now…

After consideration at the Council’s Finance Committee earlier this month (August 2004), the Council decided to defer this bill for about 45 days to allow time for council members to take the proposal to their communities for comments and recommendations. After that period, Bill 49 Draft 3 will be placed back on the County Council agenda for consideration. It is hoped that Bill 49 will be adopted by October of 2004.

Because of the complexity of our tax laws, we must be very diligent to make sure that any changes do not inadvertently have a negative impact on those who should benefit from them.

If there are any questions or if anyone would like more information, please contact Bill Takaba, the Finance Director, at 961-8234.