Why Hawaii Can't Vote On Property Taxes

Faced with a budget shortfalls and declining revenue projections (and what level of government these days isn't?), the Honolulu City Council voted today to raise property taxes and eliminate a property tax credit that would have softened the raise for some homeowners. See the reports here and here. It also voted to raise the bus fare from $2 to $2.50 for a single fare (with corresponding increases in monthly pass fares), up the vehicle weight tax 25% this year and an additional 25% next year (Hawaii taxes automobiles by weight, not by age as California does), and quadruple parking rates at the Honolulu Zoo.

There's been a lot of rumbling lately from Hawaii taxpayers about decreasing government expenditures and controlling property tax rates, but a few years ago, after years of pleading with their elected representatives for relief, Kauai voters actually did something about it. They voted to amend the Kauai Charter themselves to establish a baseline property tax rate and cap yearly increases. That charter amendment -- known on Kauai as the "Ohana Kauai" amendment after the grassroots citizens' group that drafted the proposal and gathered enough signatures to put it on the ballot -- passed by an overwhelming margin.

[Before we go further, a disclosure: I was the pro bono appellate lawyer for the four members of Ohana Kauai who defended the charter amendment in court.]

Under the Ohana Kauai charter amendment, property taxes for owner-occupied homes were capped at 1998-1999 amounts for taxpayers who purchased their homes in 1998 or earlier, and capped at the amount paid in the year of purchase for homes purchased after 1998. The measure also limited tax increases to 2% per year. It was designed to bring a measure of certainty and predictability to residential real property taxes, as homeowners would know from year-to-year their maximum tax liability, and county officials would know how much tax revenue to expect from resident homeowners.

To a Californian, voting on property taxes probably does not seem like that big of a deal. More than 30 years ago, the people passed Proposition 13, a statewide initiative that capped taxes and limited increases to 2% annually. After it was challenged on equal protection grounds, the U.S. Supreme Court upheld its constitutionality in Nordlinger v. Hahn, 505 U.S. 1 (1992), noting it was rational for the voters to have believed that Proposition 13 would give new homeowners full information about future tax liability at the time of purchase, whereas an existing homeowner was captive to the whims of the tax man, and didn't have that same choice:

[A]lready saddled with his purchase, [the existing homeowner] does not have the option of deciding not to buy his home if taxes become prohibitively high. To meet his tax obligations, he might be forced to sell his home or to divert his income away from the purchase of food, clothing, and other necessities. In short, the State may decide that it is worse to have owned and lost, than never to have owned at all.

Id. at 13. 

Kauai's similar experiment in citizen-initiated property tax revolts would have a different outcome. After the Ohana Kauai amendment was placed on the November 2004 ballot, in the run-up to the vote, virtually every Kauai elected official attacked the measure, with the Mayor and the members of the County Council leading the charge. They advanced the predictable claims: rolling back property taxes and capping increases would hamstring their ability to deliver vital government services such as police and fire (they took the usual approach of threatening police and fire services first and not last) and, most importantly, claimed the amendment would limit the County’s expenditures on the public worker’s union. However, since 1998, the Kauai budget had risen 50%, and the 2005 budget had increased 25% over the previous year’s alone. With Kauai government spending at a record $123 million, the officials’ cries apparently rang hollow with voters: in spite of the organized and well-financed opposition, in November 2004 the voters of Kauai approved the measure by a nearly two-to-one margin.

The County officials did not accept the political defeat lightly, and instituted what can only be described as a "friendly" lawsuit. The Kauai County Attorney sued the Mayor (her boss), the County Council (who finance her office), and the Finance Director, claiming the Hawaii Constitution -- which provides that "counties" may establish property tax law -- grants county councils a monopoly on that issue. In other words, the people of Kauai were without the legal authority to amend their county charter on the subject of property taxes -- only the County Council could set and change property taxes. The County vs. County lawsuit asserted the voter-enacted measure was void because the term "counties" in article VIII, section 3 of the Hawaii Constitution really means "county councils." The lawsuit was, to say the least, a novel procedure: the County Attorney represented both the plaintiff and the defendants, and the litigation was funded by a $250,000 war chest of taxpayer money, budgeted by the defendant County Council to hire Hawaii’s largest private law firm to represent the plaintiff to attack the charter amendment.

Four Ohana Kauai homeowners intervened in the collusive lawsuit -- somebody had the defend the charter after all. They asserted the plaintiff lacked standing and the complaint sought an advisory opinion, and that government officials should not be able to manufacture a lawsuit in which they were both the plaintiff and the defendants, fund the case with public money, and represent both sides in litigation. The Kauai county trial court disagreed, held the case was justiciable, and voided the charter amendment, ruling that only county councils may set property tax policy, and the people have no right to vote to amend the county charter regarding property taxes.

Up to the Hawaii Supreme Court the homeowners went, arguing first that the officials-versus-themselves lawsuit sought a nonjusticiable advisory opinion, and the case should have been dismissed before the court reached the merits. The second issue raised was whether the Hawaii Constitution delegated the property tax power to county councils when it said it delegated the property tax power to the "counties."

In the end, a sharply divided Hawaii Supreme Court ruled 3-2 that the case was justiciable and government officials have standing to manufacture a lawsuit, the county attorney may represent both the plaintiff and the defendant, and the county council could take a quarter million dollars of taxpayer money and spend it on private lawyers to assist in the anti-citizen lawsuit. On the merits, the majority struck down the Ohana Kauai charter amendment as unconstitutional, holding only county councils have the property taxation power. See County of Kauai ex rel. Nakazawa v. Baptiste, 165 P.3d 916 (Haw. 2007).

As the lawyer who ended up with the short stick, I naturally preferred the opinion of the two dissenting justices who excoriated the opinion in unusually strong terms (check it out here), accusing the majority of factual manipulations and procedural sleight-of-hand, suggesting the majority’s decision to define "county" as "county council" and preclude popular voting on property taxes was more driven by politics and the majority’s notions of good policy than by a principled analysis of the law.

But a dissenting opinion is by defintion a minority report and not the law, so even though we fought the good fight and (I continue to believe) had the better arguments, those arguments did not carry the day. The Hawaii Constitution, according to the three-justice majority of the Hawaii Supreme Court, gives county councils a property tax monopoly.

And that, dear reader, is why Hawaii voters do not have a direct say in property taxes.

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For more about this case, visit our summary page, which includes links to a Wall Street Journal report on the decision, an article with a legal focus I wrote for the ABA State and Local Government Law News, an op-ed I wrote for the Honolulu Advertiser, all the briefs of the parties and amici, oral argument transcripts, and on and on.

Comments

[Manawai]

I know you're addressing strict legal interpretations here, but I am compelled to mention that giving the direct power to tax to the electorate does not necessarily mean that it will be exercised fairly and wisely. To deprive the electorate of ability to directly set tax policy through charter amendments does not deprive them of the ample power they have to effect tax policy through their choice of elected representatives and their ability to remove unresponsive representatives. It also permits elected representatives to make wise and balanced decisions fair to all taxpayers many of which have no right to vote. These decisions may then also be enacted with an eye to economic consequences with are often overlooked by the electorate. My primary concern over the Ohana Kauai charter amendment was that it would tend to shift the property tax burden to non-owner occupants such as owners of rental units who in turn must pass this along in rent increases to their non-home owning, less affluent tenants.

I recall talking to a less than affluent renter I know who voted for the amendment because he wanted to prevent tutus from being forced to sell their homes because of high taxes. This was one of the several heart-wrenching and effective pleas that were voiced during the debate regardless of their factual validity. He had no clue that by voting for the amendment, he might just as likely be voting to indirectly his own rent. As we all know, government is reluctant to reduce spending in the face of lower revenues when it can increase them simply by raising taxes, especially when the heavier financial burden is shifted to non-voters, the uninformed and minority classes of taxpayers.

[Manawai]

Oops! I made several errors above. In one I left out the word "increase" in the forth line from the bottom. It should have read, "...he might just as likely be voting to indirectly increase his own rent."