Testimony on SB3250: No to highest income tax rate in U.S.

from Grassroot Institute, Feb 4, 2022

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration on Feb. 4, 2022, by the Senate Committee on Judiciary.
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To: Senate Committee on Judiciary
      Sen. Karl Rhoads, Chair
      Sen. Jarrett Keohokalole, Vice Chair

From: Grassroot Institute of Hawaii
           Joe Kent, Executive Vice President

RE: SB3250 — RELATING TO TAXATION

Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on SB3250, which would establish an income tax surcharge on individuals making more than $5 million a year or estates and trusts with more than $200,000 in annual income.

Though the language of the bill labels this a “surcharge,” it would be more accurate to call this an income tax hike for certain individuals, estates and trusts.

If enacted, this bill will add 5% to the income tax rate of single filers making over $5 million and joint filers, over $10 million. The “surcharge” will go to 3% for single filers making more than $12.5 million and joint filers making more than $25 million. For estates and trusts, the additional 5% applies at more than $200,000 in income and will 3% at $500,000.

This income tax hike would give Hawaii the highest income-tax rate in the country. It would also hasten the departure of high-income individuals to states with lower tax rates.

Hawaii already has the third-highest level of economic flight per capita in the nation. Researchers have noted an increasing trend in state-level economic migration over the past several years, notably from high-tax states to lower-tax states.

While the trend may start with high earners, it quickly grows to affect the state as a whole. Along with the high earners go more business opportunities and new enterprises, so professionals and middle-income families soon follow suit. In the meantime, the tax base shrinks, leaving fewer people to bear the burden of the state budget.

In effect, this bill will amplify this problem and accelerate economic flight from Hawaii.

It just isn’t so that this tax hike is necessary in order to replenish state coffers. Hawaii is enjoying a budget surplus due to higher-than-expected revenues combined with an infusion of federal funds.

While the tax hikes outlined in this bill might only apply to wealthy individuals, estates and trusts, they will have a negative effect on Hawaii residents as a whole. The tax increases proposed here are likely to drive away business and discourage investment, which would add to the unemployment problem and the lack of opportunity that has already led many residents to move elsewhere.

The minor and speculative increase in revenue that this tax hike may generate would be offset by the damage it would cause to the rest of the state’s economy.

This proposal appears to ignore the reality of our state’s budget surplus and the challenges that our businesses and residents have had to face over the past two years. The reality is that there are myriad reasons we should be wary of implementing tax hikes. Here are just a few:

>> Hawaii residents are already among the most taxed in the country; the state has the second–highest overall tax burden in the U.S.

>> Hawaii cannot sustain a hike in taxes since its already-damaged economy was hit harder by the lockdowns than any other state in the nation.[1]

>> Hawaii’s population reduction of 32,237 people since fiscal 2016[2] has left Hawaii’s remaining taxpayers with a greater tax burden.

>> Hawaii has a progressive income tax that taxes high-income earners at 11%, second only to California at 13.3%.[3] Hawaii’s top 1% already pays 23% of all income taxes in the state.[4]

The rationale for a tax on the wealthy is that such funds will be used in programs that help the less fortunate. However, a wealth tax — especially one that can be avoided by changing residence — is unlikely to provide much benefit to the rest of Hawaii’s residents.

If Hawaii lawmakers want to help working families, they should abandon their reliance on taxes as a public policy tool, which has only succeeded in establishing Hawaii as the state with the highest cost of living.

Instead of attempting to solve the state’s economic problems through a tax on the “rich,”  lawmakers should focus on strategies to lower the cost of living, such as reducing income taxes, creating an exemption to the general excise tax for groceries and medical services, lowering fees and reducing regulations that limit opportunities and stifle economic growth.

Thank you for the opportunity to submit our comments.

Sincerely,

Joe Kent
Executive Vice President
Grassroot Institute of Hawaii
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[1] Dave Segal, “Hawaii’s unemployment rate hit nation-high 15% in September,” Honolulu Star-Advertiser, Oct. 20, 2020.

[2] “Annual Estimates of the Resident Population for the United States, Regions, States, the District of Columbia and Puerto Rico: April 1, 2010 to July 1, 2020 (NST-EST2020)” U.S. Census Bureau, Population Division, December 2020. See also, “U.S. Census data,” accessed Jan. 3, 2022.

[3] Katherine Loughead, “State Individual Income Tax Rates and Brackets for 2020,” Tax Foundation, Feb. 4, 2020.

[4] “Hawaii Individual Income Tax Statistics,” Hawaii Department of Taxation, December 2020, Table 13A.