Tax Relief, RIP

by Tom Yamachika, President, Tax Foundation Hawaii

“Alas, poor Yorick!  I knew him [well].”

In Shakespeare’s Hamlet, Yorick was the court jester who had become a skull by the time Ophelia’s burial takes place and Hamlet talks about him.  This legislative session, the same fate has befallen the broad-based tax reform proposal that would have widened our income tax brackets, increased the standard deduction, and hoisted the personal exemption amount.  The proposal was initially made by the Governor as a key piece of the “Green Affordability Plan,” and then was shuffled between bills by the House and Senate money chairs, winding up in House Bill 954 before a House-Senate conference committee got rid of it.

The conference draft doesn’t leave Hawaii taxpayers with nothing.  It more than doubles the amount of expenses that can be taken into account for the credit for child and dependent care expenses.  It doubles the state Earned Income Tax Credit, from 20% of the federal amount to 40%.  It doubles many of the amounts in the food/excise tax credit and makes it available to single filers making up to $40,000 per year and other individual taxpayers making up to $60,000 per year.

But every one of the above credit enhancements has been given only a five-year life.  All of them go away on January 1, 2028.

Certainly, having an enhanced credit on the books, even with a limited life, is better than nothing at all.  Future legislatures can, and often do, tinker with the sunset date of temporary tax legislation.  On occasion, they get rid of the sunset date entirely (which we have seen all too often in “temporary” tax increases).

Hawaii taxpayers, as we have argued before, are already heading for the exits as shown by census numbers.  The State has some leftover cash this year between a faster than expected economic recovery and federal pandemic relief funds.  We were hoping that the legislature would consider Governor Green’s initiative and give Hawaii taxpayers some permanent tax relief.

When Civil Beat asked House Speaker Saiki, he replied that the proposed changes to the income tax structure were too complicated.  “Bracket changes are complicated, so they have to be really thought out,” Saiki reportedly said.

What’s so difficult about bracket changes?  The IRS and many States change their income tax brackets every year because of inflation adjustments.  I’ve never heard anyone say Hawaii’s tax code is easier or simpler because the bracket amounts don’t change.  Instead, as we argued nine years ago, keeping the brackets the same while inflation takes hold and the cost of living rises results in the higher tax rates biting more and more people at the lower end of the income spectrum.  In other words, we are taxing the poor deeper into poverty as time goes on.

If the real problem is that lawmakers can’t stomach tax cuts for “the wealthy,” however that term is defined, and therefore will automatically reject any proposal that gives tax relief across the board (because it includes cuts for the so-called wealthy), then these lawmakers should be prepared for the one-way flights out of here that these alleged wealthy folks will be taking when they find that it gets tougher and tougher to make ends meet.

Tax relief to be, or not to be?  That is the question.  For now, it is not to be.