The Second Most Unfair Tax System? Really?

by Tom Yamachika, President, Tax Foundation Hawaii

Recently, the online site WalletHub published a 50-state study called “2014’s Most & Least Fair State Tax Systems.” Local media and the Huffington Post, among others, wrote about the study which ranked Hawaii’s tax system 49th out of 50, in the order of fairness. Some candidates for political office pointed to the study as evidence that our tax system is broken and needs to be fixed…perhaps under that candidate’s leadership if elected.

But wait a minute. Have you seen the fine print behind the study?

Actually, the study surveyed only 1,050 Americans. The sample “was designed to be nationally representative by age and sex and has substantial variation across income levels, racial and ethnic categories, and political beliefs.” They asked these thousand people, “In thinking about the fairest possible tax system, what percentage of income do you think households at each income level should pay in state and local taxes?” The people were presented with ten different income levels. The survey folks averaged the results, compared the results against the actual state and local tax burden imposed by each state, and ranked the states by how much difference there was between the “fair” tax burdens and the “actual” ones.

In other words, these folks did a 50-state study on the fairness of tax systems by asking a thousand random people in random parts of the country what they thought was fair. No consideration was given to other specific criteria of fairness. Was this a valid measure of fairness? Even back in 1989 when our Tax Review Commission did one of the early studies of our tax system, it had the sense to identify several criteria to use in judging the system, namely equity, adequacy, stability, economic neutrality (efficiency), simplicity, and competitiveness. I would think that if a national study pronounces judgment on a state’s tax system, it would have a more reasoned approach than Family Feud’s “Survey says!”

Another problem that jumps out is that there is only one aspect of the tax system that is measured, namely the percentage of income that is taken away in taxes. The survey respondents thought it best that the tax rate rises gradually with the income level. Hawaii’s tax system doesn’t do that. Our income tax, for example, goes through many brackets at very low income levels and hits people at the federal poverty line with a 6.4% rate. The study noted this and concluded that we were horrendously overtaxing the poor and the middle class. No doubt this percentage is important, but is that all that goes into fairness? The study didn’t care if taxpayers get only one year to figure out how many credits they get and thereafter can’t claim a penny more regardless of reason, while the tax office gets three years to audit and assess more tax. (Sound familiar?) Nor does it give a hoot if the system pays 4% interest on refunds and charges 8% interest when the taxpayers owe taxes. (Sound familiar again?) In short, there are a number of features of a tax system that could cause it to be perceived as unfair and only one is being taken into account in this study.

Now don’t get me wrong. I would be the first to admit that our tax system isn’t perfect and could use some fixing. But I’m not about to roll over while some conclude that it is the second most unfair in the nation based on the judgment of random people scattered about the country. This study seems to be more sensationalism than substance, and to me it is unworthy of the attention given to it by the local politicians and national media. That said, let’s look forward to the upcoming elections and to fair debates on issues like these.

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