Pay Your Money and Take Your Chances!

by Tom Yamachika, President, Tax Foundation Hawaii

In Hawaii a number of us are fascinated with gambling, perhaps because it’s illegal here. Some think of Las Vegas as the ninth Hawaiian Island because of all the Hawaii people that visit this gambling mecca. This sentiment about gambling is reflected in some bills in our Legislature that are still alive and kicking.

Senate Bill 493, for example, provides that wagering losses are allowed as an itemized deduction on a Hawaii return and are not subject to the state limitation on itemized deductions. To give some background, under federal law gambling losses are allowed as an itemized deduction from taxable income, but only to the extent of gambling winnings. Conceptually, if you hit a jackpot of $100,000 but lost $98,000 to get to that point, then it would seem fair to tax you on $2,000. But wait – that isn’t what happens! The $98,000 is allowable as a deduction, true, but you need to itemize to get it. For people making larger amounts of income, itemized deductions are limited. A provision called the “Pease Limitation” eats away at itemized deductions for taxpayers making over a certain amount in adjusted gross income (“AGI”). The more they make, the less they can deduct. To make matters worse, Hawaii has a hard cap on itemized deductions (which is supposed to expire at the end of the year). So if a single taxpayer wins $100,000 and loses $98,000, the tax is applied on $75,000, not $2,000, because single taxpayers with AGI of $100,000 can deduct no more than the hard cap of $25,000. This Senate bill would fix part of this problem by removing the hard cap, effective for taxable years beginning in 2015. (Retroactive legislation….? Perhaps some people figured out that they have a problem and they need a legislative fix to get out from under it.)

Then we have Senate Bill 609, which is one of my favorites for creativity this session. It proposes that a taxpayer may pay a fee to the Department of Taxation – the amount of the fee is not specified – and would be able to get a written waiver that exempts the taxpayer from reporting as taxable income all wagering or gambling winnings acquired legally by the taxpayer outside of the state during a specific five-day period. But what happens if taxpayers want to extend their gambling time, or if they didn’t win anything during the five-day period? Then they can go to the Department and get another waiver for another five-day period. Actually, the bill allows for a taxpayer to obtain multiple waivers for multiple five-day periods, so a taxpayer thinking of taking a vacation in Nevada for 15 days can trot on down to the Department and get three of them. The bill does say that a taxpayer needs to buy a waiver at least 24 hours before the waiver first becomes effective, so no buying waivers after the fact. You pay your money and take your chances (a wager on a wager)! And when you do go to Vegas and hit it big, you need to remember to get documentation about when you scored, so you can demonstrate that you hit the jackpot during the five-day period. Doesn’t that sound like great fun? But you’ll need to make sure you don’t lose your winnings then or later, since those losses probably won’t be deductible, or, as mentioned earlier, there may be severe limits on those losses.

All of this goes to show that the itemized deduction hard caps that were enacted in 2009 have some far-reaching consequences. Apparently, some taxpayers are experiencing the pain, and convinced some lawmakers that these consequences are unfair. Rather than picking holes in the hard caps as was done for charitable contributions and is proposed for gambling, why don’t lawmakers let the hard caps gracefully sunset at the end of 2015 as scheduled?

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