One Integrated Approach to Tax Fairness?

by Tom Yamachika, President, Tax Foundation Hawaii

One of the bills percolating in the legislative miasma this session is House Bill 1586, which is a multi-faceted bill that seeks to change some of the characteristics of our tax system. I recently had a chance to speak with the bill’s authors, so this week we are taking a closer look at that bill.

On the income tax side, the bill doubles the amount of the personal exemption for income tax, from $1,144 to $2,288.  Next, it implements new income tax brackets and rates over a 3-year period.  A married couple would start paying taxes at an income level of $17,500, instead of $4,800, once fully phased in. If the couple made the Hawaii median family income of $83,283, the applicable tax rate would be 6.88% as opposed to 8.25% now. In contrast, the highest rate would rise from 8.25% now to 9%. In addition, the bill would place a cap on itemized tax deductions other than charitable contributions, but the cap would be $200,000 for a family, as opposed to the $50,000 that it was in 2015.

We have written before about our numerous and low-hitting tax brackets, which have survived decades with little or no change. The effect of keeping the brackets the same while incomes and the cost of living rise is called “bracket creep,” and has the effect of taxing the poor deeper into poverty.

In addition, the Foundation has, on many occasions, testified that we can achieve real savings in administrative costs by not dealing with the very poor in our tax system. Tax returns are among the most complicated documents in state government, and if we can get out of processing a hundred thousand of them, we would be looking at serious money savings that could help ease the burden on taxpayers.

To help pay for the lower and middle class relief, the bill would have the State phase down, and eventually quit, payments of transient accommodations tax (TAT) revenue to the counties. The counties now share $105 million of TAT revenue, and have been jockeying for a percentage of collections that would give them about $50 million more. Of course, killing the allocation would be one way of halting the constant squabbling between the state and the counties over how much of the TAT pie will be served to them.

If the TAT allocation goes away, most counties will have little choice but to raise real property taxes. The bill’s authors fully realize that. In a way, that may give the counties what they have been arguing for. The counties have argued they want a stable, predictable funding source. Real property is about as stable as it gets. It doesn’t disappear during an economic downturn as business activity might, and it doesn’t require much policing; you can hide income and you can hide some physical assets, but it’s impossible to hide real property.

Some, notably including the teachers’ union, have observed that Hawaii’s property tax rates are among the lowest in the nation, and have argued that those low rates fuel speculative buying, which somehow leads to a higher cost of living. We were not particularly impressed by that argument, and have taken issue with it before, but note that under this bill, we can expect this supposed problem to disappear because property tax would be ratcheted upward.

In any event, it’s apparent that some thought has gone into this bill. Brilliance or something less? We’ll leave it to you to decide. It is at least an attempt to fix various problems in the tax system with more of an integrated approach as opposed to a knee-jerk reaction. The bill is moving forward, and we look forward to the additional discussion that is expected to arise in the coming weeks.

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