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Sunday, March 04, 2018
Republican Tax Cuts Pump $1.3B into Hawaii Economy
By UHERO @ 1:30 AM :: 3266 Views :: Economy, Hawaii Statistics, Taxes

 

UHERO State Forecast Update: Not much lift from tax cuts in Hawaii’s soaring economy

From UHERO, March 2, 2018

Hawaii’s economy continues to grow, but with expected slowing as the cycle matures. Tourism is booming, construction remains on a healthy plateau, and jobs are plentiful. The big story this quarter is the federal tax cuts that went into effect on January 1. These will provide a modest boost for Hawaii families, who have seen little income growth in the expansion so far. Tightness in tourism and labor markets will limit the overall effect on the State’s economy.

This analysis and near-term forecast is available as a service to the public. For more detailed multi-year forecasts, subscribe to UHERO's Forecast Project.  

Tax Cuts Will Give a Boost, But How Big?

From UHERO Summary (With commentary in parenthesis designed to make report accurate.)

In December, the US Congress passed the most sweeping tax overhaul in decades. The legislation slashes the corporate income tax rate, accelerates capital expensing, and provides a temporary incentive for multinationals to repatriate foreign income. For households, the new law reduces personal income tax rates and raises the standard deduction, while capping deductions for state and local taxes. It also caps the mortgage interest deduction for new mortgages above $750,000 and eliminates the deduction for most home equity loans. Among other elements of the law are favorable treatment of “pass-through” income, higher thresholds for estate taxation, and a repeal of the Obamacare mandate. Changes in personal income taxes are phased out by 2027; changes in corporate taxation are permanent.

How much tax relief will the new law provide in Hawaii? According to the non-partisan Institute on Taxation and Economic Policy, the new law will result in a $1.3 billion cut in federal taxes on Hawaii residents. Nearly all families will enjoy a tax cut initially, although the benefits are heavily skewed toward those with higher incomes—about two thirds of the tax savings accrue to the top 20%. In part, this is because higher-income households claim the lion’s share of savings from tax cuts on small businesses and corporations. (Foreign investors also enjoy this benefit.) Because of the personal income tax cut phase-out, by 2027 lower-income households will see a small net increase in tax burden, while there will still be some positive impact at higher incomes.

($1.3B / $1.4M = $928 per person, $3,712 per family of four.)

How might the new tax law affect the Hawaii economy? The primary near-term impacts will come from increased spending induced by higher disposable incomes, both here and on the mainland. Increased demand will be felt across a wide range of businesses serving both local residents and tourists. Higher after-tax business profits may well lead to higher pay for some workers. Over the long run, investment incentives could result in expansion of the local capital stock, whether in resorts, residential, or commercial spheres. This would provide opportunities for income and employment gains.

How big will these effects be? (We at UH want to pretend) The overall near-term impact will be very small for several reasons. First, (because Donald J Trump is President we are telling you) the spending rise will be limited, because most tax savings go to well off families, who tend to consume a much smaller proportion of their income than do poorer households (and we just forgot about investment, because President Donald J Trump makes us forgetful). The spending that does occur will result in very little job creation, given the historically tight Hawaii labor market (and we can’t think of anything else because the President is Donald J Trump). Stronger demand will lead to wage growth and an increase in aggregate income, (Already has.  Did you forget all the companies that raise wages to $15 and paid out big bonuses?) but may also drive up prices, limiting gains in real purchasing power.  (But if we were arguing for a minimum wage hike, we would conveniently forget this argument.)  The growth effects, then, will necessarily occur over the long run as capital investment raises capacity and perhaps productivity. However, credible estimates for the US economy find these effects to be relatively small (because the President is Donald J Trump)….

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