Moving the Tax Burden to Others

by Lowell L. Kalapa, Tax Foundation of Hawaii

The little ditty that many of us have heard time and time again about who should pay taxes goes something like, “Don’t Tax You, Don’t Tax Me, Tax that Man Behind the Tree.”

And in the past few years when lawmakers struggled to balance the general fund budget and the recession took its toll on tax collections, that is exactly what they did. Some of their biggest targets were the so-called rich, those making $100,000 or $200,000 of income. They raised tax rates for those taxpayers to new heights of 9%, 10%, and 11% making Hawaii’s net income tax rates some of the highest in the nation, rivaled only by those imposed by California.

The consequences of limiting the amount high-income earners could deduct on their net income tax obviously did make the legislative radar. The fall out is that these folks who have the means to make generous contributions to charitable causes stopped giving as generously as their contributions in excess of the limits didn’t help ease the pain of the net income tax. Over the past two years the charitable community has taken it on the chops as potential donors cited the loss of the deduction over and above the limits imposed. So this year, lawmakers relented and passed legislation that is now pending the governor’s approval to make the itemized deduction limits apply to all deductions except those made as charitable contributions.

Another provision that shifted the tax burden to wealthier individuals is the limitation of the deduction for state income and sales taxes for high-income individuals. The argument was made at the time the legislature considered this change that one can’t deduct federal income taxes on the federal return, so why should the state allow the deduction of state income taxes on the state return. Of course, for many lawmakers of recent vintage, the concept of conformity to the federal Code is foreign, while others saw this idea as just another way to close the budget gap. Although the overall limitation on itemized deductions will sunset in 2015, the loss of the ability to deduct state income and sales taxes is a permanent fixture of the state income tax law. Thus, Hawaii’s tax laws will be one more step away from ease of compliance and it will be one more difference that will not only make it more costly for taxpayers to comply, but it will also mean that there will be one more difference between the two laws that will hamper the efforts of the department to rely on federal audits of net income tax returns.

However, the rich were not only the target of lawmakers’ efforts to raise more money by shifting the tax burden. There are those tax goodies lawmakers got accustomed to handing out like the infamous tax credits for high technology, alternate energy and, of course, for film productions. Advocates for these tax give aways argue that without these incentives these activities would not locate in Hawaii and provide jobs and income for the state. What they miss is what about those activities that are already here? If the state is going to subsidize one industry, it comes at a cost to not only other industries, but to all taxpayers, both businesses and individuals. Since lawmakers are not about to reduce spending on state programs and services, they need the necessary funds to pay for these programs and services. As a result, lawmakers cannot provide any kind of tax relief for taxpayers who are not so privileged to get a tax credit or tax incentive. And unlike an appropriation of state tax dollars which undergoes close scrutiny and for which taxpayers and lawmakers have some idea of how much it will cost the state treasury and, therefore, taxpayers; tax credits can and do have an unlimited cost.

Such was the case with the solar tax credits which because of the vagueness of the law and the lack of understanding of the technology, allowed the industry to bleed the state treasury for millions of dollars. The law itself was so vague, referring just to a “system.” The department originally interpreted a “system” as the inverter that converts the DC current into AC current and a single residence could have multiple “systems” and have multiple $5,000 limits on each of those “systems.” This abuse is symptomatic of the tax incentives the legislature has adopted in recent years. With no clear limits imposed, the sky is the limit when it comes to these tax incentives.

Unfortunately, these abuses only enable the shifting of the tax burden from the select target group of taxpayers to those taxpayers who cannot qualify for the tax incentive. The result is that someone else ends up paying more than his fair share for government services.

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