More Taxes on the Rich – But Guess What, You’re Rich

by Tom Yamachika, President, Tax Foundation Hawaii

On January 12, Governor Ige’s Chief of Staff and former Director of Taxation Linda Chu Takayama told the House Finance Committee a little more about the revenue enhancement measures (tax hikes) that the Administration is going to propose.

Ms. Takayama mentioned “wealth tax.” But we aren’t sure what that means.

In some states, “wealth tax” means a tax on net worth. If you add up the values of your house, car, stocks and bonds, artwork, and so forth and subtract your debts, that’s the amount you pay tax on.

That type of wealth tax would be a nightmare to administer here. Our Department of Taxation used to have people who could value real property, and that is because it administered a state real property tax. But then we had a Constitutional Convention in 1978 followed by a general election which voted to transfer the power and authority to tax real property exclusively to the counties. And we never had a tax on personal property (such as the stocks and bonds, art, cars, and so on). Acquiring the expertise to administer a tax like that would be no easy feat here. The real rub, however, would be on the taxpayer side. It’s already a problem getting people to value real property when you need it, such as when you want to sell the property or borrow against it. But getting the value determined each year, and not only for real property but also cars, boats, art, and furniture? Auwe!

A more probable scenario is that the Administration is considering a hike in the personal income tax.

Currently, our state imposes income tax at 8.25% on a single person’s taxable income between $48,000 and $150,000. A 9% bracket then applies to taxable income up to $175,000. A 10% bracket then applies to taxable income up to $200,000. Tax is imposed at 11% after that.

The thresholds are higher, of course, for a married couple or for people that qualify as heads of household.

Hawaii now has the second highest top marginal rate in the United States. The top rate belongs to California. For now.

One big difference, however, is that the California top rate doesn’t kick in until taxable income exceeds $1 million (the final 1% is called a “mental health services tax”). Their 9.3% bracket applies to those with incomes between $58,635 and $299,508. When California’s 10.3% bracket kicks in, we are already well into our 11% maximum rate bracket.

Meaning that when our Hawaii legislators say, “Tax the rich,” they are much more likely to be talking about you and me as “rich,” not just folks living in Kahala Avenue mansions. And, realistically speaking, if our lawmakers are looking to taxpayers to plug a $1.4 billion per year budget hole, do we even have enough of the Kahala Avenue types to make a dent in the problem? Suppose that the top 1% of our population (1.4 million and falling) pulls down taxable income of $1 million on average. Tacking on two percentage points to their top rate would yield 14,000 taxpayers times $20,000 in additional tax, or $280 million. That’s a lot of money but not close to $1.4 billion.

This year, all details must be revealed to the public on January 25th, the day of Governor Ige’s State of the State speech. At that time, we will know for sure what the Administration is proposing. But there is much to worry about before then when the Administration and other lawmakers talk about an income tax increase. In the most probable scenario, there is going to be good news and bad news. The good news is that they are only going to tax the rich. The bad news is that you’re rich.