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Throughout the nation, non-profits are looking for creative ways to fundraise in challenging economic times. Hawaii charities, which rely primarily on the generosity of private individuals and businesses, are no different.

The Hawaii Foodbank, for example, is working diligently on food drives to feed an estimated 14 percent of Hawaii’s population or 183,500 different people. This is a 39 percent increase in demand or 51,000 more people than the organization was feeding in 2006.

The Foodbank reports that many of their clients cannot cover their basic household expenses with 21 percent who say they have to choose between paying for utilities or food.

Local businesses and individuals have been extremely supportive of the Hawaii Foodbank with 97 percent of the funding coming from private donations.

That’s why House Bill 1907, HD1, SD1, CD1, which potentially reduces the incentive for the upper middle class and wealthy by further capping the itemized deductions that they can make, has outraged some local non-profit board members. These board members say this legislation steals from the local charities to pay public union worker salaries and pay for legislators’ favorite projects and programs.

Many non-profit directors are unwilling to speak on the record about their concerns for fear of offending their donors or the Legislature that gives them government funding.

However Dick Grimm, president of the Hawaii Foodbank, is frustrated with the Legislature and says he’s not afraid to call the facts as he sees them.

Concerned about any legislation that would impact the Foodbank’s ability to provide food and groceries to the estimated 416 food pantries, soup kitchens and emergency shelters around the state that rely on them, Grimm points out that the Legislature has already raided several special funds — including the Highway fund, the Emergency Fund, the Hurricane Relief fund, and the Tobacco Settlement Fund — to balance their budget and pay for their pet projects. He says now the Legislature is going to “rob the non-profits.”

“We have people in the Legislature who don’t know what they are doing,” Grimm says. “This is another one of their decisions that does not make a lot of sense.”

HB 1907, introduced by House Speaker Calvin Say, will bring an estimated $33 million into the state general fund coffers to help pay union salaries, fund government-approved social service programs, and balance out a $1.2 billion budget shortfall.

But it does so by lowering the amount of itemized deductions taxpayers in certain brackets can claim.

Specifically, a couple making $300,000 and over will now be limited to $50,000 itemized deductions including their mortgage interest deduction and those individuals making $150,000 or more will be capped at $25,000.

Assuming most couples making $300,000 a year and up would normally write off an estimated $80,000 just for their mortgage interest, that leaves no financial incentive to donate to non-profit organizations, financial experts say.

Say would not return calls to Hawaii Reporter to defend his legislation.

However, the Hawaii state Department of Taxation testified against the bill, acknowledging “This amendment could also have unintended impact of reducing contributions to charities … .”

Tan Yan Chen, Deputy Policy Advisor for the Office of the Governor, who on behalf of the state administration also testified against the measure, outlines the reasons: “We are opposed because all these tax changes add up. For higher income residents in Hawaii, the Legislature overrode the income tax increase and personal exemption phase-out vetoes last year; both of which target a specific class of residents. This year, there is the estate tax, which the Legislature already had a veto override for, and this itemized deduction cap. They say it’s little, but it’s a little here and a little there and it all adds up to a lot.”

Ron Heller, tax attorney and member of the National Federation of Independent Business and Smart Business Hawaii, agrees the bill is problematic: “Obviously, if you reduce or eliminate the tax deduction, a charitable contribution costs more on an after-tax basis, and that can only have a negative effect on the ability of non-profit organizations to raise money. What we don’t know is how big the impact will be. … Note that many non-profits provide things like food for the hungry or shelter for the homeless — if non-profits are less able to provide these things, the state could end up spending more money. “

The controversial legislation has made the national news. Robert Frank, who authors “The Wealth Report” for the Wall Street Journal, questions whether Hawaii’s high taxes will drive out the wealthy.

“The list of states hiking taxes on high earners continues to grow. Now Hawaii, which already had the highest income-tax rates in the country for the wealthy after a hike in 2009, has upped the ante even more. The state Legislature has passed a measure that caps itemized deductions at $50,000 for taxpayers filing jointly with income over $300,000, or at $25,000 for individuals with income over $150,000. The cap is expected to add about $33 million to the state coffers – more money than the state’s tax increases on oil products, estates and cigarettes. That increase is on top of the state’s 2009 increase, which added three income-tax brackets on top of the current nine, at rates of 9% on income over $150,000 ($300,000 for joint filers), 10% on income over $175,000 ($350,000 for joint filers), and 11% on income over $200,000 ($400,000 for joint filers).”

He adds: “Some local taxpayers and politicians have opposed the measure, saying it will hurt small businesses and discourage wealthy residents from donating land or other gifts. Others say the wealthy will start fleeing Hawaii because of the tax burden. This is an easy argument to make in most states, since the rich can easily pick up and move. But the wealthy go to Hawaii in large part because there is nothing else like it. Picking up and moving to low-tax Boca just isn’t the same. Do you think Hawaii’s taxes will start chasing away its wealthy?”

Gov. Linda Lingle, a Republican who signed a “no new tax pledge” in 2002, has until July 6 to veto the measure, which she will likely do since her administration testified against the legislation.

However, Democratic lawmakers, who make up all but 8 of 76 seats in the House and Senate, can easily override her veto in a special session. In fact, Democrats have already overridden nearly every one of her vetoes this session.

MORE ON THE WEB

Read the bill:http://www.capitol.hawaii.gov/session2010/getstatus.asp?query=HB1907&currpage=1&showstatus=on

To contact lawmakers:

http://www.capitol.hawaii.gov/site1/house/house.asp

http://www.capitol.hawaii.gov/site1/senate/senate.asp

Malia Zimmerman, editor of Hawaii Reporter, can be reached at mailto:Malia@hawaiireporter.com

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Malia Zimmerman is the editor and co-founder of Hawaii Reporter. She has worked as a consultant and contributor to several dozen media outlets including ABC 20/20, FOX News, MSNBC, the Wall Street Journal, UPI and the Washington Times. Malia has been listed as one of the nation’s top "Web Proficients, Virtuosi, and Masters" and "Hawaii's new media thought leader" by http://www.thewebstersdictionary.com Reach her at Malia@hawaiireporter.com