Lower the Overall Burden of Taxes

article top

Since it appears that both lawmakers and administration officials want to give away the store, let’s hope they do something for everyone rather than a select few.

In fact, it is truly amazing that no liberal policy maker has pointed out that the much touted Act 221 tax credit for high technology investments is truly regressive, rewarding the rich who invest up to $2 million in a qualified investment with a 100 percent refund of their investment and now the investor owns an equity position in what might be worth millions in the future. The equity position is paid for by the taxpayers of Hawaii, including the very poor who may even be living in public housing.


Lawmakers should turn their attention to doing something that will improve the overall condition of all taxpayers. And the latest Tax Review Commission has a suggestion. The Commission points out that while the 1998 session of the state Legislature did undertake a reform of the state’s individual income tax rates and brackets, legislators did not go far enough.

At the lower end, lawmakers barely moved the bottom threshold — that level of income before a poor person has to begin paying income taxes — such that Hawaii continues to be the state with the third lowest level of income requiring the payment of income taxes. At the top end, single individuals with taxable income of $40,000 and couples with taxable incomes of $80,000 must pay the maximum income tax rate.

While lawmakers may think that is a reasonable level of income to require people to pay the maximum tax rate, they seem to forget that a maximum tax rate recognizes that the taxpayer has more than sufficient income for all his or her needs and therefore can cope with the maximum tax rate. No one seems to have asked the question of how that is perceived by people earning more than that amount or for that matter companies looking to locate in Hawaii who must pay their prospective employees more than that amount to attract them to their companies.

The Tax Review Commission made note of this fact and recommended that to help those at the bottom end, the state’s standard deduction and personal exemption should be increased to mirror the federal law. This would mean that the standard deduction of $1,900 for a joint return would rise to $7,600 and the personal exemption would rise from $1,040 to $2,900.

The Commission also noted that the state income tax brackets are so compressed that even persons on public assistance pay income taxes. They recommend that the state’s income tax brackets be expanded so that people on public assistance do not have to pay income taxes and that the highest marginal tax rate, which is currently 8.25 percent, not be imposed until a joint filer’s income exceeds $100,000.

What may be the most difficult to accomplish, the Commission recommends even closer conformity with the federal definition of what is taxable income. This would mean doing away with a plethora of special provisions such as the exclusion for initial payments made to members of the national guard or for that matter exempting cost of living allowances.

It is interesting to note that the Tax Review Commission prefaced all of these recommendations with the statement that, “If the state cannot afford to immediately reduce net income taxes, it should make a commitment to phase in over time …” Certainly faced with a looming shortfall in the biennial budget, the state is not in a position to make some of these reductions in the net income tax burden.

While this inability to act on these tax reductions may in part be due to the sluggish economy, some of it can surely be attributed to the fact that lawmakers have sapped the state treasury with all sorts of oddball tax incentives believing that they can stimulate the economy. What they have lost sight of is the fact that the tax climate must be improved for all taxpayers.

Instead of reducing the overall tax burden for all taxpayers, lawmakers have found it more attractive to say that they have provided incentives for this or that. While each of these tax incentives may not make much of a dent in the state treasury, collectively, they have foreclosed the possible across-the-board reduction in income tax rates and perhaps even a reduction in the 4 percent general excise tax.

Hopefully lawmakers will get the picture and reduce taxes for everybody and not for just a favored few.

”’Lowell L. Kalapa is the president of the Tax Foundation of Hawaii, a private, non-profit educational organization. For more information, please call 536-4587 or log on to”’ https://www.tfhawaii.org