With rising tax collections, higher hotel occupancies and increased retail sales, everyone seems to be smiling that perhaps happy days are here again.
Elected officials proudly point to tax cuts made over the past three years and to efforts to reduce regulations made by the infamous SWAT team headed by the lieutenant governor. So everything must be hunky-dory. Or is it?
Well, income tax rates have been cut. How can one argue that the cuts haven’t been beneficial? After all, Hawai’i’s top tax rate is 8.75 percent, and in two years the top tax income tax rate will fall to 8.25 percent. The threshold at which the top rate kicks in has doubled so that married couples don’t start paying it until their taxable income reaches $80,000. For single taxpayers, they don’t start paying the maximum tax rate until their taxable income reaches $40,000.
In the area of the general excise tax, taxpayers should see a reduction in their tax burden with respect to the resale of services and where there are subleases of real property. In those cases, qualified resales and subleases will see the tax rate decline over a period of years to the wholesale rate of 0.5 percent. Thus, some of the cost of doing business should be alleviated by these measures.
But are these tax cuts enough, or are there other things that need to be done to improve the business climate and make Hawai’i a more attractive place to do business?
Well, those tax cuts are just the beginning. The income tax rates still need some work. For example, when the state picked up the federal provision in 1987 that taxes capital gains at ordinary income tax rates, the administration recommended leaving income tax rates alone but adopted a special rate for capital gains. That rate was determined to be 7.25 percent.
Thus, if income tax rates had been properly adjusted, the top tax rate for individual taxpayers should have fallen to 7.25 percent. Now that was back in 1987. What would that rate be today after some dozen years of inflation? No doubt, whatever the rate should be, it would be substantially lower than the scheduled top tax rate of 8.25 percent. Thus, income tax rates still need readjustment Other elements of the income tax law that need readjustment are the personal exemption and the standard deduction, neither of which has been adjusted in years. Of the two, the standard deduction is the most deserving of consideration, as it sets the floor over which the state income tax is imposed. The difference between the standard deduction and the personal exemption is that any and all income below the standard deduction is not taxed. On the other hand, the personal exemption is the component that reduces any amount over the standard deduction for every person for whom the return is being filed.
Thus, the standard deduction recognizes the ability or inability of those people at the bottom end of the income scale to pay taxes. At the state level, officials believe that $1,500 for single individuals and $1,900 for married couples is a sufficient floor that should be exempt from taxation. Compare that with the federal standard deduction for single filers ($5,350) and for married couples ($8,050). Although some might argue the difference is due to the fact that federal rates are higher than state tax rates, that argument does not work here.
The standard deduction recognizes that taxpayers need a minimum amount of income to subsist.
That amount should not be diminished by taxes. Thus, regardless of what the income tax rates are, the standard deduction should be viewed independently, focusing solely on what a subsistence level of income is and exempting that amount from the income tax.
Finally, not all the necessary changes have to do with taxes. One of the monumental hurdles that government needs to overcome is the attitude that government holds towards businesses and individuals. That attitude is one that has led to numerous regulations and permitting fees which make absolutely no sense. From building regulations to permits for burning agricultural waste, the state and county governments appear to have a true monopoly on the inane regulations that make living and doing business in Hawaii so difficult.
Lowell Kalapa is director of Tax Foundation of Hawai’i.