Experts: GOP tax plan would hit Hawaii taxpayers hard

HONOLULU — Experts say the Republicans’ proposed changes to the federal tax code do not bode well for many Hawaii taxpayers.

Lawmakers are considering reducing or even abolishing deductions that are particularly important to Hawaii tax filers.

Proposed new limits on the mortgage deduction would affect Hawaii more than many other places because of the state’s sky-high housing costs, while limiting or eliminating the federal income tax deduction for state and local taxes would also hit local taxpayers hard, Hawaii experts say.

The Hawaii Association of Realtors is encouraging its members to lobby Congress to block or amend the tax package to protect the mortgage deduction and other provisions of the tax code that benefit Hawaii taxpayers, said Myoung Oh, government affairs director for the Hawaii Realtors.

“Right now, as far as we are concerned, there will be a lot more taxes — in some cases double taxes — for some filers” in the years ahead, Oh said. There are still many unknowns about the final tax package, “but we have the primer, and it’s definitely a sticker shock.”

The House version of the Tax Cuts and Jobs Act would end the federal tax deduction for interest paid on student loans, which would affect many college-educated workers, while the proposal to eliminate the deduction for state and local tax payments “is definitely something that will weigh heavily as well,” Oh said.

Eliminating or limiting that state and local tax deduction is a critical component of the proposed federal overhaul because it would offset some of the cost of Republicans’ other plans such as reducing corporate income taxes and exempting more people from estate taxes, the Honolulu Star-Advertiser reported .

Taxpayers who file itemized returns today are allowed to deduct taxes paid to state and local governments from their gross incomes, which reduces their federal tax liabilities.

The state and local tax deduction is especially important in states such as Hawaii with high state and local taxes. The Tax Foundation calculates that 200,000 Hawaii tax filers used the state and local tax deduction in 2015 to reduce their taxable incomes by a total of $2 billion.

That allowed Hawaii filers to reduce their federal tax burden by $343 million in 2015, said Seth Colby, tax research and planning officer with the state Department of Taxation.

For Hawaii tax filers who earn between $80,000 and $400,000, wiping out that state and local tax deduction as Senate Republicans proposed last week would almost certainly cancel out any other benefits they might enjoy from the proposed federal tax overhaul, Colby said.