The latest round of deadlines in the legislature calendar has brought some pleasant surprises and a renewal of hope that maybe legislators are finally getting the message that they need to do something about the economy.
On the Senate side, the Ways & Means Committee has moved out several measures which could spell relief for taxpayers. One measure addresses the pyramiding of the general excise tax on real property leases and subleases. This is an age-old problem which many acknowledge merely adds to the overhead costs of businesses in Hawaii.
The pyramiding of the tax occurs because with each lease and sublease, the 4% tax is tacked on top of the previous lease rent which was also taxed at the 4% rate. The more leases and subleases in the chain, the more onerous the tax gets such that the final sublessee is probably paying more than what the original rent was at the top of the chain of transactions. SB 147, SD-1 would allow the “sandwich” person, that is the sublessor, to take a deduction for the amount of rent paid for the area that is being subleased. Thus, that amount of the rent is subject only once to the 4% tax.
Another measure, SB 932, SD-1 would address the pyramiding of the general excise tax on services. Currently, if one service provider secures another service for this customer, the service provider adds the cost of the primary service including the 4% tax that was passed on by the primary service provider to his costs and slaps the 4% tax on top of all the charges. Thus, the primary service is taxed twice at the rate of 4%.
What SB 932, SD-1 does is to allow the second service provider to reduce the amount of gross income that will be subject to the 4% by taking a deduction for a portion of the cost of the primary service provider’s services such that the net effect is that the primary services are effectively taxed at a 0.5% rate. Thus, the cost to the final consumer is that the primary service is taxed at the 4% rate and every time thereafter at the lesser 0.5% rate.
Finally, the Ways & Means Committee has something in store for individuals taxpayers. SB 1028, SD-1 increases the standard deduction on the personal income tax. Under this proposal, the standard deduction for individuals would go from $1,500 to $1,560, from $1,900 to $2,600 for joint returns, from $1,650 to #2,300 for heads of households, and from $950 to $1,310 for those who are married but file separately.
On the House side, the Finance Committee took the administration’s proposal to alleviate tax burdens for those below $22,000 and reinstated the general excise tax credit. HB 1650, HD-1 provides for the inversely graduated credit but with much more generous credit amounts than the previous schedule. The credits would range from $220 for those below $6,000 to $40 for those with adjusted gross income between $25,000 and $30,000.
On the economic development side, the Finance Committee moved out HB 98, HD-1 which would exclude capital gains from taxation provided the gains were realized from the sale of real or tangible personal property in Hawaii which was held for a minimum of five years from the date of the enactment of the proposal.
Both the House and Senate moved out bills that would exempt services sold to clients outside the state from the general excise tax. The House adopted the limited exemption (limited to architects, engineers and planners) proposed by the administration in HB 1694 while the Senate took a much broader approach in SB 934, SD-1 to include all services.
While the legislative session is only at half time, much can still happen. Should the economic and revenue outlook turn even gloomier, many of these proposals may end up on the cutting room floor. And that would be unfortunately as tax relief is ways past due.