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Just About the Only Tax Cut Hawaii Residents Have Received

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By Lowell L. Kalapa

     As the recently approved cut in personal income tax cuts was being signed into law, taxpayers were again reminded that this was the largest tax cut in the history of the state of Hawaii.  

 

 
First of all, it is the only tax cut that has ever been given to the people of Hawaii and second, nearly half of it brings the taxpayer up to par to where he was four years ago.
       Well, by gosh, ain’t that the truth, especially when one considers that this is the first tax cut ever since Hawaii became a state. In fact, the last two times that the net income tax rates were touched basically resulted in a tax increase for Hawaii residents. And the last time that a major change was made to the net income tax, it was to take away the tax credits which had been designed to help the poor.

Just prior to statehood in 1957, the Territorial legislature decided that if Hawaii was going to be a part of the United States, it ought to have a tax system similar to the American tax system. So meeting in special session that year, the legislature adopted the federal Tax Code as the basis for the Hawaii income tax.

Although income, as defined resembled the federal law, Hawaii reasoned that its tax rates should be substantially lower than the federal rates as it needed to generate revenues for only one of the states rather than for the nation as a whole. Those rates stayed in place as Hawaii was accorded statehood. However, with the advent of statehood and the arrival of the jet plane, the demand for public infrastructure in the face of a booming economy and a change in state and county responsibilities gave rise to an increase in all tax rates.

So in 1965, all tax rates, including the net income tax rates, were increased by approximately 17.5%. Those tax rates basically stayed that way for the next 20 years. True, there were minor changes to components of the income tax such as the standard deduction as the federal government adopted the zero bracket approach for a short time period, but basically the rates remained the same.

Then in 1987, following a wholesale reform of the federal Code by the 1986 Congress, the legislature was faced with the opportunity of adjusting income tax rates because the base of the income tax had been broadened. However, the state administration at that time advised caution, claiming that no one knew what the effect would be in adopting the new federal definition of income.

As a result, the income tax rates were adjusted only slightly, dropping the top rate from 11% to 10% and the number of brackets was reduced. However, to address the criticism that rates should be cut immediately, the administration proposed a new tax credit and called it the food tax credit. While the establishment of the credit was to offset the increase in the net income tax base and therefore the potential increase in income taxes [paid], the “name” of the credit allowed politicians to claim that the regressivity of the general excise tax on food purchases was being addressed.

Although officials promoted the three-year phase in of the tax rates as a means of allowing them to study the true impact, after a couple of years, the schedules were made permanent along with the food tax credit. As taxpayers may well remember, when the money started to run out, the first target was the food tax credit as well as the general excise tax credit and the medical services credit [for all health care expenses except nursing home related expenses]. In all, the repeal of the tax credits amounted to more than $70 million in added tax burden.

Now comes the BIG tax break to “jump start” the economy, proclaimed to be the biggest tax cut in the history of Hawaii. First of all, it is the only tax cut that has ever been given to the people of Hawaii and second, nearly half of it brings the taxpayer up to par to where he was four years ago. No wonder most learned observers remain cynical about the economic recharging that this tax break bill will have for Hawaii.

To be sure, everyone wishes that it could have been BIGGER, but unless state government can afford it, taxpayers will continue to labor under the heavy tax burden. The only way a BIGGER tax cut would be affordable is if the demands for those tax revenues are reduced. Unfortunately, elected officials don’t seem to understand that government has to be downsized if taxpayers are to see any kind of tax relief.

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