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Other Options for Cutting Taxes

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By Lowell L. Kalapa

So, one reader responded, if lawmakers don’t exempt food and medical services, what other ways are available to reduce the tax burden in Hawaii?
If taxpayers will recall, despite the fact that lawmakers took up the tax-cutting cross a couple of years ago, the changes they adopted did not go into effect immediately. For example, the income tax cuts adopted as part of the Economic Revitalization Task Force’s effort are to be phased-in over four years.
A year later, lawmakers adopted two other recommendations of the Task Force, resolving the pyramiding of the general excise tax on services and the exemption from the general excise tax for services sold to purchasers located outside the state. While the export exemption went into effect almost immediately, the reduction in the rate on services purchased for resale will take almost seven years to be fully implemented.
In both cases, changes are to be phased-in over time because there wasn’t enough money in the state treasury to finance the reduction in tax revenues forecasted as a result of these changes. Well, the picture has now turned with forecasts predicting that the economic growth over the next few years in Hawaii will outpace the economic growth of the rest of the nation. In other words, the state is forecasted to expect a windfall of revenues.
While those who have all sorts of ideas for ways to spend the anticipated windfall, what about the taxpayer? If lawmakers felt that the reduction of income taxes and the resolution of the pyramiding were so important to improve the economy, then why not consider implementing those changes immediately instead of waiting for the next two to five years?
And what about other changes to the tax law that are long over due? Some lawmakers accused the income tax cuts of favoring the middle income and wealthier families of our community since the top rate was reduced and maximum thresholds raised. While tax credits were adopted for those in the lowest income tax brackets, those taxpayers still have to file a return to get those tax credits.
One idea that lawmakers may want to entertain is to increase the standard deduction and personal exemption. The standard deduction is like the floor over which taxpayers begin to pay income taxes. The standard deduction has not been adjusted in more than 20 years. As a result, most resident taxpayers end up itemizing their deductions because they can do better in reducing the amount of their taxable income just by claiming the state income taxes withheld and perhaps their charitable contributions. For homeowners, the combination of the interest on their mortgage and the county property tax make the standard deduction irrelevant.
Another result of the lower standard deduction and manini personal exemption is that taxpayers with very little taxable income end up having to file a state income tax return when they probably don’t have to file a federal return. If the amount of taxable income is less than the combination of the standard deduction and the personal exemption, the taxpayer does not have to file an income tax return for that year. Thus, taxpayers end up filing a state return and not a federal return.
Another income tax change lawmakers may want to contemplate is to automatically adjust income tax rates and brackets for inflation. This is the situation at the federal level where each year rates and brackets are adjusted for the change in the consumer price index. This provision insures that government doesn’t realize a windfall of new tax revenues just because the dollar is worth less as a result of inflation.
This change may be a little bit more difficult for lawmakers to swallow as this is the phenomenon that allowed lawmakers to grow the size of government over the years. Until income tax rates were changed in the 1998 session, the rate and bracket structure of the state income tax had not been adjusted for the effects of inflation since 1965. What adjustment took place in 1987 was a result of changes in the federal law which broadened the base of the income tax. That aside, inflation took its toll on residents for more than 30 years.
While lawmakers will be tempted to fund programs that may have been cut during the past decade, they should not pass up this opportunity to complete what they started to do a couple of years ago, to modernize the state tax system by adjusting for years of neglect.

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