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Help Still Needed on Income Tax Rates

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By Lowell L. Kalapa

With the beginning of a new fiscal year, taxpayers may be wondering just how well they have been doing now that the last phase of the loudly touted income tax cuts of the 1998 legislature have been put in place.
Well, the report for the first year of the tax cut – 1999 – has been released and there is every indication that more help is needed for the beleaguered income taxpayer in Hawaii. Less than 50% of all the returns filed paid nearly 87% of the income taxes collected for 1999.
According to the department of taxation’s report on individual income tax returns filed for 1999, the richest of the rich, the top 1.4% of Hawaii income tax filers earned 15% of all adjusted gross income reported to the tax department yet they paid 19.7% of all state income taxes that year.
What is even more surprising is that the top 13% of returns filed, those with adjusted gross incomes greater than $75,000, paid more than half of the individual income taxes collected during 1999. While perhaps not as progressive as the federal income tax rates and brackets, what is frightening is that such a small percentage of individual income taxpayers pays such a large percentage of the taxes collected from this tax on earnings. Taking it one step further, just over one-third of all filers pay nearly 70% of the income taxes collected from the net income tax.
Again, while some may argue that this makes the tax system progressive, the high rate of tax at the top end of the income scale means that people with six-figure incomes, that the state and advocates of the high technology industry hope to attract, will have to think twice about working in Hawaii or in a state like Texas or Nevada where there is no state income tax.
Lawmakers and administration officials have already taken credit for enacting the largest tax cut in the history of the state. Well, er, they are right given the fact that the 1998 effort was the only time that tax rates were cut since Hawaii became a state in 1959. So they are right, but they also should be ashamed that it took a decade long slump in the economy and the need to get reelected to push elected officials to do something about income tax rates and brackets.
What elected officials also won’t admit is that they lived off the gravy that inflation created for them by bumping workers into higher and higher income tax brackets. Before rates and brackets were adjusted in 1987 to accommodate the base broadening effects of the federal tax reform act of 1986, a single individual started paying the top tax rate of 11% whenever there was adjusted gross income of $30,800 or more. For a married couple, they paid the maximum 11% rate at $61,000. That’s because income tax rates were last changed in 1965 at a time when bank presidents made something like $25,000.
In fact, the net income tax rates, as well as nearly all the other tax rates, were last adjusted in 1965 – increasing all rates upward – to provide the funds needed by the fledgling state government. And there they stayed until 1998. So while it might be argued that the 1998 legislature enacted the largest tax cut in the history of the state, that statement should be qualified by saying that there has been no other tax cut undertaken by lawmakers in the 43-year history of the state.
Some might argue that such a progressive tax system makes sure the super rich and the rich pick up the larger portion of the income taxes paid, but how much does it take to be among the wealthy and filthy rich?
According to the department of taxation’s report, to be in the top 26.5% of the returns filed in 1999, you needed to have only $50,000 of adjusted gross income and your reward is that you and your colleagues with at least that amount of adjusted gross income paid nearly 70% of all income taxes. Just under 50% of all tax returns have $30,000 or more in adjusted gross income, yet these taxpayers pay 86.6% of the state personal income taxes collected in 1999.
If Hawaii is to attract wage earners who command the good pay that we all dream about, then lawmakers need to take a second look at the income tax rates and brackets. No matter how many gimmicks or tax credits lawmakers come up with, it is really the basics, such as lowering income tax rates and broadening the brackets, that will attract investors who can create the high paying jobs that we all want.

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