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Queue in Income Tax Line Longer than Needed

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By Lowell L. Kalapa

One of the sad outcomes of the recently adjourned legislative session is that the plain, old taxpayer got left behind on the cutting room floor.
Lawmakers approved all kinds of tax breaks for hotel construction, the building of a world class aquarium out on the Ewa plains, and alternate energy devices. And when asked to stop the hemorrhaging caused by the narrowly focused Act 221 tax credits for high technology and venture capital, lawmakers refused. Of course, one has to admit that the average taxpayer didn’t get his ox gored by an increase in the general excise tax or the imposition of a new county sales tax, but neither did the plain, old taxpayer get any kind of tax relief.
That is not to say that the topic didn’t come up in discussions at the legislature. One change that would have helped all taxpayers but failed to get the final stamp of approval is an increase in the state’s standard deduction granted under the personal income tax. To be fair, it should be noted that both the administration, as well as lawmakers, proposed the idea of raising the standard deduction. And indeed the idea was kept alive throughout the legislative process and was still in conference committee when the legislature adjourned a couple of weeks ago. But apparently lawmakers ran out of money and instead put the special interest tax breaks in their financial plan ahead of the increase in the standard deduction.
And that’s too bad for the plain, old taxpayer. An increase in the standard deduction is long overdue. Under the federal law for tax years beginning in 2003 the standard deduction is $7,950 for joint returns or surviving spouse, $7,000 for head of household, $4,750 for individuals, and $3,975 for married filing separately.
Under state law, the standard deduction remains at $1,900 for joint returns or surviving spouse, $1,650 for head of household, $1,500 for individuals, and $950 for married filing separately. To be fair, it should be noted that the federal standard deduction amounts are substantially higher than amounts provided by the state due to two primary reasons. Federal marginal income tax rates are higher than state tax rates. Also, the approach to improve tax equity within the respective tax systems differs.
The federal standard deduction was increased to remove most low-income households under the poverty line from the tax rolls. By increasing the state standard deduction at this time, a similar goal could be achieved.
Removing the truly poor from having to deal with the income tax would also reduce the amount of paperwork for the department of taxation. It would also reestablish the philosophy that there should be a certain level of minimum income that is necessary for subsistence that should not be subject to tax. While the proposals under consideration this past session were not as generous as the federal amounts, they would have begun the move in the right direction.
Increasing the standard deduction has been a continual litany of every Tax Review Commission since the body was established in the state constitution. As the most recent Commission notes, the standard deduction has not been increased in more than 20 years, eroded by inflation, the result is that there are people who are receiving public assistance who are paying the state income tax. Currently, Hawaii has the dubious honor of having the third lowest threshold before the income tax is imposed.
According to the department of taxation’s estimates, the initial loss under the administration’s proposal would have cost $10 million in calendar 2004, $15 million in calendar 2005 and then another $20 million in calendar 2006 for an annual total loss of revenue of $45 million thereafter.
It should be also noted that the federal system is indexed for inflation to prevent nominal price increases from eroding the benefit of the personal exemption and standard deduction. Thus, in addition to adjusting the standard deduction, which is long overdue, consideration should be given to indexing the state income tax system for inflation as a way to gradually maintain equity in the state tax system.
Unlike the very narrowly targeted tax breaks approved by lawmakers this session, an increase in the standard deduction would have benefited every taxpayer. It would have excused many at the bottom end from even filing a tax return and made a dent in income taxes for those at the high end. Hopefully, lawmakers will give increasing the standard deduction another chance next session to help all taxpayers.

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