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End Of Session Brings Tax Relief, Tax Increases

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By Lowell L. Kalapa

With the closing of the legislative session, taxpayers can breathe somewhat easier as they now know where they stand as far as new taxes and tax relief.

While tax relief came as a surprise to some observers, to others it was a no-brainer. The governor had made tax relief one of her high profile focus points in her state-of-the-state address. Had lawmakers gone home without providing some kind of relief, the lack of providing tax relief would surely have been campaign trail fodder. However, it still may be an issue for partisan politics as the amount provided by lawmakers was only one-sixth of what the governor had requested.

While the tax relief proposal submitted by the administration would have largely benefited those in the lower- income brackets, the legislative response will actually affect all taxpayers, but with a particular emphasis on those in the lower-income brackets. The governor had proposed a series of tax credits that targeted those taxpayers with adjusted gross income of less than $50,000. The primary credit was a one-time refund credit while the other would have been a permanent credit to help offset the 4% general excise tax on food, medical services and non-prescription drugs. Again, both credits would have been available only to those taxpayers with adjusted gross income below a certain level.

Those tax credit bills were joined by a measure that would have increased the standard deduction for Hawaii taxpayers such that the amount would have been 75% of the federal amount for the 2005 tax return. The administration’s proposal would also have widened income tax brackets such that the top tax rate for joint filers would have kicked in at $100,000 and at $50,000 for single filers. 

Although lawmakers adopted a very similar adjustment to the standard deduction and broadening of the brackets, the amounts were not as generous. The standard deduction under the legislative plan, which was recently signed by the governor, would raise the standard deduction to only 40% of the federal amount for the 2005 tax year. The brackets would also be widened but the top tax rate for joint filers will kick in at $96,000 and at $48,000 for single returns. However, what is more disparate is the fact that the administration’s tax relief package would have applied to the 2006 tax year whereas the legislative proposal will extend that tax relief beginning next year.

On the other side of the coin, lawmakers decided that hitting up smokers was politically correct as they adopted a 6-cent increase in the tobacco tax on cigarettes that will phase in over the next five years. By the time the last incremental increase is levied in 2011, the tax on a pack of cigarettes will be $2.60. What is almost laughable is that the measure pending the governor’s approval will use the increased revenues to fund such “worthy” causes as the Hawaii cancer research center, the trauma system special fund, emergency medical services, and community health centers. 

What is ironic is that on one hand, supporters of the measure testified how a higher tax would make this product more expensive and therefore deter youth from starting to smoke and perhaps even providing the incentive to smokers to quit, while on the other hand, supporters of the various causes that the increase would support drooled over the possible financial windfall.

So what is the intent of the bill? Is the tax increase being adopted so the product will be so expensive it will deter smoking or is it a funding mechanism for these “worthy” causes? And if the higher tax causes a reduction in smoking will the amount of revenues generated be sufficient to fund the various “worthy” causes? Or will the proponents of the cancer research center or the trauma center beg smokers to keep on smoking because they need the money to fund those projects?

However, what will become painfully obvious is that for addicted smokers, they will attempt to find other ways of securing their cigarettes, creating an underground or black market for the product. And so perhaps sales will fall and with it the anticipated revenues. And what does it say to youth who will now see the price of cigarettes almost equal to some illegal substance be it ice or crack. 

The cigarette tax may have been well intended, but it just may create more problems than it solves. To use a tax increase that is designed to reduce use of the product and at the same time depend on the increased revenues to fund specific programs makes absolutely no sense.

Then again, this is your legislature at work with your tax dollars, tax dollars that they are reluctant to give up in tax relief.

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