The voting public’s perception is shaped largely by what they see and hear in a 30-second bite on the television or radio or the quick glance at the headlines of the daily newspaper or perhaps even the first few paragraphs of a news article, so it is not surprising that much of the technical shortfalls of legislation approved by the legislature never get the attention of the taxpayer.
Although one piece of legislation has some glaring omissions, it wasn’t vetoed because it contains the “tax relief” legislation approved by lawmakers this year. This is the measure that increases the standard deduction to 40% of the federal amounts for 2005 and broadens the net income tax brackets by approximately 20%.
Contained in the tax relief legislation is financial relief for victims of the Manoa flood of 2004 and the recent floods of this past winter. This is the tax credit that will allow victims of the floods to claim a tax credit equal to 10% of their unreimbursed losses up to a maximum of $10,000.
The problem with this provision of the tax bill is that the legislation starts off by calling the tax credit a “nonrefundable” tax credit, that is, where the amount of the tax credit is greater than the taxpayer’s liability in the year it is claimed, the taxpayer cannot ask for a refund of the amount of the credit that is in excess of his or her tax liability. However, the legislation goes on to provide that if the taxpayer has: (1) only pension income, or (2) the taxpayer’s adjusted gross income is less than $20,000, then the amount of the credit that is in excess of tax liability would be refunded to the taxpayer. So the first question is: is the tax credit nonrefundable or refundable?
Apparently, lawmakers wanted to make the tax credit refundable only for those who are retirees whose income is received solely in the form of pensions or for those taxpayers who are truly low income or have little other income besides their tax-exempt pension income and they would fall into this latter category. So lawmakers took care of retirees.
What about other taxpayers who either don’t have pension income or have nonexempt income that is greater than $20,000? Well, despite the fact that the legislation specifies that the credit is nonrefundable, it does not contain the usual verbiage that tells taxpayers if the credit is in excess of liability that the excess amount of the credit can be carried forward and used in subsequent tax years until the remaining amount of the credit is exhausted.
So what do these taxpayers do? Does use of the credit just disappear and despite the fact that they might otherwise have been due a larger credit, can only use a part of it since their tax liability is less than the amount of the credit? And what about those taxpayers who claimed a casualty loss on their federal and state income tax returns for the damage done by the 2004 floods?
Will these latter taxpayers have to go back and amend their 2004 returns because technically the state tax credit is a form of a reimbursement for the losses? And what about those taxpayers who are qualified to receive a refund of the tax credit? No doubt they will have to report the refund as income for both state and federal income tax purposes.
The other measure that is fraught with poor drafting and several omissions is the measure that will increase the tax on cigarettes. The errors occur largely in that section of the measure that earmarks the funds from the increased tax rate for various worthy causes including the Cancer Research Center and the trauma system special fund.
While the intent of the measure may have been to earmark the incremental increases in the cigarette tax to allow the total amount of the taxes collected from each cent on all cigarettes sold, the wording of how the earmarked tax is to be distributed appears to designate only one cent or two cents to each designated program. The language of the legislation does not appear to specify that it is the collections from each cent per cigarette which is to be funneled into each designated cause.
In another area of the legislation, the provisions attempt to link the earmarked amounts to the taxes imposed as the amount of the tax per cigarette is raised each year. However, the provision earmarking the tax money leaves out the last three years of tax increases. Thus, it is not explicit that there is a link between the phased-in increases and the amount that is supposed to go to each designated cause or program.
The poor drafting certainly has to be attributed to the last-minute negotiations, negotiations that could have taken place long before the final night of the legislative session if lawmakers had put their minds to the task.