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Dunning All Taxpayers Product Of 2010 Session

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By Lowell L. Kalapa
(Released on 5/9/10)

Although some lawmakers seem to understand the gravity of the situation facing the state and the community as the impact of the national and global recession is played out here in Hawaii, others seem to be oblivious to the fact that at least for the next few years, it cannot be “business as usual.”

But then again, did state lawmakers want taxpayers to notice what they were doing? Well, taxpayers should pay attention as lawmakers quickly discovered this session that there was hardly anything left to mine for additional tax revenues. Perhaps fearing a backlash at the ballot box – after all it is an election year – cooler heads prevailed despite by some lawmakers who wanted to foist a massive increase in the general excise tax.

Although that attempt characterized the proposal as a mere measly additional penny, others pointed out that the measly penny represented a 25% increase in the tax rate. The very lawmakers who put forth that proposal were only too willing to protect those who were only too willing to feed at the public trough by protecting targeted business tax credits for high technology, a tax incentive that is costing the state anywhere from $100 million to $150 million annually.

While no one liked the game plan that was eventually adopted, it allowed lawmakers to choose a path of lesser evils, of course, that depends on whether or not it was your ox that was gored. But, in general, the best outcome from this session was that there was no across-the-board increase in taxes. However, that does not mean that there was no additional burden imposed on taxpayers, it just means that the obvious targets for tax increases were not utilized this time around.

But there are plenty of ways that lawmakers “raised revenues” – read taxes – on various segments of the community. While those who are not involved in the insurance industry probably won’t notice, those who are insurance professionals will see their licensing fees doubled for the next few years.

After nearly five years of no state taxes on the estates of residents passing away in Hawaii, lawmakers decided to reestablish the tax on property that is passed from a decedent to his or her heirs. The reestablished state death tax will apply to those who die after April 30, 2010 and will be based on the amount that used to be the federal tax credit for state death taxes imposed. Those credits were wiped out over a four-year period by the federal EGGTRA of 2001. With no tax credit schedule available at the federal level, Hawaii, in all reality, had no tax on decedents’ estates. In the meantime, the federal law had grown the amount of any estate that would be exempt from federal estate taxes to $3.5 million in 2009.

At the beginning of this year, there was no federal estate tax at all. Thus, while persons dying this year will be exempt from federal death taxes, they may be subject to the newly reestablished state death tax. Because of the situation at the federal level, lawmakers had to be careful in how they crafted the new law, utilizing the federal tax credit schedule as it existed at the end of 2000, but recognizing the exemption at the federal level as it existed last year. What will be even more difficult to predict is what will happen come January 1, 2011 when the federal estate tax law is supposed to come back into being.

Then there are those income taxpayers who see their itemized deductions limited depending on their filing status and the amount of income they earn. In the case of couples filing a joint return and earning more than $300,000, they will be able to claim only $50,000 in itemized deductions; for heads of households earning more than $225,000, they will be limited to only $37,500 in itemized deductions and for single taxpayers or those who are married but filing separately making more than $150,000 of adjusted gross income, their itemized deductions will be limited to $25,000.

This legislation also turned what has been a refundable credit for the 4% general excise tax paid on the purchase of capital goods into a non-refundable credit for the next five years. This credit was adopted years ago to lessen the cost of capital equipment that most observers recognize is critical to the creation of jobs. While it may not sound like anything significant, banks and leasing companies who lease capital equipment for terms shorter than five years will not be able to take advantage of the credit because the term of the lease will preclude them from taking advantage of the credit in the cost of the lease.

While some taxpayers may feel singled out to help make up the shortfall, one should recognize that all tax- payers were asked to help close the gap, at least it was not an across-the board increase in the general excise tax.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

 

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