The result of the general election earlier this month raises the possibility of a high magnitude shake-up in our federal tax system. There are also bound to be state implications all over the country, including here in Hawaii.
Federal tax reform is hardly a new idea. Many key Republican lawmakers have been talking about tax reform ideas for years. House Speaker Paul Ryan, who is likely to retain his post, has put out a “House Republican Tax Reform Blueprint.” Senate Majority Leader Mitch McConnell said on September 29, “We need to do tax-reform –comprehensive tax-reform – not piecemeal.” With Donald Trump in the White House with his own ideas on tax reform that are not fundamentally different from the House Republican plan, the chances of tax reform becoming law have dramatically increased.
In Hawaii, as in many other states, our income tax code is largely based on the federal tax laws. Hawaii’s estate tax and generation-skipping transfer tax are also highly conformed to federal law (with the one major difference being that Hawaii doesn’t have a gift tax).
Each year, our lawmakers consider a bill to incorporate into our income tax law any changes made to the federal income tax law in the prior year. We usually don’t incorporate federal tax credits because we have our own, and we usually don’t incorporate changes relating to taxing foreign persons because our system, as well as that of most states, handles foreign taxpayers in a fundamentally different way from the federal system. Most of the other income tax provisions, however, do get picked up in our law with only a handful of exceptions.
The same process occurs for the Hawaii estate tax and generation-skipping transfer tax laws.
The last time we had major tax reform was in 1986 under President Reagan. Although Hawaii lawmakers always have the option to cast aside any federal provisions that they do not want to follow, in 1987 we picked up most of the federal changes, including getting rid of the “zero bracket” amounts and adopting a standard deduction; adopting a 2% limit on miscellaneous itemized deductions; taking away the itemized deduction for consumer interest; and adopting a deductibility limit on business meals and entertainment expenses. At the same time, we reduced the top tax rates on individuals and businesses, just as the Tax Reform Act of 1986 reduced the federal rates.
Another federal issue that could impact state tax include the proposed Mobile Workforce State Income Tax Simplification Act (H.R. 2315). If enacted, it would prohibit wages earned by an employee who works in more than one state from being subject to income tax in any state unless the employee either lives there or works there for more than 30 days during the calendar year. A similar bill is alive in the Senate (S. 386).
Next, there is the perennial problem of requiring remote sellers to collect the sales taxes imposed by their customers’ states, whether or not the seller has a presence in those states. The latest Supreme Court decision on the issue indicates that states can’t act on their own to force sellers to collect the tax. Because few small buyers pay over the tax when the sellers don’t, states are losing billions of dollars in revenue. But the high court did indicate that Congress has the power to enact such a collection requirement, and a discussion draft to accomplish this has been released by House Judiciary Chairman Goodlatte. Speaker Ryan and Senate Majority Leader McConnell support the concept, and the stars may finally align in 2017 to get this legislation passed.
Look for these and similar federal changes in 2017 when the newly elected take office, and look for a spirited discussion about them in 2018 when the Hawaii legislature will be considering any changes wrought in 2017.