Any citizen receiving wages or salaries in the State of Hawaii is required to pay Federal and State Income Tax on these wages.

All or part of this required Income Tax is paid via Federal and State Withholding Tax. A percentage of an employee’s wages are withheld from each paycheck by the employer, and the employer is responsible for paying these withheld amounts to the proper Governmental Agency.

These withheld amounts have to be paid within a time frame prescribed by law. So, in effect, the employer is a “Tax Collector."

Now if these taxes are underpaid by the employer, various events are set in motion. Notices of Delinquency are sent to the employer. These notices enumerate the shortage in payment, plus the penalties for not paying the full amount on time, plus interest on the money that the government did not receive on time. Naturally they come with a payment coupon and a payment envelope for you to offer up the required tribute.

The State and the Federal Governments are remarkably similar in their methods of collecting these “delinquent” funds.

For those who pay the correct amount on time, the delinquency scenario seems fair, and it probably is.

However, there is another side to the coin. What if the employer overpays the withholding taxes?

The equitable thing for the government to do is basically the reverse of the delinquency notice. They should notify the employer that he paid too much, offer to return it to the employer, and also pay interest on the money. That would be fair.

The Federal Government is quite good at that. In about the same time frame that it takes the IRS to send out a delinquency notice, the IRS will send out an overpayment notice. The IRS asks whether the employer wants the money returned or applied to other taxes due. The IRS even sends a reply envelope.

The State of Hawaii does things a little bit differently. If you over pay State Withholding Tax, the State Tax Department does absolutely nothing. The State Tax Department does not tell you that you overpaid…ever.

That’s right, the State Tax Department never informs you that you messed up and overpaid. The State Tax Department keeps your money - and they keep quiet about it.

Is that fair? I think not.

Jack Schneider is the chairman of the Grassroot Institute of Hawaii, a board member of Small Business Hawaii, and owner of JS Services. He can be reached via email at mailto:jschn@lava.net