Hawaiiis overtaxed and overregulated, a threat to our growth, our prosperity, and the self reliance of our citizens.
Periodically, the State Tax Working Group of the Tax Foundation meets to review tax happenings in the states. While these meetings often cover states other than Hawaii, they provide valuable information about tax reform efforts around the country—efforts that provide ideas of what might be done here. This report, part of a series, presents some of the topics discussed in the most recent meeting. We believe in citizen responsibility. We expect a dialogue with our readers. How do we best get the word out to politicians and opinion leaders? We seek your creativity. Simply talking about taxes among ourselves gets us nowhere. We must find ways to broaden our message and act to change the political status quo. Come on readers! Get involved! What should we do? How should we do it? The future of Hawaii depends on all of us!
Taxing Trends
Pro-growth tax policy applies the lowest possible rates to the broadest possible tax base. It avoids favors and penalties that muck up most tax codes, whether federal or state. The Tax Foundation has published a list of the top ten state tax trends during recession and recovery (as anemic as that is), 2008-2012. These trends can be compared to pro-growth tax policy, and we can see how these trends have played out in Hawaii
(1) States have enacted high marginal income tax rates on those with large incomes. These are often termed “millionaires’ taxes,” although they increasingly apply at income levels far below one million dollars. There are ten states with rates of 8% or more within their rate schedules. As of 2012, Hawaii has the honor of the highest marginal rate of 11%, applicable to income above $200,000. The top four brackets are all above 8%, with a rate of 8.25% once income exceeds a mere $48,000. We let this situation get away from us. The top rate had been 10% for income over $20,500 in 1997. Over the years, the rates had been reduced. Now we have allowed increases in the top brackets and a record high top marginal rate. “Soaking the rich” is poor tax policy, and it inevitably ends up soaking the middle class as well. High rates apply to ever lower incomes, and work opportunities/compensation fall as economic growth stalls.
(2) Tax reform, changes that broaden the base and lower the rate, has been considered and generally rejected by a number of states. In Rhode Island, the Republican governor and Democrat legislature came together to enact a particularly impressive income tax reform. Previously, there had been 5 brackets with a top rate of 9.9%.. Now there are 3 brackets with a top rate of 5.99%. The change was designed to be revenue neutral, as other provisions broadened the tax base by reducing tax credits and ending itemized deductions. The politicians have come to understand that this kind of structure is more attractive to job creators. Unfortunately, RI is an outlier. Most other states either adopted “millionaires’ taxes” or adopted rate increases or decreases without base changes. Hawaii was one of thirteen states that have increased personal income tax rates in the period 2007-2012. Nine states have reduced tax rates
(3) Many states have reduced corporate taxes. This tax relief takes two forms. Since 2008, eight states have reduced corporate tax rates. Most states offer targeted incentive packages to new or expanding businesses. Such new business tax preferences burden the existing tax base to pick up the slack for the newbies. The adverse effects on current businesses are never analyzed as an offset to the new business growth. An overall pro-growth tax policy is much more attractive to relocating/new businesses than temporary tax relief in a badly designed tax regime. The state should avoid picking winners and losers by advantaging some while disadvantaging others.
(4) The long term trend of state sales taxes is up, then up some more. Sales taxes generally apply to goods and not services; and a significant number of goods are often excluded from tax. The sales tax base breadth has declined from 55% of personal income in 1970 to just 35% today. Between 2007 and 2011, fourteen states have raised their sales tax rates. Hawaii’s GET applies to both goods and services. While it has not been increased in recent years (except in Honolulu County to fund the rail boondoggle), the 4% and 4.5% rate is rather high, considering it applies to virtually all goods and services. Also, a peculiarity of the GET is that it applies to gross receipts (not value added) up and down the production chain, not to the final purchaser only. Rates are reduced for manufacturers and wholesalers in recognition of this chain of production effect. Hawaii is on the right track with its broad based approach
(5) States are busily trying to find ways to collect sales taxes from internet retailers. The taxing power of the states generally extends only to their individual borders. In 2008, New York passed a law that imposes sales tax collection on businesses with no physical presence in the state if an in-state “affiliate” receives a commission for referring potential customers. Amazon cancelled all its affiliate agreements. New York received no proceeds from “the Amazon tax,” and actually lost income tax revenues as a result of the affiliate terminations. A number of states have attempted similar dodges to collect from internet sales. Either these have not worked out in practice, or courts have held the law unconstitutional. Hawaii passed a law on internet sales, but it was vetoed by Governor Lingle. So, your internet purchases could come under attack for sales taxes in future legislation. One particularly obnoxious approach occurred in North Carolina and Colorado. The law demanded that out of state companies provide customer purchase information dating from 2003. This would apparently lead to billing of sales taxes back to 2003. A federal court found the North Carolina law unconstitutional on First Amendment grounds. It is not unreasonable to collect sales taxes from internet retailers, but this will have to be accomplished with federal legislation. As a practical matter, the multiplicity of geographically based tax rates will have to be simplified. If the tax base is eventually broadened to include internet sales, it will be important to pressure Hawaii legislators to reduce the GET rate accordingly. They will undoubtedly see these new revenues as a windfall.
(6) No state has abolished a major tax since Alaska did away with its income tax in 1980, but people in some states sure are trying today. There is a “Heartland Tax Rebellion” where income tax repeals or sharp reductions are under consideration. The Oklahoma Council on Public Affairs has sponsored a repeal of the income tax in two stages: first, the 5.7% top rate (over a very small taxable income) would be replaced with a 3% flat tax; second, scheduled reductions in rate would occur over ten years until the tax ends as zero. Governor Mary Fallin has proposed a reduction in top rate to 3.5%. A proposed ballot initiative in Missouri seeks to eliminate the income tax, replacing it with a broader sales tax with a rate up to 7% (compared to the current 4.225%). While the proposed plan is revenue neutral, the governor and other political figures have opposed the idea, and the courts have kept it off the 2012 ballot. Responding to calls to eliminate the income tax in Kansas, Governor Brownback proposed replacing the three current income tax brackets of up to 6.45% with two brackets of up to a 4.9%. Brownback also proposed eliminating credits and deductions to make the new plan more revenue friendly. The legislature approved the rate cuts, disapproved much of the base broadening, and Kansans have $800 million in annual tax reduction by 2014, which compares against 2011’s income tax revenue of $2.7 billion. This is major tax reduction, although a provision to exempt Chapter S corporate passthrough income from state tax is problematical to tax fairness—and may cause problems for the plan in the future. North Dakota voters rejected a repeal of the local property tax, since those proposing it had no idea of how the revenue would be replaced. Pennsylvania legislators are considering elimination of school district property taxes, replacing them with a 1 point increase in both sales tax (plus broadening into some services) and income tax. Ohio is ending its estate tax in 2013. Indiana is phasing out its inheritance tax by 2021. There have been no efforts to abolish any major taxes in Hawaii.
(7) Over the past 3 years, 34 states have exhausted their unemployment insurance trust funds and have had to borrow from the feds. This leads to higher charges to employers, and has occurred because states reduced rates in good times and did not have enough to pay in current bad times. Hawaii is in good shape compared to other states. It is in position to pay at least one year of benefits with funds on hand
(8) State “rainy day” funds have been inadequate to cope with the recession and its aftermath. It is estimated that such funds require enough cash to deal with revenue shortfalls of 13% to 18% during a normal downturn. This would require annual funding in good times of around 2 ½%. Hawaii, with only 1.2% of general fund appropriations in its reserve fund, is 38th worst state in this regard. No worry! We just raise taxes when times get tough. It’s time for the state government to plan for the rainy day. All of us have to do so.
(9) States have learned to abuse Medicaid matching funds by charging high provider taxes so the match is on an expanded base. The extra federal funds may be expended on medical costs, although in many cases they are used for general state spending. In 2009, Governor Doyle of Wisconsin pushed through a 20% increase in the state’s health provider tax. This led to an increase of federal matching funds from $635 million to $796 million. An estimated $292 million in the matching funds is estimated to have been diverted for non-Medicaid uses. Hawaii is one of a few states with no Medicaid health provider taxes, and has yet to figure out this particular con. Shh! Don’t tell!
(10) States love to target unpopular groups for special taxes. Cigarette taxes are good examples of this tendency. However, increase activity has fallen off in the last few years. As of the beginning of 2012, the average state cigarette tax was $1.46 per pack, up substantially from $1.18 just three years earlier. From 2006 through 2010, there were 45 increases among the states, an average of 9 a year. In 2011, there were only 3 state increases. Popular resistance is beginning to grow against this most regressive of taxes. Also, states are now facing problems with smuggled non-taxed cigarettes. Note that Hawaii not only has the fourth highest tax at $3.20 per pack, but it has increased its tax in all of the six years from 2006 through 2011.
While there are some good aspects to Hawaii’s tax system, such as the broadbased nature of the GET, Hawaii is part of some of the negative trends. Personal income tax rates were raised rather than the tax base broadened. There is no “Heartland Tax Rebellion” in today’s Hawaii, and no one is arguing for ending any of the major taxes. Hawaii’s estate tax might be a good candidate for abolition. The “rainy day” fund here is a joke. Cigarette taxes are outrageous, and tend to apply to lower income citizens. If they were dedicated to health issues related to smoking, it might be possible to justify such a tax. However, the tax simply fills the coffers of the general fund. There may be future attempts to find a way to tax internet sales, and Hawaii’s legislature has already shown interest by passing a bill, which went down by veto. We have a lot of work to do to make the Hawaii tax system work for economic growth, while minimizing political favors or penalties for groups “in” or “out.
Stephen Zierak, CPCU/ARM, graduated from Boston University with a BA in Political Science in 1969. After a forty year career in property casualty insurance underwriting, Mr. Zierak retired as a Vice President of Swiss Re America in 2010. At that time, he relocated to Hawaii, a move he had always wanted to make, but had delayed due to lack of appropriate professional opportunities here. Mr. Zierak plans to continue his studies in Political Science, never really abandoned even during his professional career, and to write on matters of public policy. Recently, he produced for Grassroot Institute summaries of Hillsdale’s ten part internet course on our Constitution. Stephen Zierak is married to the love of his life, Teodora, and they reside in Honolulu.
TAX TALK/ TAX ACTION #2
Hawaiiis overtaxed and overregulated, a threat to our growth, our prosperity, and the self reliance of our citizens.
Periodically, the State Tax Working Group of the Tax Foundation meets to review tax happenings in the states. While these meetings often cover states other than Hawaii, they provide valuable information about tax reform efforts around the country—efforts that provide ideas of what might be done here. This report, part of a series, presents some of the topics discussed in the most recent meeting. We believe in citizen responsibility. We expect a dialogue with our readers. How do we best get the word out to politicians and opinion leaders? We seek your creativity. Simply talking about taxes among ourselves gets us nowhere. We must find ways to broaden our message and act to change the political status quo. Come on readers! Get involved! What should we do? How should we do it? The future of Hawaii depends on all of us!
Taxing Trends
Pro-growth tax policy applies the lowest possible rates to the broadest possible tax base. It avoids favors and penalties that muck up most tax codes, whether federal or state. The Tax Foundation has published a list of the top ten state tax trends during recession and recovery (as anemic as that is), 2008-2012. These trends can be compared to pro-growth tax policy, and we can see how these trends have played out in Hawaii
(1) States have enacted high marginal income tax rates on those with large incomes. These are often termed “millionaires’ taxes,” although they increasingly apply at income levels far below one million dollars. There are ten states with rates of 8% or more within their rate schedules. As of 2012, Hawaii has the honor of the highest marginal rate of 11%, applicable to income above $200,000. The top four brackets are all above 8%, with a rate of 8.25% once income exceeds a mere $48,000. We let this situation get away from us. The top rate had been 10% for income over $20,500 in 1997. Over the years, the rates had been reduced. Now we have allowed increases in the top brackets and a record high top marginal rate. “Soaking the rich” is poor tax policy, and it inevitably ends up soaking the middle class as well. High rates apply to ever lower incomes, and work opportunities/compensation fall as economic growth stalls.
(2) Tax reform, changes that broaden the base and lower the rate, has been considered and generally rejected by a number of states. In Rhode Island, the Republican governor and Democrat legislature came together to enact a particularly impressive income tax reform. Previously, there had been 5 brackets with a top rate of 9.9%.. Now there are 3 brackets with a top rate of 5.99%. The change was designed to be revenue neutral, as other provisions broadened the tax base by reducing tax credits and ending itemized deductions. The politicians have come to understand that this kind of structure is more attractive to job creators. Unfortunately, RI is an outlier. Most other states either adopted “millionaires’ taxes” or adopted rate increases or decreases without base changes. Hawaii was one of thirteen states that have increased personal income tax rates in the period 2007-2012. Nine states have reduced tax rates
(3) Many states have reduced corporate taxes. This tax relief takes two forms. Since 2008, eight states have reduced corporate tax rates. Most states offer targeted incentive packages to new or expanding businesses. Such new business tax preferences burden the existing tax base to pick up the slack for the newbies. The adverse effects on current businesses are never analyzed as an offset to the new business growth. An overall pro-growth tax policy is much more attractive to relocating/new businesses than temporary tax relief in a badly designed tax regime. The state should avoid picking winners and losers by advantaging some while disadvantaging others.
(4) The long term trend of state sales taxes is up, then up some more. Sales taxes generally apply to goods and not services; and a significant number of goods are often excluded from tax. The sales tax base breadth has declined from 55% of personal income in 1970 to just 35% today. Between 2007 and 2011, fourteen states have raised their sales tax rates. Hawaii’s GET applies to both goods and services. While it has not been increased in recent years (except in Honolulu County to fund the rail boondoggle), the 4% and 4.5% rate is rather high, considering it applies to virtually all goods and services. Also, a peculiarity of the GET is that it applies to gross receipts (not value added) up and down the production chain, not to the final purchaser only. Rates are reduced for manufacturers and wholesalers in recognition of this chain of production effect. Hawaii is on the right track with its broad based approach
(5) States are busily trying to find ways to collect sales taxes from internet retailers. The taxing power of the states generally extends only to their individual borders. In 2008, New York passed a law that imposes sales tax collection on businesses with no physical presence in the state if an in-state “affiliate” receives a commission for referring potential customers. Amazon cancelled all its affiliate agreements. New York received no proceeds from “the Amazon tax,” and actually lost income tax revenues as a result of the affiliate terminations. A number of states have attempted similar dodges to collect from internet sales. Either these have not worked out in practice, or courts have held the law unconstitutional. Hawaii passed a law on internet sales, but it was vetoed by Governor Lingle. So, your internet purchases could come under attack for sales taxes in future legislation. One particularly obnoxious approach occurred in North Carolina and Colorado. The law demanded that out of state companies provide customer purchase information dating from 2003. This would apparently lead to billing of sales taxes back to 2003. A federal court found the North Carolina law unconstitutional on First Amendment grounds. It is not unreasonable to collect sales taxes from internet retailers, but this will have to be accomplished with federal legislation. As a practical matter, the multiplicity of geographically based tax rates will have to be simplified. If the tax base is eventually broadened to include internet sales, it will be important to pressure Hawaii legislators to reduce the GET rate accordingly. They will undoubtedly see these new revenues as a windfall.
(6) No state has abolished a major tax since Alaska did away with its income tax in 1980, but people in some states sure are trying today. There is a “Heartland Tax Rebellion” where income tax repeals or sharp reductions are under consideration. The Oklahoma Council on Public Affairs has sponsored a repeal of the income tax in two stages: first, the 5.7% top rate (over a very small taxable income) would be replaced with a 3% flat tax; second, scheduled reductions in rate would occur over ten years until the tax ends as zero. Governor Mary Fallin has proposed a reduction in top rate to 3.5%. A proposed ballot initiative in Missouri seeks to eliminate the income tax, replacing it with a broader sales tax with a rate up to 7% (compared to the current 4.225%). While the proposed plan is revenue neutral, the governor and other political figures have opposed the idea, and the courts have kept it off the 2012 ballot. Responding to calls to eliminate the income tax in Kansas, Governor Brownback proposed replacing the three current income tax brackets of up to 6.45% with two brackets of up to a 4.9%. Brownback also proposed eliminating credits and deductions to make the new plan more revenue friendly. The legislature approved the rate cuts, disapproved much of the base broadening, and Kansans have $800 million in annual tax reduction by 2014, which compares against 2011’s income tax revenue of $2.7 billion. This is major tax reduction, although a provision to exempt Chapter S corporate passthrough income from state tax is problematical to tax fairness—and may cause problems for the plan in the future. North Dakota voters rejected a repeal of the local property tax, since those proposing it had no idea of how the revenue would be replaced. Pennsylvania legislators are considering elimination of school district property taxes, replacing them with a 1 point increase in both sales tax (plus broadening into some services) and income tax. Ohio is ending its estate tax in 2013. Indiana is phasing out its inheritance tax by 2021. There have been no efforts to abolish any major taxes in Hawaii.
(7) Over the past 3 years, 34 states have exhausted their unemployment insurance trust funds and have had to borrow from the feds. This leads to higher charges to employers, and has occurred because states reduced rates in good times and did not have enough to pay in current bad times. Hawaii is in good shape compared to other states. It is in position to pay at least one year of benefits with funds on hand
(8) State “rainy day” funds have been inadequate to cope with the recession and its aftermath. It is estimated that such funds require enough cash to deal with revenue shortfalls of 13% to 18% during a normal downturn. This would require annual funding in good times of around 2 ½%. Hawaii, with only 1.2% of general fund appropriations in its reserve fund, is 38th worst state in this regard. No worry! We just raise taxes when times get tough. It’s time for the state government to plan for the rainy day. All of us have to do so.
(9) States have learned to abuse Medicaid matching funds by charging high provider taxes so the match is on an expanded base. The extra federal funds may be expended on medical costs, although in many cases they are used for general state spending. In 2009, Governor Doyle of Wisconsin pushed through a 20% increase in the state’s health provider tax. This led to an increase of federal matching funds from $635 million to $796 million. An estimated $292 million in the matching funds is estimated to have been diverted for non-Medicaid uses. Hawaii is one of a few states with no Medicaid health provider taxes, and has yet to figure out this particular con. Shh! Don’t tell!
(10) States love to target unpopular groups for special taxes. Cigarette taxes are good examples of this tendency. However, increase activity has fallen off in the last few years. As of the beginning of 2012, the average state cigarette tax was $1.46 per pack, up substantially from $1.18 just three years earlier. From 2006 through 2010, there were 45 increases among the states, an average of 9 a year. In 2011, there were only 3 state increases. Popular resistance is beginning to grow against this most regressive of taxes. Also, states are now facing problems with smuggled non-taxed cigarettes. Note that Hawaii not only has the fourth highest tax at $3.20 per pack, but it has increased its tax in all of the six years from 2006 through 2011.
While there are some good aspects to Hawaii’s tax system, such as the broadbased nature of the GET, Hawaii is part of some of the negative trends. Personal income tax rates were raised rather than the tax base broadened. There is no “Heartland Tax Rebellion” in today’s Hawaii, and no one is arguing for ending any of the major taxes. Hawaii’s estate tax might be a good candidate for abolition. The “rainy day” fund here is a joke. Cigarette taxes are outrageous, and tend to apply to lower income citizens. If they were dedicated to health issues related to smoking, it might be possible to justify such a tax. However, the tax simply fills the coffers of the general fund. There may be future attempts to find a way to tax internet sales, and Hawaii’s legislature has already shown interest by passing a bill, which went down by veto. We have a lot of work to do to make the Hawaii tax system work for economic growth, while minimizing political favors or penalties for groups “in” or “out.
Stephen Zierak, CPCU/ARM, graduated from Boston University with a BA in Political Science in 1969. After a forty year career in property casualty insurance underwriting, Mr. Zierak retired as a Vice President of Swiss Re America in 2010. At that time, he relocated to Hawaii, a move he had always wanted to make, but had delayed due to lack of appropriate professional opportunities here. Mr. Zierak plans to continue his studies in Political Science, never really abandoned even during his professional career, and to write on matters of public policy. Recently, he produced for Grassroot Institute summaries of Hillsdale’s ten part internet course on our Constitution. Stephen Zierak is married to the love of his life, Teodora, and they reside in Honolulu.
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