A new report out from the Institute on Taxation and Economic Policy (ITEP) provides the vital statistics for each state’s tax system. It lays out, in clear and compelling numbers, the sobering message that Hawaiʻi taxes—and those in the United States on average—increase inequality between rich and poor.
How does this work? Starting with average gross income, Hawaiʻi’s poorest 20 percent earn an average of $10,200, while the richest 1 percent bring in an average of $948,200. That means that, before taxes, the richest make 96 times more money than the poorest. However, the richest 1 percent don’t pay 96 times more in taxes. Instead, they pay only 57 times more. As a result, after taxes, the gap between the richest and poorest has grown from being 96 times more to 103 times more.
If $10,200 a year seems really low, you’re right. Hawaiʻi ties with Mississippi for the 5th-lowest amount of income for the lowest tier of workers. The states with lower incomes at that tier are Kentucky, Michigan, Montana and West Virginia, which all have much lower costs of living than Hawaiʻi.
In terms of dollars and cents: That person who grossed only $10,200 pays about $1,525 in taxes per year, mostly general excise tax and property taxes passed through to rent (this also includes vehicle fees), and is left with $8,675. At the other end of the income scale, the person with gross earnings of $984,200 pays out $87,465, mostly in income taxes, leaving a net of $896,735.
Percentage-wise, those in the bottom fifth in Hawaiʻi pay 15 percent of their income in state and local taxes, while those in the top 1 percent pay only 8.9 percent, exacerbating inequality in our state. At 15 percent, we have the nation’s 2nd-highest state and local tax rate on people in poverty.
In contrast, there are eight states with tax systems that don’t worsen inequality, or even make things a little more equal. For example: in California, the top 1 percent pays 12.4 percent of their income in state and local taxes, while those in the bottom 20 percent pay 10.5 percent.
The effects of state and local taxes are even worse for the United States as a whole. The pre-tax income gap is bigger—the richest 1 percent make 132 times more than the poorest 20 percent. The rich pay 86 times more in taxes than the poor and end up with 138 times more in income.
The main cause of the heavy tax burden on those making the least in Hawaiʻi is our General Excise Tax. Families in the bottom fifth of the income spectrum spend 10.5 percent of their meager incomes on the GET, while the top 1 percent spend only 1.2 percent of their large earnings. In other words, those at the bottom spend 8.75 times more of their income on the GET than do those at the top.
Some other interesting comparisons in this data set include:
- The lowest income 60 percent of Hawaiʻi residents pay a greater percentage of their income in taxes and contribute a greater share of all taxes than the national average.
- The percentage of income the richest 1 percent pay in taxes in Hawaiʻi and nationally is less than the percentage paid by any other group. In fact, the lowest income group pays 1.7 times more of their income in taxes than the richest in Hawaiʻi.
- Hawaiʻi’s property tax rates are the lowest in the country so it’s no surprise to see that, nationally, people at all income levels pay more.
- Hawaiʻi’s overall tax rate is 10 percent compared to 9 percent for the nation.