Some of the tax proposals winding their way through the 2019 legislative process come from recommendations found in the State of Hawaiʻi’s most recent Tax Review Commission report. This constitutionally mandated commission has the kuleana to evaluate the state’s current tax structure. The commission recommends revenue and tax policy changes needed to address the state’s budget needs, as well as create greater economic opportunity and social equity.
Commission appointments are made on or before July 1, every five years. The most recent commission (2015–17), whose seven members were appointed by the governor with the consent of the Senate, submitted its report on February 18, 2018. Its primary findings are summarized below.
- Additional payments needed to fund pension and other post-retirement benefits will average over $400 million annually from 2018 to 2022, and these additional payments will require more revenue than can reasonably be expected to come from Hawai‘i’s current tax structure.
- The average share of income that Hawai‘i residents pay in state taxes rises from about 6 percent to 8 percent as household income rises from $25,000 to $50,000, but the share remains relatively flat for all brackets above $50,000.
- The state should not eliminate corporate income tax, but corporations should be allowed to deduct the cost of new investments from taxable income in order to encourage investments within the state.
- The personal exemption and standard deduction in the state’s income tax system have been eroded by inflation and are out of date.
- Although tax credits eliminate tax liability for most households with income below the poverty threshold, there remain some instances where such households are required to pay state income tax.
- The state should tax retirement income more evenly by making social security payments and income from employer-provided pensions subject to the State’s income tax. To help people plan for the tax change, enact it with a five year lag
Based on the above findings and its deliberations, the Tax Review Commission summarized its recommendations under three categories: net income tax recommendations, revenue adequacy recommendations and recommendations for further in-depth studies.
The net income tax recommendations included:
- Increasing the personal exemption and standard deduction to the 2017 federal income tax levels and indexing them for inflation thereafter, and then altering tax rates and tax brackets to make these changes revenue neutral.
- Taxing retirement income more evenly by making income from employer-provided pensions subject to state income tax after a five year lag to help people plan for the change.
- All corporations to expense new investments to reduce reportable income.
The revenue adequacy recommendations included:
- Expanding efforts to collect taxes on e-commerce and remote sales.
- Taxing e-cigarettes at a rate comparable to the tax on regular tobacco cigarette sales.
- Establishing a commission to examine how to handle the unfunded and underfunded liabilities for pensions and health care for retired public workers, including measures to raise revenues and to reduce expenditures.
The Tax Review Commission also recommended that in-depth studies be done on whether Hawai’i should institute a carbon tax and whether the withholding rate on sales of real property should be restored to its original rate of 9 percent from its current rate of 5 percent.
The full report and recommendations of the Tax Review Commission can be found here.
The next Tax Review Commission is to be appointed by July 1, 2020. It will complete its work and report its findings and recommendations within a few years after its members are appointed. More information is available here.
HB1190: Changes income tax rates and eliminates state income tax for those at or below the poverty level for taxable years beginning after December 31, 2018. Status: Passed the Senate Ways and Means Committee on Friday, March 29, and heads to the Senate for a vote.
SB579: Increases the allowable income tax credit for low-income household renters to an unspecified amount. Makes the earned income tax credit refundable for ten taxable years beginning after 12/31/2019. Increases the allowable amount of the refundable food/excise tax credit to an unspecified amount. Status: Needs a House Finance Committee hearing.
SB1405: Establishes the offense of unlawful shipment of e-liquid products. Includes e-liquid within the definition of “tobacco products”, as used in the cigarette tax and tobacco tax law. Increases the license fee for persons engaged as a wholesaler or dealer of cigarettes and tobacco products. Increases the retail tobacco permit fee for retailers engaged in the retail sale of cigarettes and tobacco products. Allocates a portion of collected excise taxes on tobacco products to the Tobacco Prevention and Control Trust Fund. Repeals certain provisions of the Hawaii Revised Statutes relating to electronic smoking devices. Status: Needs a House Finance Committee hearing.
SB1014: Amends the income tax credit for expenses for household and dependent care services necessary for gainful employment by increasing the taxpayer’s applicable percentage of employment-related expenses and dollar limit on amounts creditable that constitute the tax credit. Requires the Department of Taxation to make annual adjustments for inflation to the adjusted gross income thresholds and dollar limits on amounts creditable. Applies to taxable years beginning after 12/31/2019. Effective 7/1/2050. Status: Needs a House Finance Committee hearing.
HB 1193: Amends the income tax credit for expenses for household and dependent care services necessary for gainful employment by changing the taxpayer’s applicable percentage of employment-related expenses that constitutes the tax credit and cap amount. Status: Passed the Ways and Means Committee on Friday, March 29, and heads to the Senate for a vote.
SB885: Increases the maximum value of the low-income household renters credit to $150 per qualified exemption for households. Adjusts and provides income threshold tiers for based on filing status. Status: Needs a House Finance Committee hearing.
HB1584: Appropriates funds to the Office of Planning to conduct a comprehensive study of a statewide carbon tax. Effective 7/1/2100. Status: Needs a Senate Ways and Means Committee hearing.