Moving the tax burden to others
Many of us have heard, time and time again, a little ditty about who should pay taxes. It goes something like: “Don’t tax you, don’t tax me, tax that man behind the tree.”
In the past few years, when lawmakers struggled to balance the general fund budget and the recession took its toll on tax collections, that is exactly what they did. Some of their biggest targets were the “rich” folks — those making $100,000 or $200,000 in yearly income. They raised tax rates for those taxpayers to new heights — 9, 10 and 11 percent — making Hawaii’s net income tax rates some of the highest in the nation, rivaled only by those imposed by California.
The consequences of limiting the amount high-income earners could deduct on their net income tax made the legislative radar. The folks with the means to make generous charitable contributions stopped giving as generously, as their contributions in excess of the limits didn’t ease the pain of the net income tax. During the past two years, the charitable community has taken it on the chops with potential donors citing the loss of the deduction for their decreased contributions. This year, lawmakers relented and passed legislation, now pending the governor’s approval, to make the itemized deduction limits apply to all deductions except those made as charitable contributions.
Another provision that shifted the tax burden is the limitation of the deduction for state income and sales taxes for high-income folks. The argument was made that since one can’t deduct federal income taxes on the federal return, the state should not allow the deduction of state income taxes on the state return. For many lawmakers of recent vintage, the concept of conformity to the federal code is foreign. Others saw this idea as just another way to close the budget gap. Although the overall limitation on itemized deductions will sunset in 2015, the loss of the ability to deduct state income and sales taxes is a permanent fixture of the state income tax law. Thus, Hawaii’s tax laws will be one more step away from ease of compliance — one more difference that will not only make it more costly for taxpayers to comply, but will also hamper the efforts of the department to rely on federal audits of net income tax returns.
The wealthy were not the only target of lawmakers’ efforts to raise more money by shifting the tax burden. There are those tax goodies lawmakers got accustomed to handing out like the infamous tax credits for high technology, alternative energy and, of course, film productions. Advocates for these giveaways argue that without these incentives these activities would not locate in Hawaii and provide jobs and income for the state.
What they forget about is the activities that are already here. If the state is going to subsidize one industry, it comes at a cost not only to other industries, but to all taxpayers, businesses and individuals. Since lawmakers are not about to reduce spending on state programs and services, they need to find the funds to pay for them. As a result, lawmakers cannot provide any kind of tax relief for taxpayers who are not so privileged to get a tax credit or tax incentive.
Whereas an appropriation of tax dollars undergoes close scrutiny, giving taxpayers and lawmakers some idea of its actual cost, the total cost of tax credits is unlimited. Such was the case with the vaguely worded solar tax credit law which allowed the industry to bleed the state treasury of millions of dollars. The department originally interpreted a “system” as the inverter that converts direct current into alternating current. Therefore, a single residence could have multiple “systems” and have multiple $5,000 limits on each of them. This abuse is symptomatic of the tax incentives the Legislature has adopted in recent years. With no clear limits imposed, the sky is the limit.
Unfortunately, these abuses only enable the shifting of the tax burden from the select target group of taxpayers to those who cannot qualify for the tax incentive. The result is that someone else ends up paying more than his fair share for government services.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.