Abercrombie aims to patch last wounds of fight over pension tax

Gov. Neil Abercrombie, haunted politically by an unpopular pension tax proposal, has sought to assure seniors he will not support taxes on pensions or senior benefits if re-elected.

Abercrombie had proposed a pension tax in 2011 to help reduce a projected state budget deficit, an idea vehemently opposed by seniors and rejected by the Legislature after state Sen. David Ige, the governor’s Democratic primary opponent, refused to go along.

In an open letter to seniors and retirees in an advertisement in the Honolulu Star-Advertiser on Sunday, Abercrombie explains that nearly all options had to be considered in 2011 to close the deficit. Along with a pension tax, the governor had also proposed eliminating state Medicare Part B reimbursements for retired public workers and their spouses.

"I learned a valuable lesson and the message was heard loud and clear," the governor says in the ad. "We will never go back."

The pension tax has returned like a boomerang at Abercrombie at an inconvenient time in the primary campaign. Ige had brought up the issue as a campaign theme, but the governor’s decision this month to withdraw from three of four debates hosted by AARP Hawaii ensured that it would remain alive as a subplot.

The issue has also bled into the Democratic primary for U.S. Senate. At two debates last week, U.S. Rep. Colleen Hanabusa upbraided U.S. Sen. Brian Schatz for not publicly opposing the pension tax when he was Abercrombie’s lieutenant governor.

Schatz said he disagreed with the governor on the pension tax in private.

In Abercrombie’s tax and benefit adjustment plans to control the deficit during his first year in office in 2011, Ige said, "two-thirds of balancing the budget was really on seniors."

The state senator said it was not only Abercrombie’s policy recommendations, but his attitude that turned many people off. While the governor spoke of the need for shared sacrifice, he also had awkward confrontations with lawmakers at public hearings and with retirees at town hall meetings.

"I don’t know whether he thought he had a mandate because he won handily or whatever the case may be," Ige said.

While the pension tax turned out to be a political mistake, the idea grew from a sound policy rationale.

Hawaii is one of just 10 states that do not tax pension income, according to the National Conference of State Legislatures. The Tax Review Commission has explained that there is a disparity in the tax treatment of traditional pensions, known as defined-benefit plans, and individual retirement accounts and other defined-contribution plans, which are taxed.

But the commission has acknowledged the potential impact of a pension tax on seniors who have already planned for their retirement. The commission has urged policy analysts to monitor the shift toward taxable 401(k) plans and other defined-contribution plans, since market forces could lessen the disparity over time. If a pension tax is imposed, the commission has suggested that it be phased in over time and exclude an annual base amount of at least $50,000.

"Maybe the administration did not articulate it very positively," said Rep. Calvin Say (D, Palolo-St. Louis Heights-Kaimuki), who was the state House speaker at the time of the debate in 2011.

Abercrombie’s pension tax would have exempted many low- to middle-income retirees and would have generated about $112 million for the state each year. House lawmakers narrowed the proposal to higher-income seniors, which would have brought in about $17 million a year, and then shrunk its scope even further, so it would have targeted only wealthy seniors and produced about $7 million a year.

Ige, the chairman of the Senate Ways and Means Committee, dug in against any pension tax. While the move, in hindsight, was politically astute and has endeared him to seniors, he has also been fortunate that his advocacy for a general excise tax increase during the 2011 deficit debate has not become much of an issue in the primary.

Ige and his "Chess Club" faction of senators had wanted to keep a GET hike alive as an option, but Ige’s own Ways and Means Committee voted against the idea, a rare public split with a committee chairman.

The general excise tax is the state’s largest single source of revenue, and an increase would have had a far broader impact on the state’s economy than a pension tax.

Ultimately, House and Senate budget negotiators agreed to temporarily suspend GET exemptions on a range of business activities as the most significant tax change to reduce the deficit in 2011. That path, as Ige predicted at the time, never produced the amount of revenue lawmakers had projected over the following two years, but the economic rebound — driven by tourism — made the problem largely immaterial.

Abercrombie, at first, was defensive about the defeat of the pension tax and singled out AARP Hawaii.

"People are going to catch on to what the AARP is pretty soon, and I’m going to help them do that," the governor told the Star-Advertiser after the 2011 session. "I mean, the AARP is a business. It’s essentially a front for insurance companies."

In an interview with Civil Beat, the online news site, Abercrombie said he would "roll over" AARP.

But Abercrombie never revived the pension tax. This year, the governor called for income tax exemptions for low- to middle-income seniors and the doubling of a refundable food and excise tax credit for seniors. The ideas, like many proposed tax breaks and incentives, did not advance at the Legislature because of budget constraints.

Abercrombie, in his ad in the Sunday newspaper, says his administration will "continue to fight for a brighter future for Hawaii’s seniors," adding, "We are committed to easing your burden and improving the quality of your lives."