POSTED: 1:30 a.m. HST, Feb 2, 2011
Many of Hawaii's growing number of seniors are understandably fuming about Gov. Neil Abercrombie's proposal to begin taxing private pension benefits. But it's an idea worth exploring, provided that any such income tax increase be limited in both scope and time frame to contain what is sure to be a political bombshell for legislators.
Hawaii has a reputation as a welcome home for retirees because of its relatively low property taxes and no income tax on employer-based pensions. Hawaii is among 10 states to exempt those pension benefits among the 41 states that have income taxes at all.
Abercrombie's proposal came as a surprise to many because he stated in a campaign brochure last October that he would "have room in the general fund ... to restore broken services and for making smart public investments without raising taxes (his italics)." He more often promised not to increase the general excise tax.
The governor needs to hold true to his pledge — or at the very least, absent his comprehensive budget plan not expected until next month, must justify where the taxes raised would go. The hope is that he is working just as vigorously to cut spending as he's now attempting to generate revenue.
Under Abercrombie's bill before the Legislature, retirees would be taxed on private pension benefits that, together with other income, including Social Security benefits, exceed $37,500 annually for those filing singularly, $56,250 for heads of households or surviving spouses and $75,000 for those filing joint returns. Retirees living under that income level would be exempt. The state tax on pension income is projected to generate $114 million a year.
For example, a single person receiving $2,000 a month in Social Security benefits and $1,000 a month in private pension benefits — totaling $36,000 — would not be affected at all. However, if each of those sources amounted to $2,000 a month — totaling $48,000 — the $10,500 exceeding the threshold would be taxable at the rate of 6.4 percent for that amount. Affected most would be those receiving Social Security and private pension benefits prior to retirement or receiving significant side income after retiring.
A survey published nine years ago by the Bloomberg financial services company ranked Hawaii No. 1 in the nation in tax friendliness for the affluent in retirement — those with incomes of at least $80,000 for a couple and $40,000 for a single. Retirees with those incomes, including private pension benefits, would be slightly affected by the pending legislation.
Not surprisingly, AARP is receiving strong opposition to the proposal from its members, who are at least 50 years old and enjoying — or coping with — retirement or preparing for it. Some opposition rolling around the community, though, has been heavy on anti-tax instinct but short on detail absorption.
The proposal to tax pensions deserves to get a hearing before the Legislature — and it now behooves state tax officials to clarify the extent of the proposal's effect on Hawaii's retirees, who are totaling more and more of the islands' population with each year and will number more as baby boomers retire.
Many people have made decisions affecting their employment and retirement based partly on tax policies. Any increase in pension taxation aimed at helping Hawaii through the nation's economic troubles should recognize that reality by making the change temporary, with a two- or three-year sunset clause to allow review of its effects on senior citizens.