Reduce tax burden on small businesses

In a still-recovering economy, it makes sense to provide modest tax relief for many of Hawaii’s small-business owners, especially when they pay some of the highest income tax rates in the country. Fortunately, legislative leaders are looking at ways to reduce those rates, along with those paid by the middle class.

Hawaii’s top marginal income tax rate is now 11 percent. The only state with higher rates is California, where voters last year hiked rates to 11.3 percent for those making $300,000, 12.3 percent for those earning $500,000 and 13.3 percent for those with incomes of at least $1 million.

A proposal before the Legislature would repeal the 11 percent rate at the end of 2014, a year earlier than the temporary increase that was enacted in 2009 in an override of then-Gov. Linda Lingle’s veto. She pointed out that 27,000 of the 37,000 taxpayers who would be hit were sole proprietors, partnerships or small business owners who report their business income through personal income tax returns.

"Small business owners who count their business income as personal income will find it more difficult to support and grow their enterprises," Lingle pointed out in her veto message. "This could mean more business closures, layoffs and fewer job opportunities."

The Legislature now appears to appreciate that negative effect on lower-paid workers, rather than seeing only a tax cut for the wealthy. House Speaker Joseph Souki is in favor of lowering the top rate early, and House Majority Leader Scott Saiki says he is looking into making it "more of a middle-class cut, as opposed to just reducing the top bracket," which would be a popular move.

Why wait until the end of next year, asks Lowell Kalapa of the Tax Foundation of Hawaii. If the higher rates are deemed unnecessary, he asks, why not scrap the higher rates at the end of this year? He suggests that the state cut spending by $48.6 million a year, which is what the state would lose if the wealthy taxpayers’ rate were repealed.

Souki’s leadership coalition with House Republicans is in favor of income tax relief and a two-year shrinking of Gov. Neil Abercrombie’s spending request by $600 million. Saiki told the Star-Advertiser’s editorial board last month that the House is not the "tax-and-spend liberal coalition" that critics feared.

Speaker Emeritus Calvin Say’s former lieutenants have attacked an early repeal of the 11 percent income tax rate, saying it would leave a $48.6 million hole in the budget, and 16 Say loyalists voted against the bill when it cleared the House.

However, that assessment fails to consider that the result is likely to benefit low- and middle-income residents who work for small businesses and contribute income taxes to the state’s coffers. The present coalition sensibly takes the longer view. Some tax relief now could prove the better option for stabilizing to the economy in the years ahead.