The state House Finance Committee voted early today to tax pension income but set the threshold significantly higher than Gov. Neil Abercrombie preferred.
The committee decided to impose the tax on single and married taxpayers filing separately with federal adjusted gross income of $100,000 a year, heads of households and surviving spouses who earn $150,000, and couples that make $200,000.
The bill, which now goes to the full House for consideration, would generate $17.2 million a year. The committee estimates that the pension tax would apply to less than 1 percent of taxpayers.
In contrast, Abercrombie’s proposal would tax pensions on single and married taxpayers filing separately with federal adjusted gross income of $37,500, heads of households and surviving spouses who earn $56,250, and couples that make at $75,000. The governor’s plan would bring in $112 million a year and is a critical element in his approach to closing a projected two-year budget deficit of $700 million. It would apply to 8 percent of taxpayers.
The state Senate Ways and Means Committee deferred action this morning on a pension tax option that has higher income thresholds than the governor’s proposal but lower than the House version. The Senate option would generate about $50 million a year.
While negotiations will continue during the session, it appears Abercrombie will not realize the revenue he expects from a pension tax and that lawmakers will have to find other ways to balance the budget.
"We intentionally went at that high income level," said state Rep. Marcus Oshiro, (D-Wahiawa), the chairman of the House Finance Committee.
Over the weekend, the committee had considered a hybrid option to exclude a certain amount of pension income from taxation, which the AARP Hawaii and others preferred as a lesser evil, but chose to base the tax solely on federal adjusted gross income.
The bill also repeals a state income tax deduction. But, like with the pension tax, lawmakers opted to set the income threshold significantly higher than Abercrombie proposed. Single and married taxpayers filing separately with federal adjusted gross income of $100,000 a year, heads of households and surviving spouses who earn $150,000, and couples that make $200,000 would lose the deduction.
The repeal would generate $17.9 million a year and would apply to about 4.9 percent of taxpayers. Abercrombie had hoped to bring in $63.7 million in fiscal year 2012, $79 million in fiscal year 2013, and $94 million going forward by repealing the tax deduction.
The three Republicans who serve on the committee voted against the bill. "We’re passing a ton of taxes," said state Rep. Barbara Marumoto, (R-Kalani Valley-Diamond Head), adding that she would rather see lawmakers make spending cuts first.
Oshiro countered that lawmakers will have the opportunity to propose their own spending cuts when the committee starts work on its draft of the budget this weekend. The governor has also called for spending reductions on welfare and Medicaid services.
"You’ll have the opportunity to propose cuts, believe me," Oshiro said.
The committee also announced on Monday that it may reconsider a vote taken on Saturday on a bill to end state Medicare Part B reimbursements for future public-worker retirees. Lawmakers are still reviewing the issue and the committee has scheduled a new vote for Wednesday afternoon. Abercrombie had proposed ending the Medicare reimbursements for all retired public workers.
Barbara Kim Stanton, the state director of AARP Hawaii, was disappointed by the committee’s vote on the pension tax. She said seniors did not cause the state’s budget deficit but are being asked to absorb a significant portion of the tax increases and benefit cuts.
"We are not looking for a free ride, but we want a fair ride," she said.
Recognizing that several of Abercrombie’s tax revision and spending cut ideas are faltering, the committee has moved out some of its own revenue-generating options that could be part of a budget solution.
Early today, the committee voted to lift general-excise tax exemptions on several business activities and impose a partial GET over the next few years. The businesses targeted would pay a GET that starts at 2 percent and reaches 4 percent over the next few years. The bill would generate $67.1 million in fiscal year 2012 and $192.1 million in fiscal year 2013 to help with the deficit.
Several business interests, including the Chamber of Commerce of Hawaii, oppose the bill. Business interests successfully fought a similar bill last year.
Lawmakers on the committee are working long hours to prepare bills for crossover between the House and Senate next week. The committee vote on the pension tax occurred after 2 a.m. today.