State lawmakers have advanced a pension tax but have targeted fewer taxpayers than Gov. Neil Abercrombie recommended, which would generate far less revenue than the governor had sought to help balance the state budget.
The House Finance Committee voted early yesterday 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 who make $200,000.
House Bill 1092, 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 who make $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. The tax would affect about 8 percent of taxpayers.
Senate leaders indicated yesterday that they would consider the House version, not Abercrombie’s recommendation.
Sen. David Ige (D, Aiea-Pearl City), chairman of the Senate Ways and Means Committee, said senators might also look at excluding a certain amount of pension income from taxation in addition to the federal adjusted gross income triggers.
During the weekend, the House Finance Committee had reviewed that option — which the AARP Hawaii and others preferred as a lesser evil — but chose to base the tax solely on federal adjusted gross income.
"We are not going to take Abercrombie’s original bill," Ige said.
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» For more information about the pension tax bill (HB1092) and the GET exemption bill (HB799), go to www.capitol.hawaii.gov/session2011.
While negotiations will continue during the session, it appears Abercrombie will not achieve the revenue he expects from a pension tax and that lawmakers will have to find other alternatives to balance the budget.
Several lawmakers said that while they agree a pension tax would bring more equity to the tax code, they want to shield lower- and middle-income retirees.
"We intentionally went at that high income level," said state Rep. Marcus Oshiro (D-Wahiawa), chairman of the House Finance Committee.
The House bill also repeals a state income tax deduction. But, as 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 making $200,000 would lose the deduction.
The repeal would generate $17.9 million a year and would affect 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 thereafter by phasing out the tax deduction on a larger pool of taxpayers.
The three Republicans who serve on the committee voted against the bill. "We’re passing a ton of taxes," said Rep. Barbara Marumoto (R, Kalani Valley-Diamond 0Head), adding that she would rather see lawmakers make spending cuts first.
Oshiro countered that lawmakers will have the opportunity to propose 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 might reconsider a vote taken Saturday on a bill to end state Medicare Part B reimbursements for future public-worker retirees. Abercrombie had proposed ending the Medicare reimbursements for all retired public workers.
The committee announced yesterday that it would reconsider a vote taken earlier yesterday to fund Abercrombie’s 60-40 percent split on employees’ health care premiums. Lawmakers are still reviewing implications of both bills.
Barbara Kim Stanton, 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.
"The question pensioners are asking is how will this new tax impact them?" she said in an e-mail. "If it doesn’t affect them now, will it in the future? Is this the first step of a new policy that will eventually tax all pensioners, including those with moderate or lower incomes?
"Seniors are well aware of the serious budget shortfall and are willing to pay their fair share. But doesn’t a new tax deserve thoughtful, informed community dialogue on what other proposals were considered?"
Recognizing that several of Abercrombie’s tax revision and spending cut ideas are faltering, the House Finance Committee has moved out some of its own revenue-generating options that could help balance the budget.
Early yesterday the committee voted to lift general excise tax exemptions on several business activities and impose a GET on those activities in the next few years. The businesses targeted would pay a GET that starts at 2 percent and reaches 4 percent through the next few years. House Bill 799 would generate $67.1 million in fiscal year 2012 and $192.1 million in fiscal year 2013 to reduce the deficit, and larger amounts in the following two fiscal years to help with the state’s financial plan.
Several business interests, including the Chamber of Commerce of Hawaii, oppose the bill. Business groups successfully fought a similar bill last year.