The governor’s proposal to tax pensions came as a shock to Hawaii’s seniors whose fixed incomes are no match for rising costs. This is confirmed by the consumer price index, which shows a 70 percent increase for Honolulu over the past 20 years.
Bills proposed by both the governor and the Legislature target retiree pensions to close the state’s budget deficit.
This major change in tax policy opens the door to taxing employer-based pensions for the first time.
Although legislative leaders gave assurances only the wealthy would be targeted, and the governor stated that the most vulnerable would be spared, many seniors still fear this is only the first step down a slippery slope that could lead to taxing pensioners with moderate or lower income.
The House Finance Committee recently advanced House Bill 1092, HD1, raising income thresholds considerably above those proposed by Gov. Neil Abercrombie. The bill taxes pension income on singles and married taxpayers filing separately with federal adjusted gross income (FAGI) of $100,000 a year or more, heads of households and surviving spouses who earn $150,000, and couples who make $200,000. The bill will generate $17.2 million a year. Other bills propose lower income threshold levels.
Regardless of the threshold levels, the inescapable fact is that this and other tax pension bills is still a new tax that is being sprung on retirees retroactively to Jan. 1 of this year. Affected retirees will not have enough time to plan before they have to make an unexpected tax payment in the next year.
If pensioners are taxed, it should be fair and allow for a phase-in period allowing for adequate planning time.
The taxation of pensions is a major change to tax policy that may have a financial impact on many people. The issue of a new tax deserves thoughtful, informed community dialog on what other proposals were considered. For example, why wasn’t eliminating tax credits considered before opening the door to taxing pensions? This new tax could have far-reaching effects on the quality of life of retirees who worked all of their lives to achieve a secure future.
AARP believes we must work together to address the state’s budget crisis — which affects all of us. Though wary of new taxes, seniors understand the need for shared sacrifice and the need to do their fair share. Seniors want to be assured that if there are tax increases, they will be applied equitably and the revenues will be used for critical community services.
That said, AARP is deeply concerned that the pension tax bills that have been considered by the Legislature are flawed.
First, there are legal concerns that may decrease projected revenues. Federal law prohibits taxing pension income of nonresidents living in Hawaii (Public Law 104-95). Furthermore, the Hawaii Constitution (Article XVI, Section 2) states that accrued benefits of retirees in the state retirement system shall not be diminished or impaired. As such, the tax proposals on pensions may have legal repercussions if applied retroactively.
Second, this bill and any bill that taxes pensions by using the federally adjusted gross income causes inequities because it’s an all-or-nothing tax proposition. An individual’s entire pension income would be unfairly taxed if it were only $1 over a certain income threshold, while not taxed at all if it were under the threshold.
Third, Social Security, while technically not taxed, is taxed de facto because those benefits are included as part of the income threshold used to qualify pensions for taxation.
Taxing pensions may be a way for the governor and the legislators to balance the budget — but we must remember this is about real people, not just budget numbers.