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The Legislature is between a rock — needing to close a gap between available revenues and the cost of government — and a hard place — the notion of taxing pensioners, who are have a history of staunchly defending their turf.
The proposal to tax pensions as one means of erasing a $1.3 billion deficit had been shelved but now is resuscitated in Senate Bill 570, which has until tonight to emerge from the House-Senate conference room. It’s the least objectionable of the very few options remaining to raise a significant amount of revenue, which is needed to produce a balanced budget.
Getting it through the goalposts is going to require political courage from lawmakers; they hate angering an interest group who generally turn out at the polls in large numbers. They may be able to muster that courage if they ultimately can defend how taxpayer money will be spent in the next two lean years.
Judging by how the budget bill has proceeded so far, legislators are going to need a major infusion of taxes, at least for the short term, to keep their allotments in black ink. There are smaller pots of new cash being considered, but the biggest hole can’t be filled without a substantial revenue stream. Some have been ratcheting up the pressure to raise the general excise tax, but this would jeopardize the broader economic recovery.
The pension tax would narrow the focus of new taxation to the group that has pension income, previously untaxed by the state. Among the 41 states that have an income tax, Hawaii is one of only 10 that exempt pension income from its reach.
The pension tax bill is in flux, but here’s the basic shape of it: A reasonable income threshold would be set, with the tax levied only on the pension of taxpayers whose federal adjusted gross income crosses that line.
Lawmakers certainly should raise it above what Gov. Neil Abercrombie originally proposed: $37,500 for individuals, projected to raise about $112 million yearly. The later compromise bill, the one currently under review by conferees, set it too high: With the line set between $100,000 for individuals and $200,000 for couples filing jointly, less than 1 percent of taxpayers would be affected and only an estimated $17.2 million would be generated.
Given that the need for revenue is dire — and driven by temporary economic conditions — legislators could reasonably lower the threshold to draw in more taxpayers. As it is, the reward is hardly worth the risk.
And there is a risk to be considered. Hugh Jones, supervising deputy attorney general, wrote that the pension tax "could be the potential subject of a legal challenge on the grounds that they may violate article XVI, section 2, of the Hawaii Constitution, or may impair the Contracts Clause of the U.S. Constitution." That state Constitution bars the state from taking action that would diminish accrued benefits in labor contracts, as in the case of state and city workers who accrue a pension.
But a different article of the state Constitution holds that "the power of taxation shall never be surrendered, suspended or contracted away," so the outcome of any lawsuit filed on the tax is unclear. Jones underscored that he was not advocating against passing the bill.
The Legislature should approve a temporary pension tax that raises enough to help the state through its current crisis. It should set a sunset date in an election year — not in the off-year of 2015, as is proposed now. This will help drive the administration to work toward the less costly government it promised, and compel lawmakers to prove they are good stewards of the public purse.
