State House leaders are interested in providing income tax relief — an idea that has not had currency at the Legislature since the state was flush with a record budget surplus.
House Speaker Joseph Souki says the state’s top marginal income tax rate of 11 percent, approved in 2009 to help reduce the state’s budget deficit, is too high a burden on taxpayers. He would repeal the top rate at the end of 2014, one year sooner than scheduled, which would cost the state $48.6 million.
House Majority Leader Scott Saiki said lawmakers are also looking "to expand the concept to see if it’s possible to make it more of a middle-class cut, as opposed to just reducing the top bracket."
Details of a tax relief package will likely not emerge until the House and Senate move closer to a state budget agreement and identify the amount of money available to spend on new initiatives. Sen. David Ige (D, Pearl Harbor-Pearl City-Aiea), chairman of the Senate Ways and Means Committee, said he could add more shape to the idea this week when his committee takes up House Bill 694, the House’s tax relief vehicle.
Income tax relief could compete with an expansion of film production tax credits or cash incentives for entrepreneurs when lawmakers weigh economic stimuli before the end of session in May.
Souki (D, Waihee-Waiehu-Wailuku) said the state’s top 11 percent income tax rate — the second highest in the nation behind California, at 13.3 percent — not only falls on the wealthy, but also on small-business owners who report business income through personal income tax returns.
"We kind of want to change the paradigm from being extremely pro-labor, to try to be conscious that we need both business and labor as a balance," Souki told the Star-Advertiser’s editorial board last week.
Many House lawmakers also want tax relief for the middle class. Rep. Sylvia Luke (D, Punchbowl-Pauoa-Nuuanu), chairwoman of the House Finance Committee, and House Minority Leader Aaron Ling Johanson (R, Fort Shafter-Moanalua Gardens-Aliamanu), a vice chairman of the committee, are working through different options, including phasing in a tax break over time to soften the impact on the budget.
The Tax Foundation of Hawaii has told lawmakers that if they want to lower the top 11 percent income tax rate, they should do so now, rather than wait until the end of 2014, because "the sooner the rates are repealed the better the outlook would be for the state’s economic attractiveness." The foundation also urged lawmakers to cut state spending by $48.6 million, the amount of money the state would lose if the tax rate were repealed early.
Former Gov. Linda Lingle, a Republican, made tax relief an annual priority at the Legislature, and majority Democrats approved tax breaks aimed at middle- and lower-income taxpayers in 2007, the year after the state posted a record $732 million surplus.
But the recession quickly sapped state revenues.
Scrambling to close a projected budget deficit, the House and Senate raised income tax rates on the wealthy in 2009, along with increasing the hotel room tax and the conveyance tax on luxury homes sales, over Lingle’s vetoes.
Lawmakers made the income and hotel room tax increases temporary. The higher income tax rate is scheduled to expire at the end of 2015, while the higher hotel room tax rate would expire at the end of June 2015.
The Abercrombie administration has asked lawmakers this year to extend the higher hotel room tax rate beyond 2015 to provide greater revenue stability in the state’s six-year financial plan. The administration has also asked lawmakers to raise the conveyance tax on luxury home sales to help finance watershed protection.
Souki’s House leadership coalition — a rare partnership between an old-school tactician in Souki, progressives like Saiki and Luke, and more pragmatic minority Republicans like Johanson — is eager to show contrasts with former House Speaker Calvin Say’s 14-year reign. The House has moved legislation that had been bottled up by the more conservative Say — including emergency contraception for sexual assault victims and labeling of genetically modified imported produce — but it will take more time to determine whether the coalition represents a shift in ideology or simply a change in power.
The coalition’s interest in income tax relief, and a two-year budget draft that shrank Gov. Neil Abercrombie’s spending request by about $600 million, hint at a fiscal conservatism that many had previously credited to Say.
"Our group was painted as a tax-and-spend liberal coalition, but I think we’ve shown we’re far from that," Saiki (D, Downtown-Kakaako-McCully) told the Star-Advertiser’s editorial board.
Luke has clearly described House Bill 694 as a potential vehicle for income tax relief, a skeleton that could be molded if the House and Senate want to pursue tax relief as an option in conference committee.
But Say’s former lieutenants attacked the bill earlier this month as a tax break for the wealthy that would leave a $48.6 million hole in the budget. Sixteen lawmakers who had been loyal to Say voted against the bill when it cleared the House.
Rep. Marcus Oshiro (D, Wahiawa-Whitmore-Poamoho) said he and other lawmakers who voted against the bill are not opposed to middle-class tax relief, but expect details.
Oshiro said House leaders need to explain how Souki’s proposal to end the top 11 percent income tax rate early would be blended with a middle-class tax break and still cost the state about $50 million a year.
"The problem we had is there was nothing for us to consider, nothing for us to review. It was just mere speculation," he said. "What we saw before us was a tax cut for the upper 2 percent."
