If you are wondering how the federal tax bill approved by Congress on Wednesday will affect you personally as a Hawaii taxpayer, here is the bottom line: It depends.
The nonprofit, nonpartisan Institute on Taxation and Economic Policy has compiled data for Hawaii that show a wide variety of possible effects of the bill on Hawaii taxpayers depending on their personal circumstances.
According to the institute, the overwhelming majority of Hawaii taxpayers — more than 598,000 — would enjoy tax cuts of varying sizes in 2019 under the bill, which President Donald Trump is expected to quickly sign into law.
However, another 53,000 Hawaii taxpayers will see their taxes increase under the new law, known as the Tax Cuts and Jobs Act, ITEP said.
The measure has been fiercely criticized by Hawaii’s all-Democrat congressional delegation, with U.S. Sen. Mazie Hirono describing the tax bill as a “scam.” U.S. Sen. Brian Schatz said the bill “rewards wealth over work, at the expense of the middle class and our children and grandchildren.”
U.S. Rep. Tulsi Gabbard, 2nd District (Rural Oahu, Neighbor Islands), said the bill “was written by and for lobbyists and the corporations who sign their paychecks.” U.S. Rep. Colleen Hanabusa, 1st District (Urban Honolulu), charged the measure “helps the wealthiest Hawaii residents protect their assets while raising taxes on lower-income Hawaii families.”
The often-repeated criticism by Democrats in Congress is that most of the benefits of the tax cuts will accrue to the wealthiest taxpayers, and that certainly holds true for Hawaii, according to the ITEP analysis.
Data compiled by the institute show that the richest 1 percent of Hawaii taxpayers with incomes greater than $554,230 would enjoy an average tax cut of $39,420 in 2019. That select Hawaii group includes about 6,900 taxpayers, and they would enjoy a combined tax reduction of more than $280 million under the new law, according to the ITEP data.
By contrast, the poorest 20 percent of Hawaii taxpayers with incomes of less than $26,620 would receive an average tax cut of $130 in 2019. Their combined share of the federal tax-cut pie is just $17.7 million.
About 94,400 Hawaii taxpayers in that lowest-income category would receive that average $130 tax cut, but not everyone in that group will fare so well.
According to ITEP, another 39,600 Hawaii taxpayers who earn less than $26,620 would see no change in their tax burdens, and 7,600 others in that group would actually see their federal taxes increase.
That wide range of outcomes from the tax bill is caused by different taxpayers’ personal circumstances. For example, large families receive much greater benefit from the child tax credit.
Tax policy economist Molly Sherlock at the Congressional Research Service said the confusing differences in outcomes for individual taxpayers are due to the nature of the bill.
“This is a very large piece of legislation, there’s a lot of moving parts, and for any one family in a certain income range, there can be a lot of different outcomes,” Sherlock said.
Still, most middle-income Hawaii residents will enjoy a significant tax cut under the new law, according to the ITEP data.
Hawaii taxpayers with incomes ranging from $66,980 to $115,540 will receive an average tax cut worth $1,680 in 2019, while Hawaii families with more modest incomes ranging from $44,590 to $66,980 will receive tax cuts averaging $870, according to the institute.
ITEP calculates that 256,000 Hawaii taxpayers in those two income groups will receive tax cuts, but another 21,400 taxpayers in those same income ranges would see their taxes increase in 2019 under the new law.
Seth Colby, tax research and planning officer with the state Department of Taxation, said there are “a million moving parts to the bill,” making it very difficult to gauge the local impact.
Major features of the new law include reductions in the corporate tax rate to 21 percent from 35 percent, lower personal income tax rates for each income level, and provisions that nearly double the standard tax deduction. The tax cuts for businesses will be permanent, but tax cuts for individuals are scheduled to end after 2025.
The tax cut package is expected to cost the federal government nearly $1.5 trillion in lost revenue in the next decade.
Colby said the final version of the bill is “slightly more favorable to Hawaii” than earlier versions because it allows residents to continue to deduct from their taxable incomes up to $10,000 of the state and local taxes they pay. That is a significant issue in states like Hawaii, California and New York where residents pay relatively high state and local taxes.
The interest deduction for mortgages also will continue under the new law, up to a maximum mortgage of $750,000. That is a smaller interest deduction than is allowed under current law, which allows interest deduction for mortgages of up to $1 million, but Colby noted that change mostly will affect higher-income taxpayers.
Other federal proposals that were particularly worrisome to some Hawaii residents were abandoned in the negotiations over the bill, Colby said. That includes plans to eliminate the deduction for interest paid on student loans, and plans to tax tuition waivers as income, ideas that were both dropped.
“Most people’s tax cuts are going to be a couple hundred bucks,” Colby said. “There is going to be more money within the economy sloshing around, and that should help.”
Total value of the cuts
University of Hawaii economics professor Carl Bonham cited ITEP’s estimate that the total value of the tax cut for all Hawaii residents and families will be about $660 million in 2019, while Hawaii corporations will see their tax bills reduced by $366 million.
“Most of that is for the top of the income distribution, the top 40 percent of taxpayers, and they don’t necessarily spend that tax cut,” Bonham said. For example, if people deposit that tax cut windfall in their retirement accounts, “it doesn’t really change Hawaii’s overall economy much at all.”
“In terms of creating growth in Hawaii, the people who are going to spend the tax cut are the people in the middle of the income distribution and below,” he said.
The total value of the tax cuts for Hawaii residents who make less than $67,000 is about $159 million in 2019, according to ITEP. Even if they spent all of that money within the state, it would cause only a tiny amount of growth in the local economy, he said.
Republicans in Congress argue that cutting taxes on the wealthy and corporations will stimulate growth that will benefit everyone, but Bonham said the GOP has overstated the likely economic benefits of the tax cuts.
Interest rate increase
Since the national economy is already quite strong, any extra economic boost likely will prompt the U.S. Federal Reserve board to raise interest rates more quickly, which tends to dampen economic growth, Bonham said.
“We’re not going to grow our way out of these deficits that are being created by the tax bill,” he said.
Colby was also skeptical that the tax cuts will do much to spur investment and growth.
“Money’s pretty free right now, and corporations are actually investing at lower rates than they did 10 or 15 years ago, so that shows to me that the binding constraint on economic growth is not the cost of capital or the amount of money that’s floating around,” Colby said. “That’s my hypothesis. We’re going to see what happens.”