Wealthier isle taxpayers see most benefit from tax cuts

Hawaii taxpayers can expect to save around $1.3 billion this year from recently enacted federal tax cuts, but the near-term benefit to the state economy will be “very small,” according to a new report.

That’s the assessment of the University of Hawaii Economic Research Organization in a report released for publication today.

UHERO said much of the savings won’t necessarily be spent on local goods or services, and that the spending from tax savings that does occur won’t result in much job creation because virtually every capable person who wants a job already has one.

“The bottom line is that we should expect tax cuts to benefit households to the extent that they free up disposable income, more for some and less for others,” the report said. “But don’t expect a substantial effect on the overall path of aggregate (economic) growth.”

The report authored by UH economists notes that Hawaii economic growth is already stretched to its seams with record tourist arrivals forecast to rise another 3.7 percent this year, a construction industry atop a “healthy plateau,” and a maxed-out job market with 2 percent unemployment.

UHERO did say in its report that tourism, Hawaii’s main economic engine, could see benefits from mainland visitors arriving with more disposable income from the tax cuts, and that businesses that are reaping gains from the tax changes could elevate pay for workers and also spend more money in the long term on investments that benefit the local economy.

But the primary near-term impact from the tax cuts that took effect Jan. 1, according to UHERO, comes from additional disposal income spent by residents on local goods and services.

This spending impact, however, will be limited because most of the $1.3 billion will go to wealthier residents who generally consume a smaller proportion of their income than poorer households. Put another way, people who earn less spend more of what they earn to get by — and the folks with middle or lower incomes are getting relatively little of the tax savings.

“The vast majority of this money is going to people who make well over the median income,” said Carl Bonham, UHERO executive director. “They’re most likely going to save it, invest it, pay down debt or buy something somewhere else.”

On top of that, UHERO projects that Hawaii’s inflation rate, which was 2.5 percent last year, will rise to 2.8 percent this year and 3.3 percent next year. That would reduce some of the purchasing power for those who spend money from tax savings.

Brenden Donahue, a 24-year-old Honolulu resident who works in a surf and apparel store, expects less than $200 in tax savings based on an analysis by the nonpartisan Washington, D.C.-based nonprofit Institute on Taxation and Economic Policy that calculated savings for Hawaii taxpayers by income brackets.

Donahue has looked at his take-home pay since the start of the year and has yet to see any difference from last year.

George Choe, a district manager for a car rental company in town, also looked recently to see whether his after-tax income went up after the federal tax change. “I saw no change,” he said.

Likewise, state employee Aaron Joyce had been curious about how much he might be gaining from the tax overhaul. “I always look at my bottom line,” he said. “It hasn’t changed.”

The Institute on Taxation and Economic Policy estimated that Hawaii residents will save $1.3 billion next year from the tax cuts. Bonham said a similar amount can be expected this year.

For 2019 the institute calculated that 598,390 Hawaii taxpayers will pay less in federal taxes while 62,500 will see no savings and 53,310 will pay more.

The average savings for those with a reduction is $2,270, while those paying more would pay $1,030 on average.

Among all Hawaii taxpayers, the average tax reduction is $1,820. That’s about how much someone can expect to save if they earn the median income in Honolulu of $73,300.

The institute’s analysis said individuals earning less than $26,620 can expect to save $130 on average. People earning $44,590 to $66,980 can expect to save $870 on average.

At the higher end of incomes, individuals earning from $230,060 to $554,230 can expect to save $9,630 on average, while people earning over $554,230 can expect to save $39,420 on average.

The single group expected to take the biggest slice of tax savings are those earning $115,540 to $230,060. Their savings on average would be $2,880 and amount to $308 million.

Of the projected $1.3 billion in total savings, about $660 million would go to families and individuals, while about $245 million would go to pass-through businesses and about $370 million would go to corporations, the institute’s analysis said.