State’s poor face nation’s second-largest tax burden

The least wealthy income earners in Hawaii pay the second most in taxes of any state in the union, according to an analysis of tax systems across the country.

The study by the Institute on Taxation and Economic Policy found that the poorest residents in Hawaii pay 68 percent more in taxes as a portion of their income compared with the state’s wealthiest residents.

“It’s disappointing,” said Beth Giesting, director of the Hawai‘i Budget & Policy Center. “There’s room for upper-income people to pay a lot more in taxes.”

The study, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” analyzed tax systems, looking at such things as personal and corporate income taxes, property taxes, sales and excise taxes.

Overall, Hawaii was ranked the 15th most unfair state and local tax system in the country by the nonpartisan think tank in Washington, D.C.

As it did for 45 other states, the study labeled Hawaii’s tax system as “regressive” because of its tax burden on the poor.

“When tax systems rely on the lowest-income earners to pay the greatest proportion of their income in state and local taxes, gaps between the most affluent and the rest of us continue to grow,” the study says.

For Hawaii the study found that those in the bottom 20 percent of the income range pay out 15 percent of their income in state and local taxes, while those in the top 1 percent pay only 8.9 percent.

Only Washington state had a wider wealth gap in the effective tax rate.

Giesting said the problem in Hawaii is the state’s reliance on the general excise tax. The GET, as it is called, adds to the cost of everything from groceries to rent.

The result, she said, is families in the lowest tax brackets spend 10.5 percent of their incomes on the GET, compared with those in the top 1 percent, who spend just 1.2 percent of their earnings.

Giesting noted that Hawaii has some of the highest housing costs in the nation, along with some of the lowest wages in the nation when taking into account the cost of living.

“It does not make sense for us to pile on additional financial pressures with a high, inequitable tax burden on the residents who are struggling the most,” she said.

Nicole Woo, senior policy analyst with the Hawai‘i Appleseed Center in Honolulu, said there are a number of steps the state can take to help decrease the effective tax rate gap, including eliminating tax liability for workers in poverty.

Hawaii is one of only 15 states that taxes the income of residents living at or below the poverty level, Woo said.

The state could also exempt the first few thousand dollars earned from being taxed, allow the earned income tax credit to be refundable and raise the low- income household renters’ credit to a more reasonable level, she said.

Woo said that credit hasn’t been raised since it was established in 1981.

Giesting said asking the wealthiest residents to do more is in keeping with the values of Hawaii.

But Tom Yamachika, president of the Tax Foundation of Hawaii, said the state already has the second- highest state income tax rate for the most wealthy with an 11 percent top marginal income tax rate on those with an income over $400,000.

Yamachika said the GET is largely responsible for the regressive tax rates, but he doesn’t see lawmakers reducing the GET.

“The GET produces lots and lots of revenue,” he said.

Keli‘i Akina, president and CEO of the Grassroot Institute of Hawaii, said the poor in Hawaii are taxed at a disproportionate rate, largely because of the regressive nature of the GET.

“But this doesn’t mean that the rich are not paying their fair share of taxes,” Akina said in an email. “Those with higher incomes are also disproportionately taxed in our state. The solution is to reduce taxes on everyone. That will leave more money in the economy for consumers and businesses, and that will generate more tax dollars for the government.”

Hawaii escaped being named in the study’s “Terrible Ten,” the states with the most regressive tax structures: Washington, Texas, Florida, South Dakota, Nevada, Tennessee, Pennsylvania, Illinois, Oklahoma and Wyoming.