TAXWatch: National Attention!

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We in Hawaii are getting national (and some international) attention.

But not the good kind.

Witness an editorial from the Wall Street Journal that was published on March 12, 2021, titled “Confiscation in Paradise:  Move to Hawaii, pay the nation’s highest state income-tax rate.”

The state Senate voted Tuesday to raise the top income-tax rate to 16% from 11%. This would leap above the 13.3% California takes from its highest earners, or the 12.7% that New York City dwellers pay. Oh, and Hawaii’s top rate would kick in at a mere $200,000 of income. It would also slam many small business owners who pay taxes at the individual rate. As if they haven’t suffered enough during the Covid lockdowns.

The bill would also raise Hawaii’s capital-gains tax to 11% from 7.25%, a blow that will fall heavily on the state’s retirees. The top rate on corporations and real-estate investment trusts would rise to 9.6% from 6.4%. Legislators are shaking every conch shell in a mad grab for new revenue. …

Hawaii’s new tax increases would supposedly last through 2027, taking far more out of the economy than needed to make up for a sluggish 2020. But “temporary” tax hikes almost always become permanent as politicians rush to spend the new revenue and refuse to cut spending when the higher tax rates are set to expire.

The comments of the Wall Street Journal are not alone.  Other news services around the country also are commenting on features of the “Enola Gay” bill, Senate Bill 56, a previous version of which we discussed just a couple of weeks ago.  There were stories, for example, in U.S. News & World Report, the San Francisco Chronicle, and Shine, an English-language news service in China related to the Shanghai Daily.

According to a 2017 article by the Brookings Institution, the overwhelming majority of businesses are not C corporations subject to the corporate income tax.  About 95% are in passthrough entity form where the business owners, rather than the business entity, are taxed at their individual income tax rates.  So, a steep hike in the individual income tax will fall upon businesses, and we can expect that the tax bite swiftly will be reflected in the prices of goods and services that those businesses provide.  Lots more of us will feel the bite than just “the rich.”

And even if people directly affected by the tax hikes can’t pass them on, another option they have is to “get out of Dodge” – jump on a plane and move somewhere else.  Our state population in the past few years has been going down, not up, and a study from the American Legislative Exchange Council sums it up by saying:  “Unless high-tax states mend their ways, low-tax with pro-growth policies will benefit from the resulting flow of capital and people.”  The result?  “Data clearly shows that low tax burdens enhance a state’s chances of performing well economically…. On the other hand, a high tax burden reduces a state’s chances of performing well.  Of course, other policy variables impact economic performance, but tax burden is most consequential.”

With all of these prospects for negative economic consequences, do we really want to be in the national spotlight for having the absolute, tip-top, undisputed first place ranking for the highest tax rates imposed on individuals?

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Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.