8 takeaways from the state tax system review

Hawaiʻi Tax Review Commission members released the final draft of their study of the state’s tax system on Nov. 8. According to the Hawaiʻi State Constitution, a tax review commission must be appointed every five years to evaluate the state’s tax structure and recommend revenue enhancement and tax policy strategies to lawmakers.

For the 2018 legislative session, some of the commission’s suggestions will serve as the foundation for revenue enhancement proposals considered by the House Finance and Senate Ways and Means Committees, respectively chaired by Rep. Sylvia Luke and Sen. Donovan Dela Cruz. Below are eight highlights and lowlights of the commission’s report.

Taxes worth collecting

1. Tax justice: To make the tax code more fair for working families, tax commissioners propose increasing the state income tax’s standard deduction to $7,500 for single filers, $10,950 for head of household filers, and $15,000 for married filers. Because low-income filers are less likely to itemize their taxes than high-earners, increasing the standard deduction helps to offset the disproportionately high income tax burden felt by working families.

Additionally, commissioners recommend doubling the state’s food/excise tax credit to assist impoverished residents who spend a larger percentage of their incomes on food than their affluent neighbors (Honolulu residents spend 15 percent of their income on food overall, according a 2016 state analysis).

Together, these measures would result in an approximately $86 million revenue reduction, per commission assessments. To close the shortfall, legislators should advance the most progressive of the commission’s revenue enhancement suggestions: raising the corporate income tax to a flat 9 percent and phasing out lower tax brackets for taxpayers earning over $100,000 annually (with such filers paying the top tax rate on every dollar they earn over $150,000). In 2023, commissioners believe that a 9 percent flat corporate tax would produce $185 million, while a rate recapture for rich residents would generate $268.8 million, totaling $453.8 million in new revenue to promote the common good.

2. Carbon tax: Hawaiʻi is the most fossil fuel-dependent state in the nation, owing to our economic reliance on tourism, the military and the shipping industry. Under the Hawaiʻi Clean Energy Initiative, however, our state set a goal of becoming 100 percent clean energy-reliant by the year 2045. Under the Global Warming Solutions Act of 2007, Hawaiʻi also has a mandate to reduce greenhouse gas emissions to 1990 levels by 2020.

A 2016 Brookings Institution report found that Hawaiʻi could generate an immediate $365 million through the implementation of a carbon tax, which would be imposed on high-volume burners of carbon-based fuels—coal, oil, and gas. While revenue generated would diminish over time as carbon levels decrease, the tax would stimulate clean energy innovation and account for the fiscally unchecked costs of market activity on climate change.

3. Cigarette and alcohol taxes: I like fine wine and a good cigar. I readily admit that smoking is cancerous, however, and that excessive drinking and associated risky behaviors—in particular, drunk driving—remain a problem. When the Congressional Budget Office summarized existing research on how tobacco taxes affect consumption, it found that a 10 percent increase in cigarette prices reduced underage smoking by 5–15 percent. Increasing the state’s cigarette tax to $4 per pack and the alcohol tax by 10 percent would generate over $29 million, according to commissioners, which could be used to expand cancer research and alcoholism intervention programs.

4. Sugar tax: Commissioners estimate that revenue earned from the so-called “sugar tax,” a tax on sugar-sweetened beverages, could bring in $48.8 million in 2018 and $55.4 million by 2023. Nonalcoholic beverages account for only 0.7 percent of household expenditures, according to the report, but overconsumption of sugar-sweetened drinks is linked to heightened rates of obesity, heart disease, dental decay and type 2 diabetes. Like the GET, a sugar tax is disproportionately levied on those who can least afford it, making rich people’s lives even sweeter. If used to subsidize community health and prekindergarten programs in high-poverty areas, on the other hand, the sugar tax could be a boon to the overall wellness of working families.

Taxes that should be tabled

5. Raising the GET: Commissioners believe that increasing the general excise tax to 4.5 percent statewide would generate an additional $415 million in 2018 and $493 million in 2023. There is no revenue enhancement method that creates as much money for state services as hiking the GET. However, there is also no proposal with a similarly regressive impact on low-income residents. According to U.S. Census data, roughly 56 percent of Hawaiʻi residents are “cost-burdened,” paying at least 30 percent of their income toward rent. A 2016 QMark Research survey found that nearly half of respondents say they are living paycheck-to-paycheck. Policymakers cannot justify increasing state’s most ubiquitous tax at this time when so many residents are denied the promise of paradise.

6. Pension tax: Currently, Hawaiʻi is one of 10 states that exempt all pension income from taxation. Commissioners suggest lowering the value of the state’s income tax exemption for pensions to $25,000, generating a projected $47.8 million in revenue in 2018 and $63.2 million in 2023. Yet, taxing pension income would impose a massive tax hike on the labor force, especially retirees on fixed incomes, during a year in which the United States Supreme Court is expected to rule against labor unions in Janus v. AFSCME, undermining labor organizations’ capacity to collect resources from members and, in turn, diminishing workers’ power at the bargaining table and in the political arena.

7. Alternative accommodations tax: As Gov. David Ige negotiates a clandestine tax deal with Airbnb, tax review commissioners argue that ensuring alternative accommodations pay the transient accommodations tax could bring in $136 million in 2018 and $204 million by 2023. Opponents of the idea rightfully contend, though, that alternative accommodations deplete the local housing supply and drive up rental costs. A recent study of 100 metro areas found that for every 10 percent of growth in Airbnb listings, a zip code’s average rent increased by 0.4 percent.

Hawaiʻi needs 65,000 to 80,000 new housing units over the next decade to meet demand. Since a full-time worker must earn $35.20/hour to afford a two-bedroom apartment and a minimum wage employee must work 116 hours a week to afford a one bedroom rental at fair market value in the islands, according to the National Low Income Housing Coalition, elected officials should focus on constraining housing price surges and expanding the supply of affordable rentals to the islands’ thousands of low-income renters.

8. Medical marijuana tax: The commission proposed levying a 15 percent tax on medical marijuana transactions, which they estimate will produce $13.2 million of revenue for the state in 2018 and $40.3 million in 2023, assuming a 25 percent annual sales increase. Hawaiʻi is still suffering birth pangs from allowing medical marijuana operations to set up shop, however, having taken 16 years to authorize the first dispensaries after medical cannabis was legalized in Hawaiʻi in 2000 (the first of which, Aloha Green, opened in Honolulu in August of 2017, but ran out of product and was forced to temporarily close because of high demand.) Before considering tax schemes that might hamper access to an emergent medical treatment, legislators should focus on ensuring an efficient delivery of medical cannabis marijuana to patients. If elected officials truly want to profit from marijuana sales, they should legalize possession of one ounce of cannabis or less and tax ensuing sales of commercial cannabis products.

When the tax code is revised to be more efficient and bring in more revenue, everyone benefits. The more tax dollars the state can accumulate, the greater the reach of the public services our government can offer. Yet, revenue generation must be carefully balanced with the needs of the islands’ most vulnerable residents, so that our collective financial sacrifices reflect our spirit of aloha and magnify our ability to mālama one another and the ‘āina we call home.