Study finds tax
reform would
hurt pensioners

The analysis shows high-income
families would benefit the most

By Rob Perez
Star-Bulletin

The proposed tax changes recommended by Gov. Ben Cayetano's economic task force would benefit high-income households more than moderate-income ones, according to a preliminary analysis by one of the nation's largest accounting firms.

The analysis, done by Katherine Ordona Szem, tax partner at Arthur Andersen LLP's Honolulu office, shows that the tax savings as a percentage of income generally increase as the income level increases, providing greater benefits to the wealthy.

This is the first independent analysis showing how individual families would fare under the Economic Revitalization Task Force proposals.

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Szem's findings are certain to add to the already contentious debate over the recommendations just as legislators begin to decide whether to approve the proposals. The legislative session opened Wednesday, with the task force package at the top of the agenda.

While the 26-member task force came up with numerous recommendations to boost the economy, the tax plan easily has generated the most controversy.

The panel is proposing the steepest income tax cuts in state history -- 40 percent over three years for all income brackets -- but also is recommending a 34 percent increase in the general excise tax.

Proponents claim the changes would save most taxpayers money, but Szem's analysis shows one group who clearly wouldn't benefit: retirees living on pensions.

Even though retirees pay no state income tax on their pensions (Hawaii is one of only 11 states that doesn't tax pensions), their tax burden would increase primarily because of the excise tax increase, according to Szem's figures.

Ray Kamikawa, Cayetano's tax director, downplayed criticism that the proposed changes would make the state's tax system more regressive. "You just don't look at the top end and say, 'Hey, look at the big tax break they're getting,' and conclude it's regressive," Kamikawa said.

He noted that the plan includes two tax credits for low-income people, providing them with greater proportionate savings than other income groups -- a contention Szem agrees with. "Overall, we're taking care of lower wage-earners with these tax credits," Kamikawa said.

He also said the task force's aim was to provide incentives for investment and production in Hawaii, which meant lowering taxes for everyone, including those at the top end.

Whenever broad-based changes are made in the tax system, there always will be groups who benefit more than others, Kamikawa added. But the notion that the rich will see greater benefits at a time when the state has had to trim public services doesn't sit well with some people.

"I think it's unconscionable to consider giving tax breaks to wealthy people in our state, which results in cutting services to the poorest people in our state," said Kathleen Hasegawa, executive director of the Affordable Housing and Homeless Alliance.

Hasegawa was among those attending a closed meeting last night in which Szem discussed her analysis with a handful of legislators, task force members and others.

Szem's study, completed only late yesterday afternoon, looks at four different households (see chart). It shows how each household would be affected under the first year of the proposed changes, including the impact of the excise-tax increase.

It also shows how the two higher-income households end up paying more in federal income taxes because they have less in state income taxes to deduct from their federal return. But for the net effect -- whether someone pays more or less in total taxes -- the households with the higher incomes have the greater tax savings, according to Szem's analysis.

Even if the federal tax is excluded, the regressive effect would remain for all four households, the study shows. Asked if that trend would show up at other income levels besides the very lowest, Szem replied, "That's probably a fair statement."

Szem did the analysis at the request of Rep. Scott Saiki, who last night declined comment on her findings, saying he needed more time to review them.

Saiki (D, Moiliili-McCully-Ala Wai) is among a group of House and Senate Democrats crafting an alternative economic plan.

In addition to being in charge of Arthur Andersen's taxation business locally, Szem is a member of the taxation committee of the Chamber of Commerce of Hawaii. The chamber has endorsed the task force plan.

Her findings tend to support one of the major conclusions of a recent analysis by the Center on Budget and Policy Priorities, a Washington, D.C., think tank. That study concluded that the tax proposals likely would make Hawaii's tax system more regressive.