[ OUR OPINION ]
Hawaii is tax heaven
for affluent retireesHAWAII's taxes may be hellish for businesses but they are heavenly for well-heeled retirees. A magazine published by the Bloomberg financial services company ranks Hawaii No. 1 in the nation in terms of tax friendliness for an affluent couple in retirement, an improvement from a ranking of 16th in the survey taken four years ago. County and state lawmakers in the islands have provided well for senior citizens.
THE ISSUE
A national survey has shown that Hawaii's state and county taxes on affluent retired residents are lower than in any other state.
Bloomberg Wealth Manager magazine based its survey on state and local taxes paid by a hypothetical retired couple with no earned income, $20,000 in long-term capital gains, $5,000 in ordinary income, $20,000 in municipal bond income from another state, $10,000 from an IRA, $50,000 from a private pension plan and $34,312 in Social Security income. The couple owns a home valued at $500,000 and a one-year-old car that cost $50,000 new. The family spends $50,000, including $16,000 for food, $14,000 for medication and the cost of 600 gallons of gasoline.
The magazine calculated that the Hawaii family would spend $3,445 in state and county taxes, less than a third of the national average of $11,097 and a fifth of last-place Wisconsin's $17,756. Bloomberg credits Hawaii's four-year rise in the ratings from its lowering of income taxes. The explanation is puzzling because the reduction in Hawaii's top income tax rate from 10 percent to 8 1/4 percent was made in 1998 -- two years before the last survey -- and the state does not tax income from pension plans or Social Security.
Much of the reason for the top ranking is that Hawaii's property taxes are the lowest in the country, and homeowners get an extra break as they age. The exemption from the home's taxable value rises to $100,000 for those aged 65 to 69 and to $120,000 for those 70 and older. In most states, hefty property taxes are assessed by counties to pay for schools, while Hawaii's education bill is paid by the state from income tax revenue.
Bloomberg also ranked states according to taxes paid by three other imaginary families -- two with $500,000 in differing types of income and the other with $100,000 in income and most of its wealth in real estate. Not surprisingly, Hawaii ranked 31st and 36th for families with large incomes but second friendliest for the asset-rich family. For all the families, including the retired couple, Hawaii ranked 14th overall, compared with 39th in 2000, the biggest leap of any state.
Hawaii's top income tax rate may be reasonable for the wealthy. However, it can be a burden for people with middle incomes, because it is applied to incomes of more than $80,000 for a couple and $40,000 for a single taxpayer. Most other states have higher income thresholds before the highest rate is assessed.
"States on the mainland would be more like double that before you hit the top tax rate," says Thomas Pearson, an accounting professor and taxation expert at the University of Hawaii. Upward changes in the top tax rate and the threshold would be appreciated by Hawaii's middle class, even if it were to lower Hawaii's Bloomberg ranking.
