Surplus fuels tax reform
From rebates to new spending to indexing, ideas on how to use the funds are growing
A booming economy and a growing state surplus are increasing the speculation that this will be the year for major changes to Hawaii's tax laws.
Gov. Linda Lingle's administration is estimating the state's two-year surplus at more than $700 million, prompting Lingle to call for $346 million in tax cuts over the next two years.
At the same time the state Senate this year set up a special committee to deal with taxes, the Economic Development and Taxation Committee headed by veteran Sen. Carol Fukunaga (D, Lower Makiki-Punchbowl).
The problem in years past, Fukunaga said, is that taxes are reviewed only after all other building blocks of the budget are set into place.
"Usually it is just whatever time you have left you look at what you can squeeze in -- the one or two tax things you can afford," Fukunaga said.
"In recent years, we have seen you can use tax policy as a much more dynamic tool in terms of state growth and diversification," said Fukunaga, a supporter of using tax credits to encourage new business.
"We put a lot of money into visitor industry development and we generally don't put it into economic diversification," Fukunaga said.
Other Senate leaders are also looking at taxes not to just collect money, but to shape Hawaii's social and business climate.
Senate President Colleen Hanabusa replaced Sen. Robert Bunda as leader in the Senate. Bunda had urged that taxes should be cut to help the middle class, while Hanabusa wants tax changes to influence state policy.
"The state should look at tax relief as a vehicle by which we can enhance the quality of life of our citizens. It is a great opportunity to address the state's pressing needs," Hanabusa (D, Nanakuli-Makua) said.
Besides creating jobs and new industries, the legislators this year must deal with a constitutionally required tax rebate, which was put into the state Constitution in 1978 to satisfy government critics who said the state was collecting too much in taxes.
If the state's general fund exceeds general fund revenues for two years in a row, the public must get a rebate, but the amount is left up to the Legislature to decide. Some years, such as 1992, it has been as low as $1.
Lingle suggests a $100 rebate for each member of a family earning below $100,000, so a family of four would get $400. Lingle estimates this would cost the state $91 million.
Legislators, however, said they thinks voters would rather see the money spend on state programs, such as school repair.
"People are telling me, don't give me back that money, why don't you give me more benefits, that's what I hear in the community," said Bunda (D, Kaena-Wahiawa-Pupukea).
Hanabusa agreed, noting that "I don't believe the Senate thinks it should be a huge amount. There is strong sentiment to use the money to repair schools."
Lingle, however, said the $91 million tax rebate is an important part of her program.
"The governor wants to return the money to the people who helped generate the surplus," Kurt Kawafuchi, state tax director said.
Another item on Lingle's list is a smaller, $10 million tax change that the administration says is critical.
"Indexing is very important. Today, inflation is a hidden tax increase. As our wages go up with inflation, it pushes us into higher and higher tax brackets and we are subject to more taxes," said Kawafuchi.
Tax indexing, Lingle said, is already used by the federal government, but Hawaii has not adjusted tax rates for inflation since 1983.
The proposal would automatically adjust the standard deduction, income tax brackets and personal exemptions in the state tax laws every year.
Bunda said that this was one tax change that the Legislature could easily make.
"We should definitely look at indexing. $10 million is a pittance for taxes," Bunda said.
Sen. Roz Baker, Ways and Means Committee chairwoman, said her committee did not hear about the indexing measure and is unsure if it will move this year.
Another tax issue for the Legislature is the argument over adopting an earned income tax credit, similar to the one used by the federal government.
The earned income tax credit is a credit for those working but not earning much money. Advocates call it a credit for the working poor.
But it requires taxpayers to file a separate form. The Aloha United Hawaii, which has launched a program to urge people to file for the credit, estimates that more than $45 million each year goes unclaimed in Hawaii.
"I'm not clear if it is better than changing the standard deduction. I have heard that the earned income tax credit is better for the working poor ... but it is better to let them keep it upfront as opposed to filing for a refund," Hanabusa said.
Fukunaga also said the Earned Income Tax Credit helps the poor, but is cumbersome.
"The earned income tax credit is a very powerful way to provide the poor with investment, savings and asset-building, but there are still questions about the high error rate that haven't been answered yet," Fukunaga said.
WHERE THAT EXTRA MONEY COULD GO
Here's a look at some of the tax proposals under consideration at the state Legislature:
» Raising the standard deduction to 75 percent of the federal level, giving working poor a bigger automatic tax deduction. Supported by Lingle.
» Eliminating the general excise tax on essential foods, ranging from milk and eggs to poi and rice. Supported by both Lingle and some Senate Democrats.
» Restore the biofuels tax exemption. A general tax exemption for gasoline with ethanol expired last month, causing gas prices to jump 11 cents. Lingle and some Democrats want the exemption restored.