Simple change in law can help isle taxpayers
GATHERING PLACE
Alfred B. Fernandes
I AM pleased to see that both Gov. Linda Lingle and the Legislature are considering tax relief this year for lower-income taxpayers. As a certified public accountant and former chairman of the Tax Review Commission for 1995-1997, I strongly recommend that any relief given be done through changes in the tax law that can be easily understood by taxpayers and easily implemented and monitored by the state Tax Department.
The simplest approach to provide this relief is to increase the amount of the standard deduction. This would provide relief to taxpayers who do not itemize their deductions. The Tax Department reported that in 2003, 43.6 percent of taxpayers claimed the standard deduction. Increasing the standard deduction would provide relief to all low-income taxpayers regardless of whether they are elderly, single, married or have dependents.
If the Legislature and the administration deem it appropriate to provide further tax relief to taxpayers who are elderly or have dependents, it could increase the amount of the personal exemption for the elderly or for dependents.
The above proposals also will benefit higher-income taxpayers. This benefit can be eliminated by increasing the income tax rates on incomes above the sum of the standard deduction and personal exemptions.
If the Legislature enacts an increase in the personal exemption amount that is the same for taxpayers and dependents, then taxpayers will not have to submit any forms to obtain reduced tax withholding from their paychecks. The Tax Department would adjust its tax withholding tables, which employers utilize to determine the amount of tax to be withheld.
Additionally, the amount of the standard deduction and the personal exemption should be indexed for inflation. During 2006, the rate of Hawaii inflation was 5.9 percent. Without indexing, all taxpayers face a hidden tax increase due to inflation. Indexing is a concept that has been adopted by the federal government.
There also have been discussions on adopting a version of the federal earned income tax credit. This law is complex, which the Internal Revenue Service explains in its publication in 59 pages. The difficulty with this law is that it is expensive for the taxpayer to comply with and is targeted to taxpayers who can least afford to hire professional tax assistance. Additionally, because of its complexity it often results in errors, whether unintentionally or intentionally.
The use of an increase in the standard deduction and an increase of the personal exemption to achieve tax relief for lower income taxpayers is simpler to implement and should result in the least amount of confusion for taxpayers.
Alfred B. Fernandes is a certified public accountant in Honolulu.