Pension tax plan worrisome


POSTED: Monday, April 20, 2009

A Bloomberg financial services magazine heaped praise on Hawaii five years ago as No. 1 in the nation in tax friendliness for affluent retirees. The state House has balked at a measure that could change that status by taxing employer-provided pensions ever so slightly, but it does not seem worth the anxiety it could cause.

Hawaii is among 10 states that exempt income taxation of Social Security payments, as well as all federal, state and private pensions. Bloomberg Wealth Manager magazine based its survey on state and local taxes paid by a hypothetical retired couple with no earned income but with various investment benefits, $10,000 from an IRA, $50,000 from a private pension plan and $34,312 in Social Security income.

A provision attached to a bill that would bring Hawaii in accord with changes in the federal tax code would exempt only the first $50,000 of employer-paid pension income but would tax such income exceeding that amount. The Bloomberg couple, then, would get the pension-plan benefits free of state taxes but would have to pay taxes on the IRA income.

A tax on the high end of pensions was recommended by a legislative tax-review commission in a way that would protect those with relatively small pensions. It gave no specifics on the effect the $50,000 threshold would have in numbers or situation.

Few retirees receive more than $50,000 in income from employer-provided pensions. However, Kurt Kawafuchi, the state's director of taxation, figures it would generate more than $10 million in revenue to the state, although he has yet to determine the number of people who would be affected. Even for the wealthy, it would hand a setback to any retirees who spent their careers carefully preparing for their senior years.

Because state and county government workers “;have been enticed to remain on the job and not seek highly competitive private-sector work on the presumption that any retirement benefits will be tax-free, this legislation is inappropriate,”; Kawafuchi testified to the House Finance Committee. Employers' longtime practice of offering pensions has given way in recent years to employer-contributing 401(k) accounts and individual retirement accounts, for which federal and state taxation is deferred until withdrawal.

Republican Rep. Cynthia Thielen describes the bill as the worst of the session, telling tax day protesters, “;They want to tax your pensions — and that is unbelievably cruel.”;

That hardly seems to be the case, but further research is needed to determine more precisely what sort of retiree it would affect. As the Bloomberg magazine recognized, Hawaii has been highly considerate in the way it treats the islands' seniors in a wide range of areas, such as bus tickets, lower property taxes and income-tax exemptions. It should not depart from that practice.