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Hawaii taxpayers For taxpayers in at least a half-dozen states from Alabama to Hawaii, next month's bill will likely take a bigger bite than last year's because legislators don't account for inflation when they craft tax law.
footing the bill
again for inflation
The state's standard deduction,
The numbers
one of the lowest in the nation,
hasn't been increased since 1989Star-Bulletin staff and wire
Hawaii hasn't changed the standard deductions allowed for taxpayers -- now among the lowest in the nation -- since 1989.
The problem is that governments in those states do not automatically increase their standard deductions along with inflation, leaving middle- and lower-income taxpayers with bills that have grown steadily for years.
"It's a built-in tax increase," said Oklahoma state Rep. Dan Webb, an accountant and Republican who has pushed for change for over a decade. "We've been basically cheating the taxpayers of Oklahoma for all these years."
Since 1982, his state's standard deductions have remained unchanged, with a top level of $2,000 for singles. In Hawaii, the standard deduction for a single filer is $1,500 and for a head of household $1,650. For a married couple, it's $1,900 total, whether filing jointly or separately.
And none of that has changed in more than a decade.
In addition to Hawaii, other states in similar situations include Georgia, Louisiana and Virginia -- plus the District of Columbia.
Hawaii State Tax Director Marie Okamura said her department proposed raising the standard deduction as recently as last year. It also considered proposing an increase again for this year.
But in a period of economic downturn, legislators were unwilling to OK any kind of increase, Okamura said.
About 54,000 taxpayers would have been affected by the increase which would have been set at half the standard federal deduction in each category, Okamura said.
The federal government tied its standard deductions to inflation in 1985 by a technique known as indexing, and has seen the standard deduction for singles grow from $2,390 in 1985 to $4,550 this year.
Okamura said she would prefer to improve the taxpayers' standard deduction rather than use the federal indexing method.
"Our economy is not necessarily as tied to the national economy as in some other areas. That's one reason to be more reluctant. Also I think the state should have more control," she said.
The Tax Foundation of Hawaii's Lowell Kalapa is also reluctant to consider any kind of indexing until the standard deduction is increased.
"As far as indexing, we should only consider it after we've made the adjustment," Kalapa said. "Indexing may work fine for the feds because they can print the money and run deficits, but we can't.
"First we need to have a substantial adjustment period, probably incrementally. We've got to bring (the standard deduction) up to par with what has happened since 1989 and we should do it across the board."
Kalapa believes tax rates at both the top and the bottom of the scale should also be adjusted.
Of the 41 states that levy an income tax, nearly half increase their deductions as inflation rises.
Most others adjust their deductions sporadically. The rest have allowed their standard deductions to languish.
To decrease a taxpayer's bill, tax codes provide standard deductions for single taxpayers, married couples (who can file jointly or separately) and single heads of households.
The majority of taxpayers use the standard deduction rather than itemize
In 1999, 67.5 percent of taxpayers claimed a federal standard deduction, the Internal Revenue Service estimated. In Oklahoma, 61 percent used the standard deduction for state income taxes.
Lawmakers in some other states that have not adjusted their deductions for a decade or longer are fighting to increase them now, but acknowledge tough odds in a year when nearly every state is facing budget shortfalls.
The lack of action means at least $4,000 lost over the past decade to an Alabama family of four with an income of $42,000, said Kimble Forrister, executive director of Alabama Arise, a Montgomery-based advocacy group for the poor.
His group wants to raise the state standard deductions to match the federal deductions, at an estimated cost of $300 million, which would mean a family below the poverty line wouldn't owe any income tax.
What rankles critics the most is that the inflation-driven tax liability hits taxpayers with the lowest incomes, since they are most likely to rely on standard deductions rather than itemizing deductions.
"People who are simply struggling to keep up with the cost of living will be progressively taxed at higher rates, as if they were getting richer," said Pete Sepp of the National Taxpayers Union. "It's almost as if being thrown a concrete life preserver when you're trying to keep your head above water."
Tax administrators say that focusing solely on standard deductions ignores other steps lawmakers may take to ease the financial burdens of the tax system.
"From a policy impact, you need to consider other factors," said Harley Duncan, executive director of the Federation of Tax Administrators. "They may not be making an adjustment on deductions, but are you lowering property taxes? Or adjusting sales taxes?"
Georgia, for instance, while failing to adjust its standard deductions since 1987, has just increased its personal exemption -- a different category of deduction that decreases a person's tax liabilities.
Several other states that haven't changed deductions for singles have increased them for married couples, as in Kansas, Mississippi and North Carolina. Oregon increased the standard deduction for married couples, but also raised the tax burden for singles -- and will begin indexing in 2003.
Also, the relatively slow rate of inflation in recent years means a less flagrant increase in tax liability compared to the double-digit inflation of the early 1980s, Duncan said. Back then, public pressure drove Congress to begin indexing for inflation.
Neither low inflation nor budget shortfalls are reason to let the current situation continue, said Webb in Oklahoma.
"This is one case where even the IRS is doing better than the Oklahoma legislature," he said. "Isn't that terrible?"
Hawaii state Sen. Sam Slom puts Hawaii's legislative inaction on the matter down to lack of will -- except when conformity with changes to the IRS tax code means more money for the state.
"It's very selective. They'll bring us into conformity when it comes to generating more money for the state but they are always behind when it comes to things that will help the taxpayer," he said.
Slom said state, rather than federal, indexing would be possible in Hawaii.
"There are several different ways we could do it. But first you have to have the will," he said.
The state already does it when it taxes employers, he said.
"Every year the unemployment compensation tax that employers pay is increased because it goes up based on the average personal income in the state of Hawaii."
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Hawaii has not increased its income tax standard deduction since 1989. Assuming annual wage increases, that means each year Hawaii residents pay more in income taxes. Below is a chart showing the percentage difference between per-capita income and income after the standard deduction, which taxes are based on. In 1989, the difference would have been 8.1 percent; by 2000 it narrowed to 5.1 percent. A narrowing gap
Year Income Deduction change % difference 1989 18,566 1,500 17,066 8.1 1990 19,584 1,500 18,084 7.7 1991 20,039 1,500 18,539 7.5 1992 20,979 1,500 19,479 7.2 1993 21,557 1,500 20,057 7.0 1994 22,358 1,500 20,858 6.7 1995 23,272 1,500 21,772 6.4 1996 24,286 1,500 22,786 6.2 1997 25,427 1,500 23,927 5.9 1998 26,909 1,500 25,409 5.6 1999 27,859 1,500 26,359 5.4 2000 29,451 1,500 27,951 5.1 Source: State Data Book, DBEDT
States where the standard tax deductions have remained unchanged for more than a decade. Staying still
Alabama: $2,000 maximum standard deduction for singles; $4,000 for married couples filing jointly. Unchanged since 1982. D.C: $2,000 for singles; $2,000 for married filing jointly. Unchanged since 1987. Georgia: $2,300 for singles; $3,000 for married filing jointly. Unchanged since 1987. Hawaii: $1,500 for singles; $1,900 for married filing jointly. Unchanged since 1989. Louisiana: $4,500 for singles; $4,500 for married filing jointly. Unchanged since 1983. Oklahoma: $2,000 maximum for singles; $2,000 maximum for married filing jointly. Unchanged since 1982. Virginia: $3,000 for singles; $5,000 for married filing jointly. Unchanged since 1989. Sources: Wisconsin Legislative Fiscal Bureau, state revenue departments.