Isle taxes now called
‘wealthy friendly’But middle-income individuals
get hit with the highest rate
Hawaii may take its knocks for being unkind to business, but when it comes to allowing residents to hold onto their wealth, the state ranks among the top third in the nation.
A survey by Bloomberg Wealth Manager magazine shows that Hawaii jumped to 14th in the country last year from 39th in 2000 in keeping wealth in the hands of the breadwinners.
Wyoming ranked first for the seventh straight year while Rhode Island, called "tax hell" in the survey, finished last.
Rich man, poor man
The "wealth friendly" rankings and grades for the top and bottom five states in the country, along with Washington, D.C. Hawaii ranks No. 14 with a B+ grade.
Top five
1. Wyoming A+
2. Nevada A+
3. Tennessee A+
4. Alabama A+
5. Alaska A
(tie) Colorado A
Bottom five
47. Nebraska D-
48. Vermont D-
49. New York F
50. Wisconsin F
51. Rhode Island F
The survey compared the impact of taxes on salaries, real estate, personal property and retirement assets for four hypothetical families. As an example, the survey said that using the identical set of parameters last year for the best and worst states would have resulted in a tax bill of $7,259 in Wyoming and $56,419 in Rhode Island.
Bank of Hawaii chief economist Paul Brewbaker said one of the reasons for Hawaii's high "wealth-friendly" rating is the state's property tax rates, which he said are one-half of those in the next lowest jurisdiction in the country, one-quarter of the median residential rates in the country and one-eighth of the highest jurisdiction's tax rates.
"Why does Hawaii provide preferred tax status to wealthy investors in Hawaii real estate?" Brewbaker asked. "Why do we give Oprah a good deal on (Maui) real estate? Did I miss something about her need for a tax haven?
"I'm inclined to think that once upon a time council people and legislators thought they were doing the people of Hawaii a favor. I'm sure it has to be related politically in some way that we have a state public education system rather than a local public education system."
Unlike the other states, Hawaii public education is funded by the state rather than the local governments.
Thus, Hawaii's counties, which receive property tax revenues, don't have to worry about funding public education.
The state's reduced tax rates also are a likely factor for Hawaii's high ranking, said Thomas Pearson, an accounting professor at University of Hawaii and an expert in taxation.
The highest tax rate, which was 10 percent in 1998, was lowered over four years to where it is today at 8 1/4 percent.
That means a married couple filing jointly with adjusted gross income of more than $80,000, or a single taxpayer making more than $40,000, were taxed last year at the highest rate of 8 1/4 percent.
"States on the mainland would be more like double that (income threshold) before you hit the top tax rate," Pearson said. "This 8 1/4 used to be 10 percent, so this is a big improvement. But we're hitting the top tax rate relatively low.
"I suspect (the study) is simply looking at the income tax-rate percentage and not where it hits, so this is why this study is a little bit deceptive in giving us too much credit."
A middle-income person would pay the top tax rate here in Hawaii, while in most states they would not be at the top tax rate, Pearson said.
"It surprises me that in a state that's so heavily Democratic that there's been such compression," he added.
While the tax-rate cuts benefit all Hawaii residents, they help the high-income individuals the most because they are able to keep more of their money in absolute terms.
State Tax Director Kurt Kawafuchi said depyramiding (4 percent general excise) taxes also has helped the situation so that businesses don't have taxes at every level of a transaction.
Since business owners also may be high-wealth individuals, the changes in excise taxes could help improve their personal bottom line.
"As a general philosophy, people work hard for their money, and we wanted to balance allowing people trying to keep as much as possible that they work hard to earn," Kawafuchi said.
"But, at the same time," he added, "they need to fund government operations."
