Posted on: Thursday, January 20, 2005

Middle-class tax cut: Easier said than done

By Derrick DePledge
Advertiser Capitol Bureau

Appealing to a middle class squeezed by Hawai'i's high cost of living, state Senate President Robert Bunda suggested yesterday that the state's tax system should be revised to relieve the strain on working families.

But while tax cuts are politically popular, they often involve complicated trade-offs by state government before the people targeted for relief see any savings. Economists and tax experts said state lawmakers must decide if the state has enough money, whether other government programs might lose out, and if the tax cuts would be undermined by separate tax increases.

The state Council on Revenues has projected revenue growth as the state's economy remains vibrant, giving lawmakers some flexibility to invest in tax relief or new government programs, but there is no agreement on which direction to take.

"The question is, where is the money?" said Lowell Kalapa, president of the Tax Foundation of Hawai'i, who believes tax relief is credible if lawmakers also consider making government more efficient. "Let's be pragmatic about it. You can't speak out of both sides of your mouth."

In his opening day speech to the Senate, Bunda said higher costs for gas, food and housing are frustrating the middle class while income tax brackets are so compressed that two-income families earning $80,000 a year are taxed at the same rate as the very wealthy. "This, ladies and gentlemen, is simply not fair," said Bunda, D-22nd (North Shore, Wahiawa). "So maybe it's time for a tax cut for the middle class. Maybe it's time to review the entire system."

Bunda did not provide any details for a middle-class tax cut or how it would fit within the state's budget, and other lawmakers, including Democrats in the state House of Representatives, did not immediately embrace the idea. Gov. Linda Lingle did not include money for tax cuts in her two-year budget but will likely again recommend raising the standard income tax deduction, which would remove some people at the bottom of the income scale from the state's tax rolls.

Paul Brewbaker, chief economist at Bank of Hawaii, said tax relief should be weighed against other state priorities, such as repairing public schools or improving highways. "It's unclear to me what compelling economic logic would elevate further tax rate reductions to a very high position on that list," he said.

The state collects tax money primarily through an income tax and a general excise tax on goods and services. Hawai'i ranked ninth nationally in 2002 for its individual state income tax bite per capita, according to an analysis by the Minnesota Taxpayers Association.

During the last round of income tax cuts, approved by lawmakers in 1998 and phased in over several years, lawmakers agreed to lower the highest tax rate from 10 percent to 8.25 percent while proportionately reducing the lower tax brackets. The state Tax Review Commission has recommended expanding the tax brackets so, at one end, people on public assistance would not have to pay income taxes while the two-income families mentioned by Bunda would not pay the highest rate until earning at least $100,000.

Bunda, in his speech, talked about Hawai'i becoming a society of "haves and have-nots," an appeal to class anxiety that is bubbling up in many communities. "Even now, we are seeing signs that we are fast becoming a playground for the world's ultra-rich," he said. "The multimillion dollar homes once limited to O'ahu's Kahala Avenue have been joined by equally expensive homes on Maui, Kaua'i, and the Big Island.

"At the other end of the spectrum, if we do nothing, many will slip out of the economic middle class and become part of the have-nots, placing an even greater burden on government," Bunda said. "They are the ones who have fallen between the cracks and who do not qualify for a wide range of government and private assistance programs. They are the ones lost in the invisible middle ground of our society."

Senate Republicans welcomed Bunda's call for tax relief but are concerned by proposals in the House to give counties the option of raising general excise taxes to pay for transportation projects. Some also wondered why Democratic leaders have so far refused to back Lingle's proposal to raise the standard income tax deduction, which is aimed directly at lifting the tax burden on the poor.

"I believe people can make their own decisions with their money better than the government," said Sen. Sam Slom, R-8th (Kahala, Hawai'i Kai).

But Bunda may have a challenge convincing other Democrats that middle-class tax cuts should jump ahead of other initiatives. His staff said the Senate leader hopes to start a conversation on tax relief that may take the entire session, or another year, to turn into a detailed tax overhaul.

House Majority Leader Marcus Oshiro, D-39th (Wahiawa), was cautious yesterday. He said House Democrats did not include middle-class tax cuts among their priorities, but will be open to reviewing anything that comes over from the Senate.

"Just keep in the back of our minds that the economists tell us that the economy will level off in about two years," Oshiro said. "We have collective bargaining agreements, we have initiatives like preschools, and we have issues regarding healthcare for the underinsured and uninsured. All these things cost money. So we would need to factor in tax cuts with these other things, but we'll look at it."

Oshiro said House Democrats had not heard about Bunda's plans before yesterday. "I don't know how far along they studied (a tax plan)," he said. "I mean, wow, it was like a one-liner, right?"

Gordon Y.K. Pang contributed to this report. Reach Derrick DePledge at ddepledge@honoluluadvertiser.com or 525-8070.