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The Honolulu Advertiser

Posted on: Monday, January 31, 2005

Two plans offer families tax relief

 •  Tax-cut plans aid

By Gordon Y.K. Pang
Advertiser Capitol Bureau

Most of the families that hire certified public accountant Charles Leland make a minimum of $150,000 to $200,000 annually, but each year he prepares the taxes for one of the maintenance people who takes care of his office "because he takes care of us."

Single and with an income of about $12,000 a year, the man's earnings are at a level at which he does not pay federal income taxes, yet he still has to pay state income taxes, said Leland, owner of Accounting, Business & Tax Services.

"For the higher-income people, that doesn't bother me too much," Leland said. "But for the lower-income people who are out there just trying to stay alive, that does bother me."

Tax plans designed to help Leland's friend as well as other low- and middle-income families have become the buzz at the State Capitol.

One plan aims to help the state's lowest wage earners by raising the standard deduction in each of the next three years and by bringing back a tax credit for food, medical services and nonprescription drugs. It's being offered by Gov. Linda Lingle.

Another plan would provide relief for everyone making less than $100,000, including a provision that would drop taxes altogether for those families making less than $8,000 a year. Introduced by Senate President Robert Bunda, D-22nd (North Shore, Wahiawa), the bill has been signed by 22 of 25 members of the Senate, including all five Republicans.

But it takes three to tango at the Legislature and, so far, leaders in the House of Representatives have offered no more than a wait-and-see attitude on both plans.

Views on the tax-cut proposals are varied both inside and outside the State Capitol.

Mike Bates, a certified public accountant and Realtor, said he likes how both plans provide tax relief to those who most need it.

"Both of them sound like they would be a benefit for low-income people, who are the people that really should have the biggest tax cut," Bates said. While many are prospering during the current economic boom, others are not.

"The rich people are getting richer, but people working at McDonald's, they can barely afford to rent," Bates said. "The people at the lowest levels are getting strapped and they're really having a hard time finding places to rent. The cost of living is going up for them."

Bates said it appears the governor's plan would give a bigger boost to renters. "Most people taking the standard deduction are those who don't have a mortgage and are unable to itemize because they don't own a home or condo," he said.

Leland said both proposals are long overdue.

The state's $1,900 standard deduction pales next to the $9,700 standard deduction allowed for those filing federal income-tax returns, he said. The practical impact, he said, is that a family of four making up to $22,100 does not have to pay federal income taxes while paying $576 in state income taxes. A family making as little as $6,960 begins paying state income tax now, he said.

The 2001-2003 state Tax Review Commission, which recommended an increase in the standard deduction, pointed out that it was last raised in 1984. "This is the major reason why the state unnecessarily continues to tax persons with income levels that qualify for public assistance," a commission report said.

The commission also supported wider marginal tax brackets, noting that while the state's highest marginal rate for married couples has stayed at $80,000, it was $307,050 in 2002 on the federal level. The minimum income for the highest federal income bracket has gone up in each of the three years since, and is $326,451 for 2005.

"I think it's quite appropriate to increase the standard deduction," said James E.T. Moncur, a member of the 2001-2003 Tax Review Commission and a professor of economics at the University of Hawai'i.

Moncur also believes the plan to move tax brackets upward is also warranted. "Those should be adjusted to account for inflation at the very least," he said. "What better time to (lower taxes) than when the economy is chugging along at a great rate?"

George Freitas, who served with Moncur on the commission, was a little more cautious.

Freitas, who was Gov. George Ariyoshi's tax director from 1978 to 1984 and spent 47 years in the state tax department, said he does not believe the state can afford to cut taxes given the variety and large number of tax credits that are issued.

Further, "the cost of running government with employees and prison systems and so forth is becoming very, very expensive," he said. "There may be an increase in revenue because of the construction and the high price of homes that are being sold now, but that's only a temporary thing."

During brighter economic times, Freitas said, the state should place more money into the Rainy Day Fund as the Ariyoshi administration did to deal with unexpected disasters such as the tsunamis and hurricanes.

That air of caution is a major reason why House leaders including Majority Leader Marcus Oshiro, D-39th (Wahiawa), said they will listen to both the Senate and Lingle proposals, but are uncertain whether either can be supported.

"Everyone would like to give a tax break to people but we need to take care of our basic needs first," Oshiro said. The governor's financial plan calls for the state's $4.6 billion general fund to have an ending balance of $10.7 million at the end of 2007 and that any unplanned expenses could result in a deficit.

He noted that there are several outstanding financial issues that are yet to be accounted for, including the cost of repairing the flood damage at the University of Hawai'i-Manoa campus and the fact that most government workers covered by collective bargaining contracts will soon be in negotiations.

Reach Gordon Y.K. Pang at gpang@honoluluadvertiser.com or at 525-8070.

• • •

Tax-cut plans aid

The not-so-rich

Bottom line: The Senate's plan would provide relief to more people and is aimed more at helping middle-class families, while the Lingle proposal appears to offer more savings for those in the lower end of the income spectrum.

Lingle's tax plan:

What it does: Raises the standard deduction for those who don't itemize; also brings back the tax credit for food, medical services and nonprescription drugs, but only for those making $40,000 or less.

How it works: For those who don't itemize their deductions, the standard deduction is the dollar amount the government allows you to subtract from your total income before calculating actual taxes. Currently, a couple filing jointly can deduct $1,900 from their total income. By 2008, the standard deduction would be $5,000 for a couple filing jointly. The standard deduction for a single person would go from $1,500 to $2,500.

The food and medical services tax credit in 2005 would be $27 for each family member that is taken directly off the amount a filer owes. The credit would rise to $55 per family member in 2006.

Who it helps: The increase in standard deduction would help any individual or family who files state income taxes and does not itemize deductions, typically those on the lowest end of the earnings spectrum. The administration estimates 78,000 tax filers would get lower tax bills, while 27,000 filers would not need to pay state income taxes altogether.

The food and medical services tax credit would help anyone making less than $40,000 a year. The administration estimates nearly 515,000 people, or nearly 40 percent of the population, live in households earning $40,000 or less, an estimate that has been disputed by some. The Lingle administration believes that with the combination of the standard deduction and a food and medical tax credit, a family of four making $40,000 a year would save $187 the first year, $339 the second year and $411 annually beyond that.

How much it will cost the state: An estimated loss in tax collections of $20.5 million in the first year; $42.2 million in the second year; and $50 million in subsequent years.



The Senate's tax plan

What it does: Expands the income tax brackets without increasing the rates while forgiving taxes altogether for those making $8,000 or less.

How it works: Couples who earn $80,000 or more now pay the top rate of 8.25 percent; the proposal calls for upping that income level so that only those who earn $100,000 or more would pay at 8.25 percent. Those making between $80,000 and $100,000 would then pay at 7.9 percent. Other brackets also would adjust accordingly. For instance, those making between $60,000 and $80,000, who now pay at 7.9 percent, would pay at 7.6 percent.

Who it helps: Anyone making less than $100,000 would get some relief, and the Tax Department estimates that's about 695,000 people. There is disagreement over how much savings a family of four would get. According to Senate staff estimates, a family with a total adjusted gross income of $70,000 annually now paying $4,566 would pay $3,106, a savings of $1,460, while a family making $40,000 a year paying $2,256 would then pay $1,680, a savings of $576. State tax officials, however, estimate the family making $40,000 would save only $132. The department did not offer an estimate for a higher grossing family.

How much it will cost the state: An estimated $58.9 million annually, according to the Department of Taxation.