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The Honolulu Advertiser
Posted on: Sunday, April 30, 2006

Tax-relief plan targets state's neediest first

By Treena Shapiro
Advertiser Government Writer

The tax-relief proposal before the Legislature will not be enough to offset the rising cost of housing and fuel for most taxpayers, but the combination of expanding tax brackets and raising the standard deduction should reduce just about everyone's tax bill for years to come.

In fact, increasing the standard deduction to 40 percent of the federal level from 25 percent will relieve more residents with low or fixed incomes from paying any income tax at all.

"We're taxing a lot of our poor people ... so part of it for us was trying to get something out this year because we're trying to address that issue," said Senate Ways and Means chairman Brian Taniguchi.

The tax-relief package was agreed on by a conference committee of lawmakers on Friday night. The full House and Senate will vote on it this week.

While the proposal is not as sweeping as the $285 million package proposed by Gov. Linda Lingle in January, the $50-million compromise will touch just about everyone in the state with taxable income.

"There will be some tax relief. It may not be as large as we were seeking, but it will help a lot of people, especially the lower-income people," said Kurt Kawafuchi, state director of taxation.

Mike Abe, spokesman for O'ahu Democrats for Property Tax Relief, approved of the compromise, especially because it targeted the money at those who can use it most instead of handing out refunds to those who don't need them.

"Certainly at the lower brackets, every bit counts," he said.

With millions of dollars in requests for emergency aid after the heavy rains and a downturn in tourism last month, Abe thinks a cautious approach to tax relief is prudent.

"The opportunity to do another tax break and improve relief is available next session, too," he said.

Details on what the proposals would mean to taxpayers in the various tax brackets and income levels were not available last night because the compromise was reached so late Friday night. But the broad implications were clear.

The Legislature plans to spend roughly $40 million to expand the tax brackets across the board, with most of the relief targeted at individuals who earn less than $10,000 or married couples who jointly earn less than $30,000.

"It was part of the House's position that any tax relief be directed at those who have the greatest need first," said House Finance Chairman Dwight Takamine.

However, even those who make more than that will benefit because of the state's graduated income tax. Expanded tax brackets at the low end mean all workers will have more of their income taxed at the lowest rates before the rest of their income is bumped into higher tax brackets.

"Everyone in the state that earns a paycheck will benefit by broadening the brackets," said Lowell Kalapa, president of the Tax Foundation of Hawai'i.

The bracket adjustment does not seem like it would do much each year. For example, someone with a taxable income of $5,000 would see one of the highest percentage tax savings 21.8 percent or $32 a year, according to figures from a legislative committee.

However, the bracket adjustment is a permanent change that will benefit people more in the long run than a one-time tax refund.

"When we look at it, adjustment by the brackets will be far more beneficial to far more taxpayers," Kalapa said.

Raising the standard deduction to 40 percent of the federal level will have more of an impact on middle- to lower-income taxpayers who do not itemize their tax returns, such as those who do not have homes and mortgages.

About 300,000, or 53 percent, of filers would benefit from this, Kawafuchi said. Collectively, it would save them about $10.8 million.

"The impact of what they did is they got more people off the income tax rolls at the bottom end," Kalapa said. "You're talking thousands of taxpayers."

By raising the threshold, it leaves filers who use the standard deduction with less taxable income and could eliminate the need to pay income tax entirely.

Some of the beneficiaries of this could be the elderly who have tax-exempt retirement income and just have to claim earned interest on savings or dividend income, Kalapa explained.

Kawafuchi said the administration had hoped for more tax relief, but he was happy some of the state's $600 million surplus will be returned to taxpayers.

Reach Treena Shapiro at tshapiro@honoluluadvertiser.com.