Hawai'i must raise standard tax deduction
By Sen. Robert Bunda
For those of us who have been working to bring more equity and fairness to our state income tax system, the Feb. 22 Advertiser article "Families in poverty pay state taxes, too" was not surprising.
That Hawai'i families in poverty must pay income tax is, unfortunately, not a shock. Sadly, this has been the case for some time. Yet why haven't we done something about it?
Raising the state's standard deduction to 50 percent of the federal standard deduction would reduce the tax burden for about 60 percent of taxpayers, helping those who need it the most — the middle class and the working poor.
In 2003, the Tax Review Commission recommended raising the state's standard deduction to 100 percent of the federal level, and Gov. Linda Lingle, in her State of the State Address, suggested raising it to 75 percent.
Currently, the state's standard deduction is $1,500 for a single taxpayer, and $1,900 for married couples filing jointly. This is far below the standard deductions of most states and far below the federal standard deduction of $5,000 for a single taxpayer and $10,000 for married couples filing jointly.
Unlike the federal standard deduction, Hawai'i's standard deduction is not adjusted for cost-of-living increases. In 2001, the state's standard deduction for a joint return amounted to 25 percent of the federal level. Today, that deduction amounts to only 19 percent of the federal level. Moreover, without any adjustment, the gap between the state and federal standard deductions will only increase. It's one of the main reasons why the state has ended up taxing people who also qualify for welfare.
Increasing the state's standard deduction would not only help the poor, it would benefit the forgotten middle-class families, who do not qualify for social services and aid available to the poor and yet do not earn enough to pull themselves out of a survival mode. In a recent national survey, Hawai'i ranked as the highest in the country for the average state taxes paid per person.
While one can argue that comparing the tax systems of various states is like comparing apples to oranges, one cannot deny that our current income tax structure is regressive. Poor and middle-class families in Hawai'i pay proportionately more than the rich. In fact, according to a 2003 report by the Institute on Taxation and Economic Policy, Hawai'i families earning no more than $14,000 paid on average 12.6 percent of their income to state and local taxes. Middle-class families earning less than $42,000 paid 11.2 percent, and the richest taxpayers with average incomes of $458,000 paid only 8 percent and even as little as 5.8 percent after federal itemized deductions.
Increasing the standard deduction and eventually broadening the tax brackets would help eliminate this unfairness.
I believe we can provide tax relief to Hawai'i's families without sacrificing educational and other priorities, with or without the current budget surplus.
The working poor in general and middle-class families in particular continue to carry a disproportionate share of the tax burden. It's time to restore fairness and equity to our tax system.
State Sen. Robert Bunda is Senate president and represents the North Shore, Wahiawa district. He wrote this commentary for The Advertiser.