Using President Obama's tax policy as a guide, state House and Senate Democrats have pinned an increase in the state's income taxes on the wealthy.

The bill approved on Wednesday, which Gov. Linda Lingle has threatened to veto, would raise income taxes on roughly the top 2.6 percent of the state's taxpayers. It would create three new income tax brackets in filing categories and gradually adjust the state's highest tax rate from the existing 8.25 percent to 11 percent depending on income.

Single taxpayers who earn less than $150,000 a year, heads of households who make less than $225,000 a year and couples filing jointly who earn less than $300,000 a year would see no tax increase under the bill. Lawmakers estimate the higher income taxes would generate $48 million a year to help balance the state's budget.

Obama has attempted to shield families earning less than $250,000 a year from federal tax increases, and state Democrats said they used the president's standard in their deliberations.

"We're asking everybody to give a little. And we felt this income bracket could help a little," said state Rep. Pono Chong, D-49th (Maunawili, Olomana, Enchanted Lake). "We don't think it's that big of an increase."

According to 2005 figures from the state Department of Taxation, the latest available, 12,039 — or 2.6 percent — of 459,649 taxable returns would have been covered by the new tax rates. A similar percentage was found among preliminary 2006 figures.

Under the new tax rates, according to the state House Finance Committee, a single taxpayer earning $200,000 would pay $625 more in income taxes, a head of household making $300,000 would pay $938 more in taxes, and a couple earning $400,000 would pay $1,250 more in taxes.

Starting in 2011, the bill would also increase the state's personal exemption and the standard deduction, which would help taxpayers reduce the amount of their taxable income.

Chong said income-tax increases are also contained by the state's marginal tax rate structure. Taxpayers covered by the bill would pay the higher rates only on the portion of their income that exceeds the thresholds, not on all of their taxable income.

MINIMAL EFFECT

Carl Bonham, a University of Hawai'i-Manoa economist, described the income tax increases as modest. "Most people aren't going to see any increase in their taxes and, presumably, quite a few people will be seeing some reduction in their taxes," he said.

Bonham said that while other economists may disagree, he doubts income tax increases would have more drag on the state's economy than, for example, reducing the wages of state workers. Wage reductions, he said, would likely lead state workers to spend less in the economy than a tax increase would on higher-income taxpayers.

"From the perspective of the near-term effect on the economy, it's just not clear to me that this change is really going to hurt the economy very much," he said.

Jamie Story, president of the Grassroot Institute of Hawaii, a conservative-to-libertarian public-policy group, said she would prefer the state convert to a flat tax.

"The problem with a progressive or graduated income tax like we have in Hawai'i is that it actually penalizes people for making more money," she said. "Now the media and pop culture sometimes tends to vilify high-income earners, but really, ultimately, we want everybody to make more money. It's a more prosperous society if people make more money.

"So the last thing we want to do is discourage that or take away incentives for people to make more money by penalizing them."

NEGATIVE MESSAGE

State Rep. Gene Ward, R-17th (Kalama Valley, Queen's Gate, Hawai'i Kai), said tax increases are not the remedy during a recession. He said no matter how much it is targeted, it sends a negative message to consumers and investors.

"These are the guys who do the charity, the investments, the business development, the job creation," he said. "They're the ones who have the reserve and we want them to put it into the economy, not to shrink back and hoard their money and, quite frankly, get their lawyers to move it offshore or to move it to different places on the Mainland, but to use it here and feel comfortable here doing it."

Joe Pandolfe, a general contractor who lives in Hawai'i Kai, was one of the organizers of a tax day "tea party" protest last week at the state Capitol. State Republicans described him as a "Regular Joe" who has to shoulder the burden of higher taxes and wasteful government spending.

Pandolfe, however, will likely not pay higher income taxes under the bill because his income falls below the threshold.

"I don't like it because the only way my company can grow is to make more money, and once I make more money, now I can't keep it," said Pandolfe, whose business income is counted like personal income under what is known as an S corporation.