WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of January 21, 2018 TrumpTax, Part II By Tom Yamachika, President One of the new, key components of Trump Tax is a provision important to the vast majority of small businesses. Practitioners may know it as the Section 199A deduction. Under Trump Tax, corporations that used to see a maximum tax rate of 35% got that rate slashed to 21%. About 75% of businesses, however, are not taxed at the corporate rate. Instead, individuals who own them are taxed on the business profit at individual rates, which can go up to 37% (down from 2017’s maximum of 39.6%, but not much). We need to remember that corporations are double taxed, in that they are taxed and then pay dividends which are then taxed to the recipients. But even allowing for double taxation, the corporations seem to get a big break here. Trump Tax’s answer to this anomaly is Section 199A, which tries to measure how much income has come from business operations and then gives the recipient a 20% deduction for it, which would give those earnings a benefit economically similar to a lower tax rate. The individual tax rates were designed for most people who are wage earners. They earn money by providing their services to a business. Businesses that are service oriented, like law firms, accounting firms, or brokerage houses make their money the same way, and for that reason are not allowed the deduction—at least they aren’t allowed it if they make enough money. The law provides thresholds and phase-in treatment so that those making smaller amounts of money can take the deduction as well, but those earning too much are out of luck. Here's an example. Kenny, who owns a plumbing business, is married. His taxable income is $335,000, $300,000 of which is ordinary income that comes from the business after it pays wages of $150,000. Kenny might deduct 20% of the $300,000, or $60,000. If Kenny instead owned an accounting firm, his taxable income is 20% of the way through the phaseout range, which for couples is $315,000 to $415,000. So, only 80% of his business income, or $240,000, is considered. He may be able to deduct 20% of the $240,000, or $48,000. (Note that the actual law is quite a bit more complicated. There are limitations based on W-2 wages that the business paid, for instance, and others that are designed to take account of income already taxed at a lower rate such as capital gains. Those limitations don’t kick in with the numbers in this example.) Here in Hawaii, our focus over the years seems to have been to soak the individuals. Our top individual tax rate is 11%, second highest in the country, while our top corporate tax rate is 6.4%, which is much more on par with what other states are charging corporations. In the upcoming legislative session, our lawmakers will be asked to conform our Hawaii income tax law to the federal changes that have taken place in 2017. One decision that they need to make is whether to conform to this provision, section 199A. Right now, our individual income tax law doesn’t even attempt to distinguish between income that comes from a business and income that comes from wages. Because we have chosen to tax business income at a much lower rate if the income is earned in a corporation, we should seriously consider adopting section 199A here in Hawaii to give some relief to the 75% of businesses that are not in corporate form, especially the small businesses. MTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of January 15, 2018 TrumpTax, Part I By Tom Yamachika, President As we nervously await the opening of the 2018 Legislature, we wonder how our state will approach tax conformity now that the Tax Cuts and Jobs Act, or “Trump Tax,” is now law. Most states, including ours, conform to federal tax law. That means we generally adopt the federal law provisions that tell us what is income and what we can deduct, so that most of us don’t have to figure out our taxable income many different ways. In fact, our most frequently filed income tax form, the Hawaii N-11, starts off with amounts reported on the federal return, and then adds and subtracts a few things to get Hawaii taxable income. Every year, our legislature is required to consider a bill to make our state income tax law conform to the federal changes made in the previous year. The legislature will have its work cut out for it this year, because Trump Tax made sweeping changes to the federal law. In a nutshell, Trump Tax did two major things regarding taxation of individuals: it dropped the tax rate for most people, but it limited or wiped out many deductions, making the tax base higher. The tax you need to pay to the federal government is figured by multiplying the two, and the net effect is what you see here, according to data put out by the national Tax Foundation: On this chart, Hawaii middle-income families take home more money on average. Hawaii families also appear to be doing well against their counterparts in other states.
When our state legislature conforms to federal tax changes, we typically adopt the federal provisions regarding what’s taxed and what’s deductible, but typically do not change the tax rates. If our lawmakers stick to that script this year, they will be hurting taxpayers, who will pay tax on a larger tax base but with the same rate as before. You might remember that the Tax Reform Act of 1986 also dropped rates and broadened the tax base to accomplish tax reform. Our legislators reacted by enacting Act 239 of 1987, which dropped our tax rates to offer relief from the base broadening. This time, our legislature should consider doing something similar. If they don’t, it will be functionally the same as raising taxes. If you don’t want this to happen to you, please let your legislators know that you won’t be fooled if they simply pick up the federal base broadening without doing anything to the state tax rate. It’s an election year, after all, and legislators need to know that taxpayers are watching! WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of December 31, 2017 What's A Carbon Tax? By Tom Yamachika, President Recently, the Hawaii Tax Review Commission’s primary consultant, PFM Group, issued a final report to the Commission asking it to review many taxing alternatives, including a “carbon tax” that had the potential to put an additional $360 million per year into our state coffers (assuming a tax rate of $20 per metric ton of CO2 released). PFM Group pointed out that we in Hawaii already had enacted a very ambitious climate change policy, Act 234 of 2007, that requires state greenhouse gas emissions to be reduced to 1990 levels by the year 2020. An economist from UHERO, the University of Hawaii Economic Research Organization, recently posted an analysis arguing that strong, decisive action such as a carbon tax is going to be needed if we are going to achieve the greenhouse gas goals. “But without any specifics as to how we are to achieve [greenhouse gas] reductions – through a carbon tax or otherwise – it is largely symbolic,” she argues. So what is a carbon tax? It is a tax imposed on the carbon content of different fuels. Typically, it is due and payable when the fuel is either extracted and placed into commerce, or when it is imported. At present, neither the U.S. federal government nor any U.S. state has enacted a carbon tax. The city of Boulder, Colorado, enacted one by referendum in 2006; it applies at the rate of $7 per metric ton of CO2 and is imposed on electricity generation only. Several European Union countries, Japan, and South Africa have carbon taxes. In Hawaii, we have a liquid fuel tax (chapter 243, Hawaii Revised Statutes). Like a carbon tax, the fuel tax is imposed upon import and entry into commerce. So, PFM Group thought that the systems and processes we now have in place to collect fuel tax in Hawaii can be adapted to a carbon tax, and for that reason concluded that a carbon tax would entail “[l]ittle administrative burden.” There are, however, several important differences between the two: Both the county and state governments are given the power to impose fuel tax. One big question up for discussion will be whether, and to what extent, the counties will have a piece of any carbon tax. The fuel tax is now earmarked for Highway Fund use, and the money in that fund is spent by the Department of Transportation. As a result, vehicles that don’t use the highways, such as tractors and other farm machinery, are exempt from fuel tax. A carbon tax would need to apply to both on-road and off-road use, as long as the CO2 generated from burning it gets into the atmosphere. The potential big losers will be the electric companies, because electric generation accounted for 6.8 million metric tons of CO2 in 2013 out of a total 18.3 million metric tons. However, the electric companies won’t simply absorb the tax, but can be expected to pass on the enhanced costs to anyone who gets an electric bill. Finally, the fate of our existing fuel tax needs to be decided. If a carbon tax is going to be layered on top of the existing fuel tax, which the PFM report assumes, people who pay the fuel tax now (anyone who drives a motor vehicle, for example) may complain that they are being unfairly treated. If it is going to replace the fuel tax, there will be winners and losers such as farmers and the Department of Transportation. Both the Tax Review Commission and our lawmakers are in for a lot of hard work as they wrestle with the issues surrounding carbon taxation. |
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