Starting over with the tax code

What if the Hawaii tax code disappeared overnight and we had to start all over? What if our government had to design tax returns that fit on one page, with one page of supporting information (if necessary)?

What if we could force the tax return people to sit down in a room with a computer, no Internet access, and a TV camera to broadcast all of their discussions?

If we had to start all over again, here are five ways to make the tax code simpler and easier to understand:

* State sales tax on retail sales, NOT a general excise tax (GET). The sales tax would tax all retail-level goods and services, perhaps at 7%. It would exclude food, drugs, and medical care. There would be no taxes at the manufacturing or wholesale level, which would save us all a lot of money because the prices of foods and goods would decrease. There would be no Internet or out-of-state sales, because we don’t have the power to impose a tax on another state.

* Flat state personal income tax, not a progressive tax. Personal income (salaries, wages, tips, commissions, bonuses, prize winnings, gambling earnings, royalties, and pass-through business income) would be taxed at a single flat rate, perhaps 5%. The standard deduction would be lower, so that more people would pay taxes at a lower tax base. We would eliminate most tax credits for individuals, except for education and child care expenses, health care expenses, retirement contributions, and charitable contributions. I know that many people would be angry about losing the homeowner’s tax credit, but maybe we need to shift our priorities to having a home, not necessarily owning a home.

* Flat state business income tax, not a progressive tax. Business income (sales, royalties, licenses) would be taxed at a single flat rate, perhaps 5%. We would eliminate most tax credits for businesses, except for a small business tax credit to encourage entrepreneurs. Tax credits to lure businesses to Hawaii would have to be on a graduated scale, with smaller tax credits in succeeding years or for additional projects.

* End state income tax withholding. In a way, our income taxes are “hidden” because they are withheld from our paychecks and we never even have the money in the first place. If we eliminate withholding, we’ll see how much we are really paying in income taxes when we fill out our tax returns. In addition, it would reduce the paperwork for businesses; after all, why should businesses collect taxes for the government?

* No taxes on investment income (interest, dividends, and capital gains), up to a set amount that is adjusted for inflation. Investment income over that amount would be taxed at a low rate, perhaps 3%. We want to encourage savings and investment, and discourage frivolous spending. We shouldn’t penalize savings; the more money we save, the more money the banks can lend in our communities.

We can’t control the federal government – not unless other states join Hawaii in calling for a complete overhaul of our tax system. But we can work to change Hawaii’s tax system.

We all deserve reasonable taxes that we can all understand, and we can make it happen. How else can we simplify our taxes? If you disagree, what are your suggestions?

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