Archive for the ‘Taxes’ category

We’re growing the wrong tax tree

April 11, 2017

I published this post in 2010 and again in 2013. For those of you who are new to Better Hawaii, and for all of us who could use a reminder, I think it’s worth repeating.

Let’s ignore, for the moment, the fact that the IRS tax code is over 44,000 pages, is so complicated that even tax experts don’t understand it, and desperately needs simplification. Let’s ignore the benefits of a national sales tax or a flat income tax.

Think about this: like a tree struggling to shade us from harm, our tax system needs more sunshine, more pruning, and a lot less graft.

In fact, we are growing the wrong tax tree entirely.

Our current tax system is an overgrown banyan tree, with roots extending down and spreading over the whole economy. The federal government has higher income tax rates, ranging from 0% to 35%. The states have lower income tax rates, ranging from 0% to 11% – with Hawaii at the top – but are dependent on federal funds and must comply with unfunded mandates.

It makes more sense to have a tax system like a strong pine tree, simple and orderly. The federal government, which has national responsibilities and a larger tax base, should have lower tax rates. The states, which directly care for citizens but have smaller tax bases, should have higher tax rates and not rely on the federal government for funding.

The only rational explanation for this upside-down, overgrown tax code is that the federal government wants the power to redistribute taxes among the states. They want to create welfare states and ensure that states are dependent on the federal government.

Does this make non-sense? Do you have another explanation – or better yet, solution? Does anyone have ideas about how states can reclaim their power and independence from the federal government?

2017 Hawaii Legislative Watch: Taxes

February 28, 2017

Hawaii Legislature 2017

The 2017 Hawaii Legislative Session started on January 18 with prayers, speeches, and music. Hawaii residents definitely need the prayers – our lawmakers have been busy, introducing 1,601 bills in the House of Representatives and 1,317 bills in the Senate. It’s a mountain of paperwork, negotiation, tax dollars, and details.

Every year, I do a legislative round-up that spotlights bills that could have a big impact on Hawaii. I will focus on taxes, education, individual rights vs. government powers, controversial issues, and (in my opinion) unnecessary and wasteful spending. With over 2,900 bills being proposed in 2017 and less time than ever to read through them, I rely as always on bill summaries to accurately reflect the bills’ intentions.

Here is an overview of the significant tax bills being proposed in the 2017 Legislative Session. I’ve organized the bills into two sections: 9 tax increases to watch out for and 7 bills that could save us time and money. If I’ve missed any important bills, please let me know!

9 tax increases to watch out for:

  1. Taxes on Internet purchases. HB398 and SB161 would require out-of-state businesses to collect general excise (GE) taxes. HB1413 creates a “voluntary” program. This is taxation without representation for out-of-state businesses, and it would be a burden on Hawaii residents who already pay higher shipping costs.
  2. Higher general excise (GE) taxes. HB1319, SB1132 and SB1132 would increase the general excise tax by 0.5% to fund education. HB924 would increase the GE tax by 1% to fund agricultural land purchases. Any GE tax increases should be looked at with suspicion, because they tax transactions from wholesale to distribution to retail.
  3. Higher property taxes. HB180, HB182, HB1254, and SB686 add an education surcharge on residential investment properties and visitor accommodations. Real estate and property taxes are high enough – this could be a small step towards adding an education surcharge for everyone.
  4. Permanent county surcharges on GE taxes. HB349, HB1442, HB1565, SB432, and SB1183 would make county surcharges permanent. SB576 and SB1176 would extend the county surcharge on mass transit beyond 2027 and allow the surcharge to be used for operation and maintenance of mass transit, as well as public transportation and road maintenance. SB1278 would extend the county surcharge on mass transit to 2047 and allow the surcharge to be used for affordable housing and transit-oriented development. Apparently, there is no such thing as a “temporary” tax.
  5. New family leave insurance tax. SB408 would create a family leave insurance program and require employees to make contributions into a trust fund. No new payroll taxes!
  6. Higher costs to own and operate a car. HB1144 and SB1010 would increase the state motor vehicle weight tax. HB1145 and SB1011 would increase the state motor vehicle registration fee. HB1146, SB1009 and SB1012 would increases the State Fuel Tax. HB1259 and SB1187 would add a clean transportation fee. Higher taxes won’t necessarily make our roads better-maintained.
  7. New tax on sugar-sweetened beverages. HB1210, SB375 and SB837 would add a fee on sugar-sweetened beverages.
  8. Higher taxes on cell phones and cell phone plans. HB206, HB1021, and SB887 would add a 2.64% surcharge on prepaid wireless services for Enhanced 911 services.
  9. Discouraging visitors from coming to Hawaii. HB401 would increase the rental motor vehicle customer facility charge from $4.50 to $9.00. HB546 would increase the transient accommodations tax (TAT) to fund workforce housing development. HB1453 and SB1143 would add a $20 visitor tax to fund conservation. Why penalize visitors for spending their time and money in Hawaii?

7 bills that could save us time and money:

  1. Repealing the county rail surcharge. HB970 would end the 0.5% county surcharge for Honolulu mass transit.
  2. Repealing the estate tax. HB364 would end the inheritance and estate taxes. We shouldn’t have to pay taxes on money that was already taxed.
  3. Lower income taxes for lower-income taxpayers. HB362 and HB690 would decreases income taxes by twenty-five per cent for all but top income earners.
  4. More county surcharge taxes benefiting the county. HB719 would reduce the amount of the county surcharge that goes to the State from 10% to 5%. HB1072, SB431, SB938, SB1242, and SB1276 do not specify the lower reimbursement rate. HB1002 would reimburse the State 0.5% and use 9.5% for infrastructure improvements along the rail corridor.
  5. A new earned income tax credit. HB209, HB212, HB352, HB670, SB508, SB648, and SB707 would create an earned income tax credit.
  6. Extending the food/excise tax credit. HB209, HB210, HB932, SB256, and SB648 would extend the food/excise tax credit.
  7. Quarterly withholding tax filings. HB1141 and SB1007 would allow withholding taxes to be paid quarterly instead of monthly. We could save time, paperwork, and record-keeping.

The 2017 Hawaii Legislature adjourns on May 4. Please think about these issues and how they may affect you, everyone around you, our children, and our grandchildren. Whether you have concerns or feel strongly about an issue, speak up, talk about it, and be part of the discussion!

 

A 1-2 punch of tax proposals

February 7, 2017

1-2 Punch of Taxes

So far, 2017 has delivered a one-two punch for Hawaii residents.

In January, as we were still reeling from holiday celebrations and new year’s resolutions, the Hawaii State Teachers Association (HSTA) proposed a constitutional amendment to add a property tax surcharge on residential investment properties as well as a visitor accommodations surcharge (Honolulu Star-Advertiser, “HSTA pitches property tax, hotel surcharge to hire, retain teachers,” 1/24/17). The surcharges could raise $500 million a year for hiring and retaining teachers.

A week later, Honolulu Mayor Kirk Caldwell proposed offering the State of Hawaii a larger share of the of the 0.5% general excise tax surcharge that was intended to fully fund the rail project, in exchange for extending the surcharge in perpetuity. The State’s “share” is currently 10% (Honolulu Star-Advertiser, “Mayor proposes larger share of rail tax for state,” 2/1/17).

Is it reasonable to require homeowners to pay higher taxes for a service that is unrelated to their home or property? Is it reasonable to require non-residents to pay a dedicated tax for Hawaii public education? Is it effective to create a dedicated funding source that has little oversight by Hawaii legislators and taxpayers?

Public education is funded by state income taxes and the general excise tax. Hawaii’s property taxes can barely pay for the current level of city services; and the transient accommodations tax (TAT) has already jumped to 9.25% in 2017. It’s disingenuous to compare Hawaii’s real property taxes and TAT to other U.S. cities – Hawaii residents have higher costs of living and lower availability of land and affordable housing than other mainland cities; and visitors face higher transportation costs and time commitments just to travel to Hawaii. In greater numbers, homeowners could be forced out of their homes and visitors will choose to vacation elsewhere.

Is it reasonable and effective for the City and County of Honolulu to claim that they need to make the rail surcharge permanent, while simultaneously claiming that they don’t need the full amount of the surcharge?

The Honolulu rail is funded by the general excise tax surcharge. Without another extension, or making the surcharge permanent, Honolulu rail may not be built. But offering the State of Hawaii an even higher percentage of the general excise tax surcharge seems like a bribe to Hawaii legislators in exchange for their support.

For some perspective, in Fiscal Year 2016, collections of Honolulu’s county surcharge totaled $259.2 million, according to the “Hawaii Department of Taxation Annual Report 2015-2016” (page 30). The State kept 10% of the surcharge collected or $25.92 million – which is more than the Department of Taxation’s entire Fiscal Year 2016 operating budget of $24 million (page 37).

Do you think these tax proposals are good ideas? How do you rank public education and Honolulu rail on your list of priorities for Hawaii?

Making property taxes less taxing

January 24, 2017

Property Taxes

A few weeks ago, Hawaii homeowners received their 2017 property tax assessments. It was not a pleasant way to end the holidays or start the new year.

I understand why there are property taxes. Government needs tax revenue to pay for city services such as roads, trash pickup, and utilities, and it can’t pay for those services through excise taxes and user fees alone. With land in Hawaii valued at over $335 billion, the Hawaii collected $1.7 billion through property taxes in fiscal year 2016-2017 alone, according to the Real Property Assessment Division.

What I don’t understand is why property taxes need to be so taxing or – or so arbitrary. We have a property tax system that is based on the property values (sales) of our neighbors. It’s based on what other people buy, and that is neither fair nor reasonable.

Here is a three-fold proposal to make property taxes less taxing:

  1. Arrange monthly tax payments. Instead of two hefty tax payments in February and August, Hawaii counties could allow homeowners to make monthly property tax payments. This would let homeowners spread out the payments over 12 months (as many homeowners already do by combining property taxes with their mortgages), and give county governments a steady stream of tax revenue. To reduce billing costs, government could offer this option only for automatic payments from a bank account or credit card.
  1. Create a flat property tax fee based on lot type and building square footage. Instead of basing property taxes on property valuation (and sometimes “speculation”), we could create flat property taxes based on lot type (residential, commercial, industrial, hotel, agricultural, conservation, and unimproved) and building square footage. With a flat property tax, anyone could calculate and budget for their taxes once the property tax rates are announced. There would be no valuations, no need for an appeals process, and no worries if a neighboring property is sold for an inflated price.
  1. Require reasonable limits on property taxes. Instead of property values and tax rates rising without constraints, require reasonable limits to tax increases. For example, county governments could limit increases to the rate of inflation each year or to a dollar amount, such as 35 cents per year. This would allow property owners to more easily budget tax increases and require government to operate within a budget, instead of arbitrarily raising taxes to meet increased spending.

 How do you think we can make property taxes affordable while still providing basic city services? If you are a homeowner or landlord, how affordable are your property taxes?

 

 Clipart by cgvector.

Taxes and tracking your odometer

September 20, 2016

Hawaii Road Usage Charge Demo

The Hawaii State Highway Fund is funded by fuel taxes, vehicle registration fees, vehicle weight tax, and rental motor vehicle and tour vehicle surcharge taxes. Drivers pay 17¢ to the State of Hawaii, plus up to 17¢ to county governments per gallon of gasoline. The fuel tax currently funds 33% of the State Highway Fund.

Recently, the Hawaii Department of Transportation (DOT) revealed that it is considering a mileage-based user fee for highway maintenance, which would potentially replace the fuel tax. The DOT is planning a statewide pilot “road usage charge” (RUC) test in early 2017.

On the surface, this seems like a good idea. It seems fair. Like fuel taxes, the more you drive, the more taxes you pay. It taxes all vehicles equally, though it does not reward or encourage fuel-efficient vehicles.

But first, there are 5 critical questions that need to be answered:

  1. Do we need it? In fiscal year 2015, the State Highway Fund collected $86.8 million in fuel taxes, $76 million in vehicle weight taxes, $49 million in vehicle registration fees, and $51.9 million in rental/tour vehicle surcharge taxes, according to the Fiscal Year 2017 State Receipt and Revenue Plans (page 21). The DOT’s budget was $316 million to build and maintain highways, according to the Fiscal Year 2017 Executive Supplemental Budget (page 116). How much additional revenue does the Department of Transportation project to raise from mileage-based user fees?
  1. Can we afford it? The three-year pilot project is estimated to cost $19 million, which will be paid by Hawaii taxpayers (at least $12.5 million) and federal funds (approx. $6.5 million). Will the additional revenue collected from usage fees cover the cost to administer the program and increase revenues for the State Highway Fund?
  1. How will mileage-based use taxes affect tax collection? The DOT currently requires annual safety checks, in which odometer readings are collected. Would the mileage-based usage fee be collected at the time of the safety check? Will the DOT need to step-up enforcement of safety checks? How will an annual fee affect tax collection, compared with fuel taxes, which are collected at the time fuel is purchased? What kind of burden would this place on taxpayers, who would pay a lump-sum tax once a year? How would tax collection be affected if the proposal to create bi-annual safety checks (due to improved car manufacturing and safety standards) gains support in the legislature?
  1. How will odometer readings be used? Odometer readers are already collected during annual safety inspections, but will the DOT share this data with other agencies – such as insurance companies or employers? How will the DOT protect drivers’ privacy?
  1. Will the usage fee truly replace fuel taxes? This is the most significant concern. There is no guarantee that a mileage-based fee will replace the fuel tax, or add another level of fees. A new administration, new Congress-members, new department heads, and economic downturns are all opportunities to “extend” fees and taxes indefinitely.

I usually support user-based fees, because it places more of the burden for maintenance on those who make the most use of a service or facility. But when it comes to government, I am concerned that replacement taxes, like “temporary” taxes, never go away.

To review the grant proposal, visit http://hidot.hawaii.gov/administration/library/publications/.

How many miles to you drive in an average year? Do you support a mileage-based user fee? Would it make you change your driving habits?

2016 Hawaii Legislative Watch: Taxes

February 16, 2016

2016 Hawaii Legislature

The 2016 Hawaii Legislative Session started on January 20. It’s hard to believe, but 2,658 bills are under consideration in the House of Representatives and 2,371 bills are up for debate in the Senate.

This year, I’m highlighting bills that focus on taxes, education, individual rights vs. government powers, and (in my opinion) controversial issues. It would be impossible for me to read every bill in such a short time, so I’m relying on bill summaries to accurately reflect a bill’s intentions.

Here is an overview of the significant tax bills being proposed in the 2016 Legislative Session. There are over 45 income tax credit proposals, over 15 General Excise (GE) tax exemption proposals, and proposals to increase and decrease taxes and fees – a jumble of tax savings and tax increases, but all of it meaning more paperwork and forms.

I’ve grouped the bills into three sections: 6 tax proposals we should fear, 6 tax proposals that help Hawaii taxpayers, and 12 tax proposals to watch for – the good, the bad, and the ugly. If I’ve missed any significant bills, please let me know!

6 tax proposals we should fear:

  1. General Excise (GE) tax on Internet purchases. SB259 would allow Hawaii to adopt the Streamlined Sales and Use Tax Agreement to tax online purchases.
  2. Increases to the retail GE tax. HB2731 and SB2599 would increase the GE tax from 4% to 5% to fund Department of Education (DOE) operations. HB 330 would increase the GE tax from 4% to 5% for a two-year period to provide a dedicated funding source for the acquisition of agricultural lands. HB1240 would increase the GE tax by 0.25% to provide a dedicated founding source for the DOE.
  3. Increases to the wholesale GE tax. HB1137 would increase the wholesale GE tax from 0.5% to 1.5% to fund Hawaii’s unfunded liabilities for the EUTF and ERS. SB1317 would increase the wholesale GE tax from 0.5% to 1.0% in 2016 and 2017 for infrastructure development and public schools.
  4. Surcharges on real property taxes. HB2065 and SB2292 would raise property taxes to fund public school capital improvements projects. HB2210 would raise property taxes collected from oceanfront properties to fund coastal protection.
  5. In 2059, you may owe GE taxes you didn’t know you owe. HB968 HD2 SD1 would make a taxpayer liable for any amounts passed on and separately stated as the tax owed by the taxpayer for the transaction in a receipt, contract, invoice, billing, or other evidence of the business activity. There’s also a civil penalty and reporting of violations.
  6. More GE tax paperwork and higher fees. SB2927 requires that GE tax licenses be renewed annually.

6 tax proposals that help Hawaii taxpayers:

  1. No GE taxes on wholesale transactions. HB1915, HB1973, SB946, and SB2705 repeal the GE tax on all intermediary business transactions.
  2. No GE taxes on food and medicine. HB419 proposes GE tax exemptions for food starting in 2020 and for medical services starting in 2018. HB1922 proposes GE tax exemptions for food starting in 2021 and for medical services starting in 2019. HB477, HB984, SB957 propose GE tax exemptions for food, while SB2006 proposes GE tax exemptions for certain food or food ingredients. HB1062 and SB2054 propose GE tax exemptions for medical services.
  3. Encouraging businesses and economic growth. HB470, HB1977, and SB958 repeal the corporate income tax. HB2667 and SB3012 reduce the corporate income tax rate by 50%.
  4. Helping seniors who worked and saved. HB245 excludes retirement income from the state income tax for taxpayers 65+ years.
  5. No penalty (double-taxation) for dying. HB476, HB1978, SB959, and SB2710 repeal inheritance and state taxes.
  6. A supermajority required to raise taxes or create new taxes. HB423 proposes a constitutional amendment to include a two-thirds supermajority voting requirement for the legislature to pass laws that raise taxes or create new taxes.

12 tax proposals to watch for – the good, the bad, and the ugly:

  1. GOOD: Tax at every level of production vs. retail sales tax. SB529 and SB1222 create a tax reform task force to review the general excise (GE) tax versus a sales tax.
  2. BAD: Keeping visitors away from Hawaii. HB2702 and SB2945 increase the Transient Accommodations Tax (TAT).
  3. GOOD: Tax credit for teachers. HB13, SB821 SD1, and SB2624 give school teachers a tax credit of up to $500 for out-of-pocket classroom supplies.
  4. BAD: Surcharge on wireless phones. HB431 imposes a prepaid wireless 911 surcharge of 1.2% of each retail sale. HB2276 and SB2805 impose a 66¢ surcharge for E911 per prepaid wireless transactions. SB193 SD2 HD2 imposes an unspecified prepaid wireless E911 surcharge per retail transaction.
  5. GOOD: Encouraging diversity in hiring. HB343, HB1870, and SB2219 offer a tax credit for six months for hiring an individual with a disability. HB1276 HD1, HB1871, and SB2218 offer a tax credit for an individual age 65 or over.
  6. BAD: Dollars for voting – can we trust the vote of someone who was bribed to do it? HB789 would offer a tax credit for voting in elections.
  7. GOOD: Calling all doctors. HB1073 offers a temporary income tax exemption for physicians and osteopathic physicians who relocate and practice in Hawaii.
  8. BAD: Higher taxes for a bigger social program. HB1253, HB1885, SB272 SD1, and SB2478 establish a long-term care surcharge on state tax to pay for claims for defined benefits under the long-term care financing program.
  9. GOOD: A helping hand for farmers and food security. HB2117, SB224 SD1, and SB2440 offer a tax exclusion for the first $50,000 earned to farmers earning less than $200,000.
  10. BAD: Higher taxes for drivers. HB2409 and SB2938 increase the State Fuel Tax and State Motor Vehicle Registration Fee, and state motor vehicle weight tax.
  11. UGLY: Warning ahead – higher GE taxes possible. HB320 and SB426 extend the deadline to establish a county surcharge and increase the maximum surcharge from 0.5% to 1.0%.
  12. UGLY: Politically self-serving. HB2600 allows an income tax deduction for political contributions.

If you feel strongly about an issue, please speak up! Contact your state senator and representative by phone, mail, or email. Talk to your family, friends, co-workers, and neighbors. Write to a local newspaper or magazine.

 

“In lieu of money” tax relief

August 11, 2015

In Lieu of Money

Taxpayers owe the State of Hawaii millions in unpaid taxes. How much? Delinquent taxes reached $456.1 million at the end of fiscal year 2014, according to the State of Hawaii Department of Taxation Annual Report, 2013-2014. (I calculated this amount by adding the $429.9 million delinquent tax balance and the $251.7 million in new delinquent referrals, minus the $225.5 million collected last fiscal year.

It bothers me that Hawaii has millions in uncollected taxes (last year saw 3,553 liens filed and $31.3 million in uncollected tax write-offs), and there’s not much we can do about it. We can harass them through letters or threaten them with a lien (and possibly force them out of their home) or subject them to wage garnishment (deduct money directly from their paycheck). None of that makes people want to pay taxes or helps people appreciate all the services that our taxes pay for.

Maybe we need a different way to pay taxes, one that doesn’t involve money. Maybe we need a way to give taxpayers some tax relief and allow them to pay taxes, student loans, and fines “in lieu of money” – that is, through goods and services.

Paying taxes through goods and services would provide tax relief while showing that we value everyone’s contributions, big or small. It could make it easier and less stressful to pay taxes. It could let us share our time, knowledge, and experience with our community. It could give taxpayers more choices in how we interact with government.

How could an “in lieu of money” tax relief program work? Here are a few examples:

* In lieu of income taxes and fines. A hair stylist could pay part of their income taxes in free haircuts to low-income individuals as part of a work-training program. This would give individuals confidence during job interviews and benefits the hair stylist because they may have future customers. A retail clerk could pay part of their income taxes by providing daycare or after-school care at public schools or local parks. This would give working parents access to childcare and help individuals keep more of their wages.

* In lieu of property taxes. A farmer could pay property taxes in fruits and vegetables that could be delivered to public schools or sold at farmers’ markets. This would give students access to fresh, local produce and guarantee a market for some of the farmer’s harvest. A retired senior could pay property taxes by mentoring small businesses and nonprofits. This would give small business owners and local organizations access to experienced business people, while keeping seniors active and connected to the community.

* In lieu of student loan repayments. A teacher could repay Hawaii student loans by participating in after-school mentoring or tutoring for adult education programs. This would provide help for students who want to learn and help new teachers keep more of their wages. A lawyer could repay Hawaii student loans by working on cases for the public defender or prosecutor, teaching classes, or offering free legal advice during community sessions. This would give individuals access to free or low-cost representation or advice.

Who could benefit from this program? Families at the border of low-income and middle-income, where a slight increase in income might mean a reduction in government aid… Recent graduates struggling to repay student loans in a tough job market… Families who are land-rich (for Hawaii) but bank-account poor (anywhere in the country)…

Of course, there would have to be some guidelines in place:

* Limits on “in lieu of money” payments. We would need to set a maximum amount of taxes, student loans, or fines that would qualify for the program. We might cap the program annually at $2,400 in tax payments, student loan repayments, or fines. This would reduce an individual’s monetary tax payment by up to $200 per month; the balance would be paid in cash.

* Caps on assets. People could qualify for this alternative tax payment program by having limited income, a limited amount of cash in the bank, and a single home that they use as their primary residence (no vacation homes or timeshares).

* Simple rate schedules. We would need fair, consistent, and easy to understand rate schedules that convert money owed to the government into goods and services. Ideally, rate schedules would be set by quality, skill, and experience, but there’s no easy way to rank products or capabilities across all professions. Maybe we could set the value of goods at cost plus 5%, and hourly rates based on education level (high school diploma/GED, Associate’s degree, Bachelor’s degree, Masters degree and higher).

* Fair and reasonable negotiators. We would need fair and reasonable negotiators who could approve and suggest accepted “in lieu of money” goods and services. The advocates could be program participants themselves.

The truth is that money is not our society’s most valuable commodity. There are many other ways to contribute to the community, pay it back, and pay it forward. What do you think? Could an “in kind” tax relief program succeed?