Ka Wai Ola - Office of Hawaiian Affairs, Volume 6, Number 3, 1 March 1989 — Taxes and You [ARTICLE+ILLUSTRATION]

Taxes and You

By Lowell L. Kalapa, Director Tax Foundation of Hawaii

Administrat ion Proposes Tax Changes

Faced with an embarrassment of riches, the state administration has proposed to use some of the $470.6 million in surplus funds to "give" taxpayers a break. The administration has proposed a tax package whieh it says will reduce taxes by an estimated $51 million. One of the new

lures of the proposal is a brand new "tax credit" for medical care services. The credit will be available to all taxpayers, regardless of ineome, and will be equal to the amount paid as the 4 percent tax on expenses for medical, dental or other types of health care. Generally, expenses whieh qualify are those whieh you would have been able to elaim if you itemized your deductions for ineome tax purposes. There is a $200 limit on the credit, however. A taxpayer over 65 years old ean elaim up to $400 and if both spouses are over age 65, the maximum credit is $600. This translates into $5,000, $10,000, and $15,000 of medical expenses. Also being proposed is an increase in the standard deduction whieh is the amount you would take if you did not have sufficient deductions to itemize. The standard deduction would increase, as shown below, from: $1700-1900 joint return, surviving spouse $1500-1650 head of household $1000-1500 individuals $ 850- 960 married, filing separately Another part of the proposal recognizes that perhaps the state ineome tax rates were not adjusted sufficiently when the state adopted all those changes made by the 1986 federal tax reform act. As a result, the rates are being altered, particularly for low ineome taxpayers as follows: Joint — 2 percent up to $3,000 taxable ineome to 10 percent over $41,000 of taxable ineome— 8 steps Head of Household — 2 percent up to $1,500 taxable ineome to 10 percent over $41,000 of taxable ineome — 8 steps Estates and Trusts— 2 percent up to $1,500 taxable ineome to 10 percent over $20,500 of taxable ineome — 8 steps The measure also proposes to extend the current $50 per exemption renter tax credit to those individuals with adjusted gross incomes of more than $20,000 but with less than $30,000. The current law allows only those with adjusted gross incomes of less than $20,000 to elaim the credit. Last but not least, the measure proposes to grant the maximum dependent care tax creditrate to those with adjusted gross incomes of less than $22,000 before the amount of the credit begins to be reduced to 10 percent. The current law extends the maximum credit only to those with adjusted gross incomes of less than $10,000. So what does this mean for you as a taxpayer? Let's take that new credit first. The medical expense credit is no doubt in response to efforts in recent years to exempt medical services from the general excise tax. Like the Food Tax credit enacted as part of the 1987 state tax reform package, the credit is being granted without regard to the taxpayer's ineome status or ability to pay. These two credits are a marked change in direction from the other ineome tax credits designed to alleviate excessive tax burdens imposed by other taxes imposed by the state. Since, these credits are not based on ineome, that is, anyone ean elaim them even though they may have substantial incomes, the credits merely represent rebates and don't recognize that the 4 percent tax takes a bigger share of ineome than

others. The new medical expense credit also highlights the misunderstanding of the real reasons for the high cost of medical care, if not cost of living, in Hawai'i. The credit is intended to be an offset against medical expenses on whieh the 4 percent general excise tax has been paid. For the vast numbers of Hawaii's residents who belong to a health maintenance organization (HMO), the credit will be meaningless as these residents have paid for their medical care through a premium and are subject merely to a registration fee. Thus, there is no visible 4percent tax imposed on individual members..On the other hand, for those with group medical insurance who pay the physician first and then are reimbursed by a medical insurance carrier, this proposed credit would be available as the billings would reflect the 4 percent tax. Thus, this proposed medical services credit favors one type of health care coverage over another and cannot be justified on the basis of equity. The measure also makes modest adjustments to the ineome tax rates whieh were proposed for tax years beginning after December 31, 1988, and makes these new adjustments permanent. The maximum tax rate remains at the 10 percent level with the rate reduction percentages declining as ineome rises. Unfortunately, these rate reductions still do not put state ineome tax on the revenue neutral target that had been the hope of the administration and the legislature when they initially adopted the changes made by the Federal Tax Reform Act of

1986. The rates established by the 1987 law provided only modest tax relief through the rate adjustment structure, relying heavily on the $45 food tax credit to mitigate increases in tax liability and therefore tax collections. For example, individuals with $20,000 of ineome and couples with $41,000 of ineome will be paying the top rate of 10 percent. Given what wages are like today, these are not "high" incomes by any means. More than likely, people earning this kind of money are "middle class" and are just barely making ends meet what with the high cost of housing, food, transportation, etc. True, there are suggestions to increase the renter and dependent care credits as well, but these are available only to those who have these expenses. For the working man or woman, the meaningful component is the tax rates and brackets. If nothing else, legislators should re-examine the tax rates and brackets to bring them into line with reality. While this tax package is just the administration's proposal, state legislators will have a crack at it before the session is over. What "relief' is proposed in this measure doesn't begin to make up for what state government took away in the adoption of the 1986federal tax reform act. If the proposed spending plans of the state administration are condoned along with the minimal adjustments afforded in this measure, taxpayers ean be sure that they will eonhnue to pay dearly for state government. If these minimal adjustments are adopted, taxpayers will be sorely disappointed when they file their returns in 1990.