TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, July 9, 2011

Forbes: Hawaii Adopts Obama-Style Tax Hike on the 'Rich'

Forbes, Hawaii Adopts Obama Style Tax Hike on Rich, by Janet Novack:

[T]he largest dollars in President Barack Obama’s proposed deficit-reducing tax hikes ($293 billion over ten years) come from limiting the value of itemized tax deductions claimed by the better off.

While it’s gotten little notice on the mainland, Obama’s birth state has just raised its taxes on the well off  in much the same way.  Last month, Democratic Governor Neil Abercrombie  signed S.B. 570, making Hawaii the first state in the nation to place a dollar cap on the itemized deductions that better off taxpayers can claim. For 2011 through 2015, singles in Hawaii with adjusted gross income above $100,000 will be allowed to claim a maximum of $25,000 in deductions for mortgage interest, charitable giving, medical expenses and the like, while couples with AGI above $200,000 will be allowed no more than $50,000. Moreover, the new law requires these folks to figure their tax bills another way, applying a federal partial phaseout of itemized deductions for the better off. ... High income Hawaii residents must then use whichever restriction produces the higher tax bill.

[A]ccording to an analysis by the state’s Department of Taxation, ... than $40 million a year extra being extracted from the wealthiest 26,000 Hawaii households. Note that Hawaii already has the highest state income tax rate in the nation—a hefty 11% on taxable income above $400,000 for a couple or $200,000 on a single.

By contrast, Obama’s deduction takeaway—which he proposed in his 2010, 2011 and 2012 budgets and again in his April deficit reduction speech—wouldn’t put a strict dollar cap on itemized deductions.  Instead, it would reduce the value of those deductions in two ways.

First, it would reinstate that Sec. 68 partial phase-out of certain itemized deductions that the George W. Bush tax cuts suspended—a provision that added in the 1990 tax-raising, deficit-reduction deal cut by the administration of George H.W. Bush.  That phase-out takes away $3 of deductions for each $100 of  income a couple has above about $175,000. But it never reduces taxpayers’ deductions by more than 20%.

After that, another new gotcha would apply. It would allow those remaining deductions to be credited at only a top 28% tax rate—even though the top tax rate is 35% and, unless Congress acts, will rise to 39.6% in 2013 when the now extended Bush tax cuts expire. Moreover, taxpayers paying the alternative minimum tax (which has a top rate of 28%) would only get to apply these deductions at a 21% rate. ...

The net effect of ths new restriction is that $1 dollar of charitable giving, that now can save a well-off donor 35 cents of tax, would save him only 28 cents, or 21 cents if he’s paying AMT.

Hawaii already had the highest state income tax rate (11% on income of $200,000 single/$400,00 married).  The U.S. Commerce Department's Bureau of Economic Analysis reported last month that Hawaii's GDP 1.2% growth rate was in the bottom quintile among the 50 states (average 2.6% GDP growth rate).

Tax | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Forbes: Hawaii Adopts Obama-Style Tax Hike on the 'Rich':


This is inherently deceptive. It raises the effective tax rate while they can claim they did not raise (statutory) tax rates. It also adds another layer of complexity to figure out the standard deductions.

Assuming the Hawaian political class is not just a bunch of liars, what is the POINT of reducing deductions. Want to discourage people from charitable giving?

Posted by: Ed D | Jul 10, 2011 6:05:41 AM

I just did my Hong Kong taxes, it took me 20 minutes to fill form out and an hour to gather documents and do calculations. No cap gains tax, no dividend tax, no unearned income tax. No crazy deductions, (although we do have a silly mortgage deduction that is helpful, but would be better to cut rates and dump that as well).
Did I also mention that HKG is refunding every resident, including expats who hold a permanent id, USD $800 this year. Again, could make it easier, but why laugh at money.
The US problem is a complicated tax system that is costly in addition to being burdensome.

Posted by: mark simon | Jul 11, 2011 6:01:19 AM

@Ed D, Of course the Democrats would like to discourage charitable giving. A dollar in charity is a dollar that is not used to make someone dependent on the government.

Posted by: johnnycab23513 | Jul 11, 2011 6:15:33 AM

Haven't lived there, nor been there, in decades, but I'll bet money that it's closely related to kneejerk class-warfare ideology.

I went to high school in Honolulu in the late Fifties. (Wallace Rider Farrington for a year, among others. Good experience.) My mother worked at Bishop Estate during that time. I read Michener's book Hawaii twice, and studied local history in some detail.

There was no overt socio-political strife in the Islands at that time, but there was an underlying jealousy of the Landed Classes, if you will. These were the monied haole families whose kids went to Punahou (I took one summer session course there, 3 years before Barack Obama was born) and whose ancestors had overthrown the Hawaiian monarchy.

In addition, one day I noticed something in the newspapers about a local political controversy. Apparently it was running pretty hot, because this then a-political kid remembers asking my dad what the "ILWU" and "Harry Bridges" were.

Research those and I'll bet you'll find where this current legislation is coming from. Thought patterns change only glacially, and that faction is on top now -- kneejerk ideological, and therefore functionally stupid.

Posted by: pre-Boomer Marine brat | Jul 11, 2011 6:34:51 AM

From the Obama's perspective - and that of leftwing and probably a lot of rightwing politicians - the purpose of the income tax is not to raise revenue, but to control and manipulate the economy. To a very large extent, they govern us by how they tax us, rather than through the traditional method of directly passing laws on any particular matter. Deductions, credits, exemptions, surtaxes, penalties - all of these things are calculated to affect our behavior. Tax legislation is the real legislation - most everything else is window dressing and patronage spending. Most other important "legislation" has been delegated to the administrative agencies.

This is why these people really don't care about deficits. This is why their answer to practical problems, like how do we pay for welfare, interest, and yes, even defense, is raise taxes and increase the debt ceiling. (In my view, borrowing is no different than taxation - it extracts money from the economy. Were it not for the psychology of the situation, the government could probably just borrow all the money it needs each year rather than engage in the tax game.)

And this is a major reason why the income tax needs to be repealed, and replaced with a consumption tax.

Posted by: punditius | Jul 11, 2011 6:51:10 AM

"Note that Hawaii already has the highest state income tax rate in the nation—a hefty 11% on taxable income above $400,000 for a couple or $200,000 on a single..."

I wonder why so many articles on Hawaii's taxation omit their infamous General Excise Taxes. Yes, Hawaii's taxes are the highest in the nation, and that's without including the 4.5% of YOUR GROSS INCOME the state will steal if you happen to work in one of the industries targeted by Hawaii - (in which White people normally excel); banking, insurance, real-estate, architecture and engineering. If you're in any of these "high-paying" fields, get ready to pay out 4.5% of your GROSS - OFF THE TOP, before you even begin to pay your state taxes. And if you don't like it, they'll send some thug Hawaiians to beat you, and burn down your house..!

Posted by: Craig Bodeker | Jul 11, 2011 6:57:54 AM

The U.S. tax return already has limitations on charitable contributions, which is why there is a carryover, in addition to the phased reduction of itemized deductions for taxpayers over a certain income.

But, a certain former resident of Hawaii has pushed limiting charitable deductions and making more people dependent upon the goverment.

Charity tax limits upset many - The Washington Times, February 27, 2009

...Still, the charitable giving deduction reduction, which would limit deductions for couples making $250,000 or individuals making $200,000, provoked the most heat Thursday. Mr. Obama is counting on that provision to raise $179.8 billion over 10 years.

Roberton Williams, senior fellow at the Tax Policy Center, said it’s impossible to calculate the exact effects of all the tax changes, but said the overall result is clear - less philanthropic giving.

“This will lead people to give less to charities if they behave the way they’ve behaved in the past,” he said. “We’ve already seen a drop in giving as a result of the economic collapse. On top of that, this will just reduce the amount of giving.”

Asked about that, Office of Management and Budget Director Peter Orszag said Mr. Obama took care of that by giving charities government money to make up part of the difference. ....

Posted by: Woody | Jul 11, 2011 7:31:50 AM

They're gonna lose a lot of Californians who go off to retire there...

Posted by: DirtCrashr | Jul 11, 2011 8:49:20 AM

Following the "Law of Unintended Consequences" I see three results for this ham-fisted attempt at class warfare;

- a significant rise in unemployment.
- a serious reduction in tax revenue for the state.
- a lot of very nice property for sale.

I thought about making a trip to Hawaii, even though I'm not particularly wealthy, but I think I'll go to Texas instead.

Posted by: forrest | Jul 11, 2011 9:07:23 AM

"the Hawaian political class is not just a bunch of liars, what is the POINT of reducing deductions?"

Bad assumption. The Hawaii political class is/are a bunch of liars.

"Want to discourage people from charitable giving?"

Yes. They want the non-profit sector to depend on the legislature (aka the political class) for handouts.

Posted by: JKS | Jul 11, 2011 10:56:58 AM

The posted information is new to me. The arguments here have been about the GET and its exemptions, being more pervasive, and comparatively little on the actual methods used in the income tax.

Note the General Excise Tax (which some refer to as a Sales Tax but it is not like the sales taxes most people on the mainland encounter) is extensive enough that it brings in something like half to two-thirds of general state revenue, I think. As a result, a decline in business hits the GET recipts pretty hard.

Now the legislature has recinded various exemptions to the GET which were put into place, partially or mostly, to offset the pyramiding effect of applying the GET to various levels of "retail" activity before it gets to the actual 'retail' level. Something like that.

Posted by: GFH | Jul 11, 2011 11:21:39 AM

That last paragraph is misleading. It slyly suggests Hawaii’s higher tax rate caused its anemic GDP growth. Since the tax increase was just passed a cause and effect are unlikely.

Furthermore, comparing the BEA data with the top tax rates in each state fails to indicate that higher top tax rates lead to lower GDP growth. <>

Oregon has a top income tax rate comparable to Hawaii's—11% for incomes greater than $250k and yet they are in the highest quintile for GDP growth with 3.4% growth. New York, D.C., and Vermont are all in the top quintile for BOTH GDP growth and top tax rates—all with top rates of 8.5% or greater.

Wyoming and Nevada, neither of which collect income taxes, are in the bottom quintile with negative growth rates of -.3% and -.2% respectively.

Top income tax rates may affect growth, but Janet Novack's data doesn't appear to show that affect.

Posted by: Scott Brenenr | Jul 11, 2011 12:44:20 PM