Sunday, July 10, 2011
[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).