HI beefs up income tax from 8.25% to 11%

[Keith and stuff]

Hawaii Hikes Income Taxes to Pay for Earned Income Credit
July 24, 2017
Kari Jahnsen
https://taxfoundation.org/hawaii-inc...income-credit/

On July 10, Hawaii Governor David Ige (D) signed a bill that significantly alters Hawaii’s tax code. The bill, HB 209, has two main provisions. Together, the provisions implement a state-level Earned Income Tax Credit and reinstate top marginal individual income tax rates that had been allowed to expire. While the tax credit is widely supported, it may affect only a small portion of eligible residents. On the other hand, the increased top individual income tax rate could raise costs for local businesses.

In 2009, Hawaii passed a temporary tax increase on high-earners, which expired in December 2015. HB 209 reinstates those rates on a permanent basis. The hike is expected to bring in $51 million in additional tax revenues in 2018. With the EITC expected to cost $16.7 million, the state anticipates that the rate adjustment will bring in an extra $20 million to $40 million in annual tax revenue, after accounting for a separate refundable food/excise tax credit for low-income families that is now being made permanent.

Currently, Hawaii has a top marginal income tax rate of 8.25 percent for a single filer making over $48,000. HB 209 will create three new brackets with new corresponding rates. In the highest bracket, single filers will face an 11 percent tax rate on all income over $200,000.

This has serious economic implications for Hawaiian businesses. In particular, the application of the new top rate to pass-through businesses is concerning. These businesses report their income on an individual’s personal tax return, rather than on a separate corporate filing, and are thus taxed at individual rates.

According to the latest available IRS data, about 8,000 Hawaiians making over $200,000 listed income from pass-through businesses on their tax returns. These filers accounted for only 22.9 percent of pass-through businesses, but contributed 84.5 percent of net pass-through income in 2014.

With the new law in place, Hawaii will levy the second highest top rate in the nation on these businesses. Such a high top marginal rate could discourage business investment in Hawaii, particularly among small businesses. In 2013, small businesses accounted for 96.2 percent of Hawaiian employers, and employed over half of the state’s workforce. Even though not all small businesses are pass-through entities, the impact on those that are could be tremendous.

[CaptUSA]

There. That'll fix the problem!