I received an interesting email yesterday from my old friend, Chuck Smith, a proud product of Lanai High School, now living in California. His blog, Of Two Minds, is a constant flow of provocative economic and political data and analysis.
His comment takes off from a Wall Street Journal story about income taxes on high income taxpayers. He notes that, according to the WSJ, Hawaii has a low threshold for its highest marginal tax bracket, a high proportion of millionaires, but a comparatively low proportion of income taxes collected from the highest income taxpayers.
Hi Ian:
Did you see this article on “taxing the rich” in the WSJ.com?It’s well worth a look, as it is apolitical and simply points out how relying on income taxes on the wealthy is a policy that leads to state budgets falling off a cliff when the wealthy folks’ stock portfolios crater.
I noticed in the chart that Hawaii taxes $200K as “wealthy” compared to $500K in NY and $1M in Calif. Yet Hawaii collects only half the income tax off its top wage earners (20% of all taxes) compared to 40% in Calif., NY, etc.
Given its high nominal tax rate and low threshold for “wealth” then Hawaii should be collecting a lot more of its income taxes from the top.
That raises all sorts of questions.
#1 is that with a big mortgage and a couple of kids in private school or college, $200K isn’t really all that much money. I think the $500K threshold of other states is more realistic for the top bracket. It’s really only the top 1% who are truly wealthy, and so they should pay the lion’s share.
#2: why is the state collecting so little from its population of millionaires? There must be some big tax breaks at the top end.
#3: Maybe Hawaii depends on income taxes too heavily. property taxes in Hawaii are very low compared to Calif. Why not a “surcharge” on properties worth $1M and up? That would only affect the top layer of property owners.
Just for context: California has run out of oxygen because it basically taxes everything and everybody heavily. The property taxes are very high—we pay $11K annually on a property assessed at $430K. Income taxes are also high, though they are very progressive (see article above). Sales tax is 9.75%, the only “break” being it isn’t applied to services (dental bills, etc.) or food. add in business license taxes and other local taxes, and the truth is most people with incomes around the median pay a lot of tax here, in every category, as do the well-off. the “wealthy” pay most of the income tax, so the progressive system works, but the problem is the wealthy’s income is now heavily dependent on an erratic stock market.
Food for thought when you think about how to make Hawaii’s tax system more equitable.
chuck
The WSJ story notes that Hawaii raises the lowest proportion of total revenues from income tax, and the lowest proportion of income taxes from those in the top 1% of earners, of those states highlighted in the table that accompanies the story.
The low figure for all income taxes reflects Hawaii’s general excise tax, which is the major source of state revenue. It has an advantage, for residents at least, because visitors account for a healthy percentage of the total GET payments. That’s important. We’re essentially exporting our taxes to residents of other states. If we relied more heavily on income tax, we would lose this advantage.
The property tax issue is also important. It’s true that Hawaii’s rate is at near the bottom of all metropolitan areas, as I’ve commented here before.
Thanks, Chuck. Lots of stuff to think about.
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Hawaii consistently ranks in the top ten nationally as to the total tax burden placed on residents.
I don’t think our problem is that we are under taxed.
The tax Hades of California, with all its attendant problems, is not a goal to which we should aspire.
Senator Hee held AG Louie’s confirmation hearing yesterday and despite over-whelming testimony in support, grilled Louie for about 35 minutes before recessing the hearing until next Tuesday. Hee went after Louie over an opinion sent to Hee on HB 1092 proposing to tax State pension income which advised Hee that if enacted, it could be subject to legal challenge under provisions of the Hawaii constitution.
Many Hawaii “millionaires” are judged so on the basis of the perceived value of their property. If you bought your home 30 years ago, and it’s a reasonably nice place, even if you make less than 50K a year you might be considered a “millionaire.”
Burl,
I shared your doubt about the claim we have “the most millionaires per capita,” and assumed the study was including our over-inflated home prices in their analysis. It turns out my assumption was wrong.
The source for the “most millionaires” claim comes from a study done by Phoenix Marketing. This is from their website:
“Phoenix’s annual market sizing analysis and aggregate wealth rankings shows that approximately 6.4% of Hawaii’s households are millionaires, leading the nation for the second year in a row. Phoenix defines a millionaire household as one with $1 million or more in investable or liquid assets (excluding sponsored retirement plans and real estate). ”
Different folks would define “millionaire” differently, depending upon what they are trying to measure. If we are measuring “wealth,” I think it is reasonable to include real estate, particularly real estate other than the primary residence.
Phoenix appears most interested in figuring out where people with money to invest live.
Everyone thinks we should resolve the deficit problem, but nobody wants to help pay for it. If the rich — defined by whatever criterea — were asked to give up the equivalent of one weekend Las Vegas getaway, we could make real progress toward a solution. Why is that so unreasonable? And, for heaven’s sake, wailing over an additional nickel tax on a bottle of Coke is simply absurd.
I think more people would be willing to pony up if they felt that it would actually make a difference.
Please cite your source for the opinion “Hawaii consistently ranks in the top ten nationally as to the total tax burden placed on residents.”
Sure. Here ya go. One of many such studies.
http://www.jsonline.com/news/wisconsin/89702927.html
Richard,
Here is how they define the tax burden:
“Tax burden per capita is total tax collections spread over population.”
Using that methodology, Alaska is BY FAR the state with the highest tax burden per resident.
Because Hawaii relies so heavily on the GET for our taxes (about 2/3), we are able to export a much higher % of our tax load to non-residents. Local tax authorities estimate we “export” about 38% to non-residents.
So any computation of tax burden which simply takes the total of all taxes collected and divides the sum by the number of residents will over-report Hawaii’s tax burden.
If 2/3 of our total taxes come from the GET and if 38% of that is exported to non-residents, math on the back of an envelope would suggest the “study” cited over-reports the tax burden on Hawaii residents by about 25%.
Interestingly, conservatives like to pretend they understand economics better than liberals, yet the often make this mistake, not bothering to investigate the “facts” they cite.
The tax totals are the sum of all local, city, county and state taxes. I don’t think the GET represents 66% of the that total?
In fact, as the chart on the website clearly shows, the GET is 39%. So even with the tourist share the export is under 15%. And this is before the most recent fee and rate increases.
(I guess if the conservatives fail at economics, the liberals just fail at reading,huh?)
Anyway my point stands – the problem is not that we are under taxed.
Touche, Richard. Well played. I was sloppy.
I saw the 2/3 figure somewhere recently and it stuck in my brain. As a result, I was (almost) as sloppy in talking about economics as a conservative! My bad. The exact percentage of the STATE revenues coming from the GET vary slightly, year to year, but it is very close to 50%.
When State and local taxes are combined, which is appropriate for considering the total tax burden on residents, it DOES drop to about 39%.
So the math problem changes to 39% x 38% if we want to figure what percentage of the “per resident tax burden” gets over-reported by the study you cited. Which brings us to the 15% figure.
To be fair, other states also export a portion of the tax burden. But since Hawaii collects a much higher percent of our total revenues from a “sales” tax than other states, and because tourism is our major industry, I doubt any other state is able to export anywhere near as high a portion.
Once that 15% exaggeration is factored into the analysis, it is obvious that Hawaii’s actual tax burden is significantly lower than most rankings state.
Thanks for insisting I be accurate with my facts. Now if only you can get your fellow conservatives to stop exaggerating how much of a “tax hell” Hawaii is, we can all move forward towards a calm, rational discussion of the subject.
If you think you’re not paying enough taxes, I’m fairly confident the government would welcome additional donations on your part.
Hawaii property tax rates will always appear abnormally low because Hawaii public schools are funded by the DOE (i.e. state revenues), not by the individual counties.
Thanks for raising the topic here, Ian. I guess one way to look at taxes is in terms of proportion: are those at the highest income/wealth levels paying proportionately as much as those in the lower brackets? It seems likely that a family earning $60K in Hawaii is paying a lot more total tax as a & of their income than a household earning $600K.
The excise tax is extremely regressive. I wonder how much of it is really paid by visitors.
“property taxes in Hawaii are very low compared to Calif.” Yea, so? STOP comparing Hawai’i to cali. No one cares.
” Why not a “surcharge” on properties worth $1M and up? That would only affect the top layer of property owners.”
Uh NO. It would affect a major portion of property owners. “top layer”? what is that a thin slice you assume?