Gov. Neil Abercrombie‘s tax reform plans took another hit Friday.

Lawmakers cut his proposal to tax pensions, trimming $62 million in revenue from the $112 million he hoped to bring in.

The Senate Ways and Means Committee heard testimony on Senate Bill 162, which strays from the governor’s original plan to tax pensions of more than $37,500.

The new version ups the thresholds — by as much as 100 percent — to tax pensions of higher earners. This version would instead bring in $50 million, according to the state Department of Taxation. The measure would affect 3 percent of taxpayers, compared to Abercrombie’s plan, which would have applied to 8 percent.

Still, retiree groups, such as AARP Hawaii, oppose the plan, citing the challenges of living on a fixed income that would shrink if taxed.

The Tax Foundation of Hawaii shared concerns about both versions of the bill because they used what’s called federally adjusted gross income as the threshold. That includes all forms of income, and could include Social Security benefits that have already been taxed at the federal level.

“The governor said this wouldn’t tax Social Security, but by using federally adjusted gross income, it could,” Lowell Kalapa, executive director of the Tax Foundation of Hawaii, testified. “If we’re looking at this income called pension, we shouldn’t use a threshold that looks at all other income. To be fair … look solely at the amount of pension income.”

The average state government retiree earns a pension of $23,000, according to the state Tax Department.

Senators asked Tax Director Fred Pablo about taxing only pension income.

“That is a possibility for this committee to consider,” Pablo said. “As presently proposed from the administration and the Senate, it just looks at federal [adjusted gross income], which could include other types of income.”

Here’s a comparison of the proposed thresholds:

Abercrombie’s version

  • $37,500 for single or married filing separately
  • $56,250 for head of household or surviving spouse
  • $75,000 for joint returns

Senate Bill 162

  • $75,000 for single or married filing separately (double the original proposal)
  • $100,000 for head of household or surviving spouse (75 percent higher)
  • $125,000 for joint returns (66 percent higher)

Kalapa suggested adding a sunset date to the bill to be able to track its impact. He also cautioned that once it becomes law, future lawmakers could always tinker with the thresholds.

“While these thresholds are quite generous, there’s always the slippery slope that those thresholds will fall,” he testified. “Should the state need additional revenue, future legislatures could reduce those.”

Ways and Means chairman Sen. David Ige said Friday’s hearing was basically to listen to testimony. He told Civil Beat the bill likely won’t be scheduled for a vote any time soon. The committee asked the tax department for more information, including how the proposal would impact different income brackets.

Earlier this week, the Senate Judiciary and Labor Committee killed SB 1268, the governor’s plan to save $42 million by cutting Medicare Part B for current retirees and dramatically cut back his proposal to save $32 million by ending the use of overtime in figuring retirement benefit.

Another Abercrombie proposal, SB 570, which would raise about $99 million through eliminating the deduction for state income taxes paid, has yet to be scheduled for a public hearing. The Ways and Means committee did pass a so-called short form version of the bill on Thursday, to keep the proposal alive.

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