WASHINGTON — Tax fairness and income inequality have become key issues in the 2012 presidential campaign. But it’s hard to compare what tax rates the poorest and wealthiest Hawaii residents pay, in part because the state has stopped tracking that data.

On a federal level, the tax fairness issue came to a head earlier this year in the race for the Republican presidential nomination when former Massachusetts Gov. Mitt Romney was pressured to release his tax returns.

Romney, who is worth as much as $200 million, paid an effective tax rate¹ of 13.9 percent in 2010, according to a Washington Post analysis of his tax records. Romney’s income last year was nearly $21 million, mostly from investment profits, dividends and interest. In other words, none of his income came from wages, the primary income-source for most Americans.

If Romney’s income had been earned in wages, he would have paid the nation’s highest tax rate: 35 percent. The fact that Romney paid 13.9 percent instead illustrates how U.S. tax policy favors investment income rather than wage income, and helped fuel the debate over tax fairness.

The 13.9 percent effective tax rate on Romney’s investment income in 2010 was closer to the lowest tax-bracket rate for wage earners: 10 percent. The average American paid an effective federal tax rate of about 11 percent in 2009, the most recent year for which data was available, according to the Washington, D.C., nonprofit Tax Foundation. (It should be remembered that a significant percentage of Americans pay not federal income tax.)

Effective tax rates measure the percentage of income that an individual pays in taxes, and can be calculated in different ways. The effective tax rates described in this story are based on adjusted gross income, a narrow measure that produces a higher rate than other calculation methods that account for government transfers, income from bonds and other benefits.

While the average American paid an effective federal tax rate of about 11 percent in 2009, the nation’s top earners — the top 1 percent of them — paid a rate of more than 24 percent, according to a Tax Foundation analysis of IRS data. The bottom half of earners had an effective tax rate of less than 2 percent that year.

The IRS keeps some state-by-state data. An IRS report of the most recent state data available shows that it collected $6.3 billion from Hawaii residents in 2010, which amounts to about 0.3 percent of the $2.4 trillion that the IRS collected nationwide that year. But the agency can’t say what the average Hawaii resident’s effective federal tax rate is.

The Congressional Budget Office (CBO) estimates broader measures of effective tax rates by combining IRS data and population data from the U.S. Census Bureau, but the estimates are not Hawaii-specific.

A CBO spokeswoman told Civil Beat that her office does not “cover that level of detail” on state-by-state federal tax rates. At the state level, too, it’s hard to say who is paying what in Hawaii. The Hawaii Department of Taxation doesn’t have detailed data breaking down the effective tax rates that state residents pay, a spokeswoman for the department told Civil Beat.

“We used to have statisticians and people that would normally do that kind of stuff,” said the department’s public information officer, Mallory Fujitani, in a phone interview. “This is where people would really love us to get the staffing level back up because they really do help shed light on whether we’re being fair in our application of the law.”

Residents in other parts of the country have access to data that provides such perspective. In New York, for example, the New York Department of Taxation and Finance publishes an annual report detailing the distribution of individual effective tax rates by income level.

In recent years, the Hawaii tax department only keeps data on those who file N-11 forms, which are typically used by higher-income filers because the forms entail itemized deductions. Fujitani said the data from N-11 forms offer an incomplete picture for the following reasons:

• Lower income taxpayers may not make enough income to have to file federal tax returns, but will file state income tax returns just to claim the refundable food/excise tax credit.

• The state does not tax pensions, so if that income is the taxpayer’s primary source of income (or they have other income that’s not taxed) they may file a federal return, but not a state return. 


• The data hasn’t been “cleaned and edited” by research staff.  This function essentially looks for possible quirks/mistakes in the electronic data.

• N-11 filers can be broadly characterized as the higher income taxpayers because most N-11 filers are taking itemized deductions, rather than just the standard deduction. The most common reason for filing a N-11 is because the taxpayer has mortgage interest deductions.

The Tax Foundation’s Mark Robyn said in an email that while the state Department of Taxation is “the only place that will have real-world data” to illustrate Hawaii individual effective tax rates at different income levels, there are organizations that make estimates in order to compare states.

For example, a 2009 study by the nonprofit Institute of Taxation & Economic Policy found that Hawaii ranked sixth-highest for taxes on the poor. That report, based on 2007 state tax data, found that the average tax rate for Hawaii residents was 10 percent while the average tax rate for the poorest fifth of the Hawaii population was 12.2 percent.

“This is based on their state income tax computer model, and is just an estimate,” Robyn cautioned. “If other organizations tried the same thing they might come up with another estimate, depending on their assumptions.”

Even if it were possible to obtain concrete data about the average effective tax rate for Hawaii individuals, such an average could be misleading because of how many wealthy individuals live in the state. More than 7 percent of the state’s population has at least $1 million in available assets, according to an annual report released in October 2011 by the firm Phoenix Marketing International.

It’s also important to note that there are variations in effective tax rates within any given income category because taxpayers claim a wide array of deductions — some have more children than others, some make more charitable contributions, and so on. Tax blogger Mary O’Keefe makes this point in her December 2011 critique of a state-by-state comparison by the Tax Foundation.