It might seem unlikely any Republican idea would gain traction in Hawaii’s political climate, but there are elements in the Republican Tax Reform agenda which might just be perfect for the Aloha State. 

While the Republicans are cobbling up an actual tax reform bill  — The Trump administration released details Wednesday — likely the main elements of the bill will be modeled after The Better Way Republican Tax Reform Blueprint published in July 2016. 

While there are parts of the Republican Tax Reform Blueprint I disagree with (primarily, the actual tax rates), there are elements in the Blueprint which Hawaii should consider adopting. 

A Higher Standard Deduction

Hawaii’s current standard deduction is $4,400 for a married couple and $2,200 for a single person. The current federal standard deduction for 2017 is $12,700 for a married couple and $6,350 for a single person. The Republican Tax Reform Blueprint raises the standard deduction to $24,000 for a married couple and $12,000 for a single person. 

Generally you’re required to file a tax return if your income is above the standard deduction, plus personal exemption amount.  For Hawaii the personal exemption amount is $1,144, meaning you’re required to file an income tax return if you make over $3,344 for a single person or $6,688 for married taxpayers. The federal poverty line for a single person is $12,060. 

US Capitol House chambers Congress1. 6 june 2016
The U.S. House of Representatives. Congress intends to take up major tax reform legislation this fall. Cory Lum/Civil Beat

This means there are Hawaii residents who are not required to pay federal income taxes but are required to pay Hawaii income taxes. This is not only problematic for the taxpayer but also for the Hawaii Department of Taxation who has to process these tax returns and provide services to these accounts, whether it be answering phone calls, assisting taxpayers with their filings or monitoring payment accounts for over or underpayment. Raising the standard deduction and/or personal exemption amount in Hawaii effectively takes low-income Hawaii residents out of the tax system, leaving resources for DoTax to focus on compliance and enforcement efforts on the larger accounts. 

Recently Hawaii has added in its own version of the Earned Income Tax Credit. It would take another 800 words for me to describe why this was probably a bad idea. But generally I believe tax systems should focus on collections, compliance and enforcement while welfare programs should be administered by other government departments.

The Immediate Expensing Of Equipment

Under current federal and Hawaii tax rules, equipment which has a useful life greater than one year, must be written off over multiple years. The philosophy is when you purchase equipment, such as a car/truck/van, the car will last you more than one year and therefore the cost (or deduction) of the automobile should be allocated over the years that automobile remains useful.  Depreciation represents the portion of the total cost which can be written off in the current year. While this sounds simple in theory it can get very complicated very quickly.

To spur business spending, federal tax laws often allow for additional depreciation or the ability to write off more of the equipment costs upfront. Hawaii has decoupled itself from many of these federal tax provisions on additional depreciation creating a different net income amount for federal vs. Hawaii, which is problematic because it’s often confusing. Confusion in the tax system is a breeding ground for fraud, human error and inability to effectively enforce the law. 

To spur business spending, federal tax laws often allow for additional depreciation or the ability to write off more of the equipment costs upfront.

The Republican Tax Reform Blueprint allows the immediate expensing of most equipment used in a business which should encourage businesses to invest in their operations. Anyone who has ever owned a business knows the excitement and draw of purchasing new innovative equipment, whether it be a nice camera for a photography business, medical equipment for a doctor, or a fortune cookie maker for a bakery. Think of the ability to immediately write off the total cost of this equipment as a government discount on such equipment. 

Generally, I would recommend Hawaii conform to the current federal laws on additional depreciation or if federal tax reform was passed, to conform to any federal tax laws regarding depreciation.  When Hawaii is often in the bottom half of places to start a new business, this is one way to spur entrepreneurship without giving up certain Hawaii values, such as regulations protecting environment and its residents.

Tax Credits And Deductions

Tax credits and deductions are problematic in a sense that there are simply too many to keep track of. Often tax credits unfairly enrich the particular industry who lobbied for them and do not bring about the change intended. 

To add insult to this, Hawaii has a unique rule in which most tax credits must be properly claimed within one year compared to the typical three years you or the taxing authority has to make any changes to your tax return. Often the Hawaii Department of Taxation examines and disallows these tax credits after the one year mark making the taxpayer unable to correct what was only a paperwork error.

Any CPA in Hawaii can tell you a horror story regarding this rule, but they all end the same where the taxpayer qualified for the credit, but lost because either they filed too late, they forgot to attach a form, or they checked the wrong box.   It is a cruel provision of Hawaii’s tax law which unfairly punishes those who do not enlist professional tax preparers. 

The Republican Tax Reform Blueprint does away with most deductions and credits, but keeps the mortgage interest and charitable contribution deduction. While I’m not an expert on the effects of credits and deductions I do know as you add a greater number in, the greater chance people without professional tax guidance will ultimately lose out simply from not knowing and the easier it is for someone to find a loophole in the system.

Taxation should ultimately be as simple as possible, clearly explainable to the taxpaying population, and easy to enforce compliance. Most of us just want to pay our fair share of taxes and don’t want to feel like the sucker who paid more. The current complexity in our taxation on both the state and federal level makes it possible for some to brag about not paying taxes and the rest of us to wonder “is he telling the truth?”.

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