Congressional Republicans’ looming federal tax reform bill could be both good and bad news for Hawaii taxpayers.

While most people will get some kind of tax break in the short run, over time the tax cuts could force reductions in federal services, increase the trade deficit and discourage visitor spending.

That’s according to Carl Bonham, a professor and director of the University of Hawaii Economic Research Organization. He doesn’t expect the tax cuts to do much for the islands’ economy.

Hawaii’s high cost of housing and relatively high state and local taxes mean that limits on deductions for mortgage interest and state taxes could hurt the middle class. And developers say the anticipated corporate tax cuts are already making it harder to finance low-income units.

2017 US Capitol Early fall. Constitution Avenue.
The full details of congressional Republicans’ tax cut plan are expected Friday. Cory Lum/Civil Beat/2017

“Some people are calling it tax reform. I like to call it deficit enhancement,” said Bonham, noting that the proposed income tax cuts are temporary while the corporate tax cuts are permanent. “Despite what we’re being told by the proponents of these tax changes, it’s not going to pay for itself. It’s not going to cause huge increases in growth.”

President Donald Trump said he wants to give Americans a big tax cut by Christmas, and House and Senate Republicans agreed on a draft Wednesday. The full details are expected out Friday, according to the New York Times. But Republicans still haven’t figured out how to pay for the $2 trillion proposal.

Bonham said slashing the corporate tax rate could help the economy in the short term. But he’s not optimistic that Hawaii would see much job growth, given that the state’s unemployment rate already was down to 2.2 percent in October.

The state could eventually suffer under the plan because of its dependence on tourism. Bonham said lowering tax rates could increase inflation, which is likely to cause the Federal Reserve to increase interest rates. That would strengthen the dollar and discourage spending by international visitors.

New Limits On Deductions

Some aspects of the latest version of the congressional tax bill aren’t as bad for Hawaii as previous drafts, Bonham said. Instead of eliminating the federal deduction for payment of state and local taxes, the measure would cap the deduction at $10,000.

In 2015, 151,000 Hawaii taxpayers used the state and local tax deduction to reduce their federal tax burden by about $343 million, Gov. David Ige told Civil Beat.

Governor David Ige education interview in his office, interviewed by Suevon and Chad.
Gov. David Ige said the ability to deduct state and local tax payments is important to Hawaii residents. Cory Lum/Civil Beat

The latest proposal would also cap the mortgage interest deduction at $750,000 of mortgage debt. Bonham said he interprets that provision to mean that that mortgages higher than $750,000 could deduct interest on that amount, but no higher. That’s a higher threshold than previous versions, but could still affect a lot of Hawaii homeowners given that the median price of a home in Hawaii hit $780,000 earlier this year.

The average mortgage interest deduction in Hawaii is $12,752, compared to the national average of $8,612, Ige said.

“It’s hard to measure what the impact would be because they’re looking at a number of changes and they’re all interrelated,” the governor said. He added that he hasn’t actually heard much concern from constituents about the bill, but has heard from affordable housing developers like Kevin Carney of EAH Housing.

“It’s a nightmare for our industry,” Carney said of the tax bill.

Kids play inside Mayor Wright public housing for Anita story. Didn’t notice much neglect or damage. After speaking to several residents most declined to let me check out inside their residences. 31 jan 2015. photograph Cory Lum/Civil Beat
The GOP plan could hamper the redevelopment of the Mayor Wright public housing project. Cory Lum/Civil Beat

Anticipation of corporate tax cuts has already diminished the value of low-income housing tax credits, which developers sell to investors to finance affordable housing projects. Carney said his organization has already been forced to seek extra money to refinance a low-income rental housing project. If the tax cuts take effect, the tax credits may be even less attractive to investors.

It’s unclear whether the final version of the bill would get rid of private activity bonds, a key method for financing low-income projects. Another proposal would eliminate the preference for artists in developments like one of Carney’s projects in Kakaako.

Ige said the elimination of private activity bonds could hurt the state’s ability to pay for the redevelopment of the Mayor Wright public housing project. The work is supposed to add thousands of much-needed units, but the loss of the bonds could put more pressure on states to spend millions more to fund low-income projects.

‘Congress Is Really Rushing’

Apart from the specific provisions, Ige took issue with how the tax bill is being crafted.

“My biggest concern is that Congress is really rushing through this tax reform bill,” Ige said.

Hawaii Congresswoman Colleen Hanabusa, a Democrat, said a bigger concern is how taxpayers will have to pay for the tax cuts down the line. She’s worried they’ll result in cuts to programs like Medicare, Medicaid and Social Security.

“What’s critical is that the tax break doesn’t last,” she said. “In a few years it’s going to all expire and it’s the middle class that’s going to end up paying for everything else in between.”

If that happens, Bonham said the end result would be simply income redistribution.

“That’s what the plan is — effectively raise taxes on your average working person and give that money to a corporation,” he said.

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