Spotlight on Retirement Income
 
This week we continue our series on the recommendations made by the Hawaii Tax Review Commission.

“Hawai‘i taxation of retirement income is neither fair nor equitable,” they say.  “The exemption of large portions of retirement income impairs tax adequacy.”  Their recommendations:  “Tax pension and other retirement income uniformly. Exempt a base amount of pension income initially. Continue to exempt Social Security benefits from income tax.”

Hawaii taxation of pension income is somewhat of a mixed bag.  Our income tax law has an exemption for “compensation received in the form of a pension for past services” that has been on our books since Act 169 of 1953.  When individual retirement accounts and self-employed retirement plans gained popularity in the 1970s, our Department of Taxation issued Tax Information Release 53-77 (1977), saying that it was limiting the pension exclusion to “plans fully funded by the employer,” on the theory that if the employee contributed to the retirement plan, the employee was in effect buying an annuity for himself or herself, and taxation would then follow the rules for annuities.  Thus our tax laws allow employer-funded pensions to escape tax, while fully taxing 401(k) plans, IRAs, and other retirement vehicles that are funded through the employees’ choices.

The Tax Review Commission slammed this distinction, saying that there is no economic justification for this.  It was also clearly troubled by the sheer amount of pension benefits escaping the state income tax every year, which topped $4 billion in 2019:

(Tax Review Commission Report, p. 20.)  The Commission pointed out that Tax Review Commissions from prior years also struggled with this issue and recommended change.

Implementing the recommendation, however, has been a heavy lift politically.  In 2014, then-Governor Neil Abercrombie became the first elected Democratic governor in Hawaii to be defeated in his bid for re-election.  Honolulu Magazine cited his proposal to tax pensions as one of the nine reasons for his defeat.  The Honolulu Star-Advertiser reported broad-based public opposition to the idea, even though it had been recommended by the Tax Review Commissions in 2003 and 2007.  As the director of AARP Hawaii said at the time:  “I think there is really deep concern, right across the board. … And it’s not that they’re just saying, ‘I don’t think this is a good idea.’ They are saying, ‘I think this is a terrible idea.’”  Many seniors at the time expressed the view that they spent many years planning for their retirement and saw their pensions as a contract that the state wanted to disturb at a time when they were on fixed incomes and facing increased costs for health care or long-term care.  The proposal to tax pensions did not pass, but voters still sent Gov. Abercrombie to the exit.

Current politicians, fearing a similar fate at the ballot box, are expected to be wary when confronting this issue.  In that respect it might not matter that our current treatment of pensions might be illogical, inconsistent, or uneconomic.  Many voters have seen it as a sacred cow, and it is going to be very difficult to change.

​WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers ​to view the archives of the Tax Foundation of Hawaii's commentary click here.

More on Green Fees
 
Once every five years or so, the Hawaii Constitution asks our government officials to put together a Tax Review Commission.  Its job is to “conduct a systematic review of the State’s tax structure, using such standards as equity and efficiency.”

To some people, it means it’s a chance to get in front of lawmakers and argue that we aren’t being taxed enough.

One of the proposals that the commission was urged to push was for the establishment of a “green fee.”  As its proponents put it:

Visitor green fees are used all around the world to generate revenue to protect natural and cultural resources, create green jobs, and enhance the visitor experience. Visitor green fees are payments made by tourists, primarily to regulatory entities, with the explicit purpose of funding natural resource management. This policy approach, now implemented in dozens of geographies worldwide, offers a solution to offset visitor impacts to ecosystems, and provides a means to protect nature that communities and tourists alike depend on.

Last year, we wrote in this space that the kind of green fees that are imposed in foreign destinations aren’t imposed in any state of the United States – probably because such a fee would be unconstitutional.  States have no right to burden the right of Americans to travel throughout the country, which means we can’t tax the entry or departure of mainland tourists.  And there is another part of the U.S. Constitution that forbids States from discriminating against foreign commerce, because that is a task left exclusively to the federal government.  So, we can’t impose such a fee on foreign tourists either.

To get around these restrictions, the proposal before the Tax Review Commission seeks to instead build on existing taxes and fees:

• Using existing state Transient Accommodations Taxes or adding a TAT surcharge;
• Implementing or increasing park and other user fees for outdoor activities;
• Imposing general excise tax surcharges for certain visitor-related activities, services, and purchases; and/or
• Some combination of these or other approaches.

The U.S. Constitution requires that if we kama’aina want to travel to another island and stay in a hotel, rent a car, or otherwise do touristy stuff, we are going to get whacked to the same extent as other tourists from other places.  Is that what we want?

We also need to realize that most of our economy is based on tourism.  When COVID-19 shut down our tourism, widespread pain and anguish was felt in our state between layoffs, business closures, and rent and mortgage defaults.  Taxing tourism to death might have the same impact.  “Now is not the time to visit the Islands,” Gov. Ige said in August because of our COVID surge.  Jacking up the taxes on the tourism industry is like telling the tourists that there isn’t ever a good time to visit the Islands.  Is that what we want?

So, before we go down the road to green fees or something like them, we should be asking ourselves if we really want to go there.

And by the way, Tax Review Commission, it’s questionable whether “finding new taxes” is in your job description when we have enough problems with the taxes we have.
​More on Green Fees
 
Once every five years or so, the Hawaii Constitution asks our government officials to put together a Tax Review Commission.  Its job is to “conduct a systematic review of the State’s tax structure, using such standards as equity and efficiency.”

To some people, it means it’s a chance to get in front of lawmakers and argue that we aren’t being taxed enough.

One of the proposals that the commission was urged to push was for the establishment of a “green fee.”  As its proponents put it:

Visitor green fees are used all around the world to generate revenue to protect natural and cultural resources, create green jobs, and enhance the visitor experience. Visitor green fees are payments made by tourists, primarily to regulatory entities, with the explicit purpose of funding natural resource management. This policy approach, now implemented in dozens of geographies worldwide, offers a solution to offset visitor impacts to ecosystems, and provides a means to protect nature that communities and tourists alike depend on.

Last year, we wrote in this space that the kind of green fees that are imposed in foreign destinations aren’t imposed in any state of the United States – probably because such a fee would be unconstitutional.  States have no right to burden the right of Americans to travel throughout the country, which means we can’t tax the entry or departure of mainland tourists.  And there is another part of the U.S. Constitution that forbids States from discriminating against foreign commerce, because that is a task left exclusively to the federal government.  So, we can’t impose such a fee on foreign tourists either.

To get around these restrictions, the proposal before the Tax Review Commission seeks to instead build on existing taxes and fees:

• Using existing state Transient Accommodations Taxes or adding a TAT surcharge;
• Implementing or increasing park and other user fees for outdoor activities;
• Imposing general excise tax surcharges for certain visitor-related activities, services, and purchases; and/or
• Some combination of these or other approaches.

The U.S. Constitution requires that if we kama’aina want to travel to another island and stay in a hotel, rent a car, or otherwise do touristy stuff, we are going to get whacked to the same extent as other tourists from other places.  Is that what we want?

We also need to realize that most of our economy is based on tourism.  When COVID-19 shut down our tourism, widespread pain and anguish was felt in our state between layoffs, business closures, and rent and mortgage defaults.  Taxing tourism to death might have the same impact.  “Now is not the time to visit the Islands,” Gov. Ige said in August because of our COVID surge.  Jacking up the taxes on the tourism industry is like telling the tourists that there isn’t ever a good time to visit the Islands.  Is that what we want?

So, before we go down the road to green fees or something like them, we should be asking ourselves if we really want to go there.

And by the way, Tax Review Commission, it’s questionable whether “finding new taxes” is in your job description when we have enough problems with the taxes we have.

​The New County TAT Earmarks Aren’t the Real Problem
 
Honolulu, just like most of the other neighbor Island counties, has passed a 3% addition to the Transient Accommodations Tax (TAT).

It had to.

The State was giving it millions of dollars a year in revenue sharing, but in 2020 the Governor shut off the spigot using his emergency powers and in 2021 the legislature made that permanent.  “We’ll keep the money permanently,” they said, “but you counties can enact a TAT of your own.”

Here in Honolulu, enactment of the county TAT was pretty much a foregone conclusion.  But there was lots and lots of debate over earmarking the money.  This much goes to the General Fund.  This much goes to the Transit Fund (i.e., rail).  The final version of the bill also sets up a special account in the general fund, which must be used to “mitigate the impacts of visitors on public facilities and natural resources, including the restoration, operations, and maintenance of beaches and parks,” and to “supplement, and not supplant, any funds regularly appropriated for those purposes.

May I suggest, though, that these debates are meaningless.

Suppose I had three bank accounts, one called “General,” one for “Vacation,” and one for “House Maintenance.”  I dutifully put some money into each account every month, pay my house maintenance expenses out of the House Maintenance account, and pay other expenses out of the General account.

Then tragedy strikes!  My spouse gets sick and has to go to the hospital.  Because I don’t have a diamond-studded platinum health plan, the health insurance only pays a certain percentage of the hospital bill, leaving a good chunk for me to absorb.  My mortgage is due in a few days, and my General account doesn’t have enough to pay it.  Do I preserve the other two accounts, let the mortgage fall into default, and cringe while waiting for the foreclosure notice?  Not a chance.

The Honolulu rail project is hitting some serious bumps in the track. 

The wheels don’t fit the rails (or the rails don’t fit the wheels). 

Someone forgot that there’s electric power needed to get a train moving – a lot of power –every time a train leaves a station, so that other customers on the power grid might be impacted if the trains simply pull power out of the grid without doing anything to protect the other users.

And now, HART needs to start building the rail track in urban Honolulu, which is going to be quite a bit more complicated, and may contain more surprises, than building in the suburbs or in rural areas.

These surprises may require more than the Transit Fund is going to have.  Are we going to preserve the General Fund and the visitor mitigation (or whatever it’s going to be called) fund while letting the City & County of Honolulu go into default, wrecking its bond ratings in the process? 

Although that decision may be made by future City Councils and not this one, we can bet that we won’t be worrying about the integrity of the special funds as much as we would be worrying about how to pay the City’s bills.

Which is why, when we are examining county council actions like this one, we need to pay more attention to the reality of the action (a new tax is being imposed) rather than the “earmarks” on that tax (which may become entirely meaningless once financial reality sets in).  As voters and taxpayers, I suggest we be more watchful of what issues are threatening to give us even more cost overruns, and that we insist that our politicians who are (or want to be) in that office give us some action on those issues now.