Estate Tax Revival and Itemized Deduction Limitation Key to Shoring Up Hawaii's Budget

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Federal and state lawmakers should study the example set by Hawaii during its most recent legislative session.  By reinstating the state’s expired estate tax, limiting itemized deductions for wealthy Hawaii residents, and increasing the state’s per-barrel tax on petroleum products, the solutions Hawaii found for its budget difficulties actually mirror some of the progressive revenue-raising ideas discussed at the federal level, and in other states.

Hawaii used to have a “pick-up” estate tax, meaning one that was tied to a credit in the federal estate tax, but that credit expired in 2005. So Hawaii lawmakers decided during this session to enact — over the Governor’s veto — an estate tax containing the same $3.5 million exemption that existed in 2009 federal law (see Hawaii HB2866).  With more than half the states, and the federal government, currently lacking an estate tax, this development is one that more than a few governments around the country should consider emulating.

In addition to Hawaii’s newly reinstated estate tax, lawmakers during this past session also voted to limit the sharply regressive nature of the state’s itemized deductions in an interesting way.  HB1907, which is expected to be signed by the Governor some time in the next month, will limit the maximum itemized deduction that can be claimed by the state’s wealthiest taxpayers.  Married couples earning over $300,000 per year, and single filers earning over $150,000, will be prevented from taking a total itemized deduction in excess of $50,000 (or $25,000 for single filers). 

To be sure, relative to the modest $4,000 standard deduction enjoyed by most low- and middle-income married couples in Hawaii (or the $2,000 standard deduction for single filers), itemized deductions in the state will remain quite generous.  Nonetheless, the proposal has roughly the same goals as President Obama’s proposal to limit these costly tax breaks by preventing wealthy taxpayers from applying them against any rate rate above 28%. 

Rhode Island and New Mexico have also taken steps to rein in itemized deductions this year, with Rhode Island eliminating them entirely, and New Mexico ending the itemized deduction for state income taxes paid.

Finally, even before the Deepwater Horizon spill made the case for taxing oil a political no-brainer, the Hawaii legislature overrode the Governor’s veto again in order to raise the state’s petroleum products tax by $1.50 per barrel.  The tax, included in HB2421, will raise much needed revenue for deficit-reduction and renewable energy initiatives.

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