Hawaii residents with low incomes should expect to receive much bigger federal tax savings this year than previously estimated, according to a new state report.
The state Department of Business, Economic Development and Tourism figures that local residents earning up to $10,000 will save $1,182 on average this year under federal tax cuts adopted in December under President Donald Trump.
That’s a lot more than an estimate made in December by the Institute on Taxation and Economic Policy, a nonpartisan Washington, D.C.-based nonprofit.
| BY THE NUMBERS
$857
Savings for taxpayers earning $25,000 to $50,000
$1,182
Savings for taxpayers earning up to $10,000
$2,438
Increase in federal tax owed for those earning $500,000 to $1 million
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Overall, DBEDT’s report and the one from the nonprofit aren’t far apart on total savings for individual Hawaii taxpayers. DBEDT estimated this figure at $710 million, compared with $659 million by the institute. The institute, which based its assessment on 2019 taxes, also estimated tax savings for Hawaii corporations and pass-through businesses totaling $609 million. DBEDT did not make an estimate for this category of taxpayers.
DBEDT produced its report, which was released Monday, using IRS statistics for Hawaii taxpayers and drew conclusions about impacts from certain elements in the Trump tax overhaul, including a cap on state and local tax deductions.
Overall, Hawaii taxpayers in most income groups will have lower tax liabilities that translate to more take-home income or income left over after they pay 2018 taxes early next year, the report said.
High-income residents will owe more individual taxes this year, mainly because of the cap on how much state and local taxes can be deducted.
However, this group earning over $500,000 a year should see the negative impact offset by reduced tax rates on dividends, interest and investment income comprising more of their earnings, according to Eugene Tian, the state’s chief economist.
“High-income households will benefit more from business tax reductions since most of their income is from businesses and investment,” he said in a statement.
Excluding benefits from business and investment income, taxpayers earning $500,000 to $1 million would pay $2,438 more in federal taxes this year while taxpayers earning over $1 million would pay $33,941 more this year, DBEDT’s report said.
Not being able to deduct more than $10,000 of state and local taxes is the primary reason for the increases, according to DBEDT, which said those earning $500,000 to $1 million could deduct an average $58,034 in state and local taxes under the old tax code while the average comparable deduction for those earning over $1 million was $272,192.
The report said 960 taxpayers in Hawaii fall into the highest income category while 2,380 fall into the second highest.
The biggest category by income range includes 177,520 taxpayers earning $25,000 to $50,000. This group can expect to save $857 this year.
For 92,030 filers earning up to $10,000, the biggest benefit DBEDT cited is for those with dependents who can claim a child tax credit that doubled in the new law, which also increased the refundable portion of this credit to $1,400 per child.
DBEDT said an increase in the standard deduction will benefit lower- to middle-income groups, and that a significant number of middle-income taxpayers will shift from itemizing deductions to taking the standard deduction.
The report also noted that taxpayers filing jointly will generally benefit more than single filers or heads of households.
Tian said most of the savings will increase disposable income spending given that Hawaii residents typically spend 86 percent of what they earn. That should produce $600 million in additional spending largely in the local economy.
A report earlier this month from the University of Hawaii Economic Research Organization said the local economy won’t see a significant boost from tax-related spending this year largely because Hawaii’s economy is already growing about as much as it can.
Tian said the UHERO assessment is fair but that even a slight tail wind is positive. “Even if it’s small, it will help,” he said.
Added DBEDT Director Luis Salaveria, “We’re looking at disposable personal income increasing by $710 million, where we will see an increase in consumer spending by more than $600 million. This should help to boost our economic growth, if federal spending in Hawaii remains unchanged.”
A copy of the report can be found at dbedt.hawaii.gov/economic/reports_ studies Opens in a new tab.
