The Republican proposals for tax reform are running into headwinds in Congress, which Hawaii residents may take as a hopeful sign. But that shouldn’t stop their elected representatives on Capitol Hill, as well as advocacy groups, from beating drums, demanding a rewrite of this ill-considered legislation.
The advocates for the bills that have emerged contend that revising the tax code is sorely needed to encourage investment and economic growth. But it doesn’t follow that robust growth will result from these measures, certainly not enough to compensate for what they would add to the national debt.
What does seem plain is that the principal beneficiaries of this initiative are the wealthy. Further, experts have projected that in certain high-cost states such as Hawaii, the middle class will take a real hit.
Primarily they cite two factors: a proposed reduction in the deduction for mortgage interest, and the elimination of the deduction for all or most state and local taxes.
And on Tuesday, the Senate leadership agreed with President Donald Trump to include ending the Affordable Care Act individual mandate, with its tax penalty, as an added element of tax reform. This may make it harder for moderate Republicans to support.
In the immediate term, it saves someone without health insurance from a tax penalty. Those taking the long view, though, foresee destabilized insurance markets, more uninsured people and higher premiums. This is a bad bargain.
Still, if the GOP and the administration are to fulfill their dubious shared objectives of cutting corporate taxes dramatically and exempting more from the estate tax, some of that lost revenue must be recouped from somewhere.
Strategies targeting a broad-based source — such as capping the homeowners’ deduction to mortgages of $500,000, half of the current $1 million maximum — are tempting them.
But average home prices here easily top $700,000, so prospective Hawaii homeowners stand to lose a lot. The average deduction claimed for Hawaii mortgage interest stands at $12,752, according to The Pew Charitable Trusts — well above the national average of $8,612.
Existing mortgages would likely be “grandfathered” in. However, not surprisingly, the real estate lobby nationally is mobilized to oppose this provision, asserting that it would depress home purchases.
As for state and local taxes, the House version of the legislation would make an allowance for property taxes. In Hawaii, however, this is thin comfort because relatively speaking, property taxes are low here. This is largely because unlike other locales, Hawaii’s counties don’t pay for education out of property tax revenue. The average property tax claim is $2,290, compared to a $4,992 national average.
This is not nearly enough to offset the sacrifice of the state-and-
local-tax (SALT) deduction, averaging $9,906.
There are other deductions that could be lost, including the one for charitable contributions, and if charity is disincentivized by the tax code, nonprofits of all kinds, such as those that work to help the lower-income population, will find it harder to maintain their mission.
University of Hawaii economist Carl Bonham told Star-Advertiser staff writer Kevin Dayton that the House package of tax cuts would initially offer savings of more than $29,000 for the top 1 percent of earners in this state; the middle 20 percent of the population here would average cuts of $790 in 2018. And that gap between high- and low-earning taxpayers would only widen in the coming years.
What’s worse is that congressional leadership is racing to hammer this through under a ludicrous end-of-year deadline. Even good ideas for something as complex as the tax code take time to solidify — and knowledgeable observers are hard-pressed to find good ideas in these so-called reforms.
