Hawaii: Lingle Strikes a Healthy Balance

Another day, another governor crowing over emerging budget surpluses. But compared to what we've heard in many states so far this year, Hawaii Governor Linda Lingle's State of the State address is getting positive early reviews. Her plan includes:

• increasing the income tax standard deduction to 75% of the federal amount;
• widening the income tax brackets (instead of $80,000, the 8.25% top rate would start at $100,000);
• introducing a new refundable tax credit designed to offset sales taxes-- $100 per family member, available to married couples earning less than $50,000
• a one-time refundable tax rebate of $150 per family member. This one has a higher income limit-- married couples earning less than $100,000 get it.

There's a lot to like here. A good chunk of the revenue loss from this plan would be a one-shot deal, thanks to the temporary tax rebate. And much of what's left is progressive, offering the most help (as a share of income) to low-income Hawaiians. The low-income tax credit is very clearly meant as a less expensive, better targeted substitute for the grocery tax exemption that at least four other states are considering right now-- and that's exactly what it is. On the whole, this package of reforms would give a needed jolt of fairness to a fundamentally unfair tax system.

Lingle clearly gets this: her State of the State address notes that "the bottom line is that we are collecting income taxes from people who simply can't afford to pay them."

The Honolulu Advertiser's editorial board is all over it. The Hawaii Tax Foundation is less impressed, accusing her of "pandering to the poor and middle class."

Lingle's strategy is apparently to co-opt her opponents' ideas-- the tax bracket expansion is an idea proposed by Senate President Robert Bunda. In fact, it sounds like the only salient tax reform idea she's not glomming onto is the Democratic proposal to enact an Earned Income Tax Credit.

A brief stop in Wonkville for complaints/comments:
1) Hawaii already has a low-income refundable tax credit with one set of rules. If Lingle's plan passes, it will have two, each with eligibility criteria that are different enough from each other to make things complicated but not different enough to have a real rationale. The smarter thing to do would have been to increase the existing credit.
2) There are certainly states where widening the brackets should be a priority. Take Alabama, where the top tax rate for married couples kicks in when your taxable income hits $6,000-- exactly as it did 70 years ago. Of course, when the income tax was introduced in 1933, $6,000 was the equivalent of $90,000 today. So a top tax rate that used to apply to the wealthiest few now hits 75% of all Alabamans. But Hawaii's not in the same boat. Right now married couples don't pay at the top rate until their taxable income hits $80,000. Expanding the top bracket from $80,000 to $100,000 is hardly a barn-burning need.
3) This package of tax cuts (pegged at about $200 million a year) may ultimately prove to be affordable-- but it would be nice to make sure. Closing a couple of unwarranted loopholes in the state's income tax code by taxing capital gains and pension benefits the same as regular income would go a long way toward ensuring the long-term adequacy of income tax revenues. And it's a lot easier to propose needed tax hikes when they're being used to finance needed cuts.

But all in all, Lingle's ideas are looking a lot fresher than what we're heading from the mainland these days...