Don’t Buy that House in Honolulu Just Yet

May 28, 2009

State tax expert David Brunori commented yesterday on our Hawaii report, “The Price of Paradise: Hawaii Becomes Fifth State to Adopt New Income Tax Brackets on High-Earners”:

[The tax increase] caused my friends at the Tax Foundation to issue a report noting that Hawaii now has the highest income tax rate (11 percent) in the nation — jumping over such notorious tax-and-spend states as Maine, New Jersey, Iowa, Oregon, Vermont, Rhode Island, and California.

The foundation claimed that imposing high taxes on the wealthy runs counter to sound tax policy. Now, the foundation is usually pretty good on the principles of sound tax policy. But not in this case. The income tax can, and should, be designed to impose burdens based on ability to pay. The wealthier you are, and the more you benefit from our civilized society, the more you should pay. The tax can be implemented so that low-income folks pay less, while the wealthy pay more. There is nothing unsound about that philosophy.

The compliments are appreciated and reciprocal, but Hawaii’s move is poor tax policy. No state (and as far as I know, nowhere on earth since Swiss canton Obwalden) has a “degressive” tax system that imposes higher rates on lower-income people than higher-income people. While it’s a big debate that richer folks benefit more from society than low-income folks, they already pay more in taxes under every state income tax system, including Hawaii’s before the recent increase. (The statutory rates or effective rates, of course, might be insufficiently progressive for Brunori’s tastes, but that doesn’t change the fact that the wealthy now pay more dollars in state income taxes than the poor.)

Back in the day, many states had double-digit state income taxes. Since then, states realized that taxes matter: high taxes deter new investment and economic growth. As we noted in the article, geography and climate mean it’s unlikely that Hawaii’s new taxes will cause millionaires to pack up and leave (although that apparently happened in New York with Tom Golisano). But it will deter new ones from arriving, hurting Hawaii’s long-term economic growth in the future.

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