April 6, 2011- Despite the efforts of the American Association of Retired Persons, Rep. Barbara Marumoto and dozens of individuals, bills to tax pension income continue to progress through the Legislature.
The House Finance Committee packed SB 570 SD2 with 1) the pension tax increase, 2) disallowed the deduction of state taxes, 3) placed caps on itemized deductions and 4) also delayed state adoption of the increase in standard deduction and personal exemption adopted by federal law. The pension tax increase would affect individuals who make an adjusted gross income (AGI ) of $100,000 (or couples who make $200,000).
Rep. Marumoto strenuously opposed the tax when the Governor initially proposed a $37,500/$75,000 income threshold. AARP testified that members opposed the tax on pensioners on principle and also expressed fears that the income levels could be decreased in the future.
The Attorney General weighed in with warnings that the bill could be unconstitutional and that there would likely be protracted and expensive law suits. “… It could be the potential subject of a legal challenge on the grounds that they may violate article XVI, section 2 of the Hawaii Constitution, or may impair the Contracts Clause of the U.S. Constitution.”
AARP also protested that the bill would indirectly tax social security as the threshold uses federal AGI which includes Social Security benefits. In response, the Director of Taxation said that “a modified AGI could be utilized.”
An issue pointed out by the Tax Foundation is that a pensioner with a $99,999/year income would be taxed on the pension portion, if he or she earns $1 more, the pensioner would fall over the threshold and be forced to include pensions in the taxable income.
“With a revenue gain of only $17 million at the $100,000 threshold, the pension portion of the measure should be scrapped,” said Marumoto.
