Honorable Robert Bunda

President of the Senate

Twenty-Second State Legislature

Regular Session of 2003

State of Hawaii

Sir:

Your Committee on Ways and Means, to which was referred S.B. No. 1396 entitled:

begs leave to report as follows:

The purpose of this measure is to correct an inadvertent regressive effect on taxpayers with adjusted gross incomes (AGIs) of $50,000 or less.

As such, this bill corrects a problem created by Act 190, Session Laws of Hawaii 2002, which amended the payment threshold for avoiding the estimated tax underpayment penalty. In addition, the bill conforms Hawaii law to the Internal Revenue Code by lowering the minimum estimated tax payment to one hundred per cent for prior year returns.

The other primary purpose of this bill is to remove the ambiguity of competing provisions of the Internal Revenue Code and the authority of the Department of Taxation relating to granting extensions of time to file net income tax returns.

Testimony of the Department of Taxation indicated that last year the Legislature passed H.B. No. 1996, which was signed into law as Act 190, Session Laws of Hawaii 2002. This act decreases the required estimated annual payment amount from ninety per cent to sixty per cent of current year liability. However, an unintended result of Act 190 is that individuals with AGIs of $50,000 or less remain subject to the prior higher annual payment requirements.

Your Committee finds that this bill will treat all taxpayers equally by applying the sixty per cent payment requirement to all individual taxpayers, regardless of AGI. This bill will also lower the minimum estimated tax payment to one hundred per cent for prior year returns.

Further, under current Hawaii law, extensions of time to file tax returns, with one exception, may not exceed a six-month period, while certain federal provisions, to which Hawaii law conforms, grant extensions that would exceed Hawaii's six-month limitation. This bill resolves the conflict between Hawaii's strict six-month limitation and the more flexible federal provisions in favor of conformity to the federal tax laws.

As affirmed by the record of votes of the members of your Committee on Ways and Means that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1396 and recommends that it pass Second Reading and be placed on the calendar for Third Reading.