Honorable Robert Bunda

President of the Senate

Twenty-Third State Legislature

Regular Session of 2005

State of Hawaii

Sir:

Your Committee on Education and Military Affairs, to which was referred H.B. No. 1583, H.D. 1, entitled:

begs leave to report as follows:

The purpose of this measure is to exempt from income tax the basic military pay of active military personnel based in Hawaii but assigned outside the State by military order for the time spent outside the State.

Testimony in support of the measure was submitted by the Department of Taxation, Department of Defense, and an individual. The Tax Foundation of Hawaii submitted comments.

Your Committee finds that other qualified military benefits are already exempt from taxation under the Internal Revenue Code, to which Hawaii conforms. Without this exemption, many military personnel change their Hawaii residency in their military records to show that they are assigned to a state where income tax is exempt for military personnel. Benefits such as this tax exemption will encourage members of the National Guard and reserves to continue serving and protecting our homeland.

Upon further consideration, your Committee has amended this measure to:

Your Committee is concerned with declining revenues, but the Department of Taxation has assured your Committee that this measure is revenue-neutral. Analysis has concluded that initial revenue loss from the exemptions will be offset by the increase in retention of Hawaii residents filing taxes and their additional sources of income tax such as dividends, interest, and certain capital gains.

As affirmed by the record of votes of the members of your Committee on Education and Military Affairs that is attached to this report, your Committee is in accord with the intent and purpose of H.B. No. 1583, H.D. 1, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 1583, H.D. 1, S.D. 1, and be referred to the Committee on Ways and Means.