SB1025

SECTION 1. The legislature finds that inflation erodes the value of personal exemptions and deductions in the state individual income tax structure and distorts fiscal equity among taxpayers. Inflation-induced increases in individual income tax revenues result in annual collections that exceed the amounts anticipated by legislative actions establishing rates, exemptions, deductions, and other features of the state individual income tax. Furthermore, the income tax laws of this State, in combination with economic inflation, have caused inequitable treatment of taxpayers because the application of inflexible, statutorily prescribed rates of tax, standard deduction, and personal exemption to increasing personal incomes has resulted in increasing the taxpayer's tax liability while the taxpayers purchasing power has remained the same or, in some instances, has decreased.

The purpose of this Act is to correct this situation by requiring that certain components of the individual income tax structure be adjusted to compensate for the impact of inflation.

SECTION 2. Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§231- Cost of living adjustments. (a) As used in this chapter, unless the context indicates otherwise, the following terms have the following meanings.

"Consumer price index" means the average over a twelve-month period of the national consumer price index, not seasonally adjusted, published monthly by the Bureau of Labor Statistics, United States Department of Labor designated as the "National Consumer Price Index for All Urban Consumers-United States City Average."

"Cost-of-living adjustment" means an adjustment equal to the consumer price index for the twelve-month period ending December 31 of the preceding taxable year divided by the consumer price index for the twelve-month period ending December 31, 2006.

(b) Beginning in 2007, and each subsequent year thereafter, the department of taxation shall multiply the cost-of-living adjustment for taxable years beginning in the succeeding year by the following:

(1) Standard deduction amounts under section 235-2.4(a);

(2) Tax rates under sections 235-51; and

(3) Exemption amounts under section 235-54;

and assess these taxes or recognize these amounts after adjusting for inflation as prescribed by this subsection.

If the dollar amounts of the tax, deduction, or exemption adjusted by the application of the cost-of-living adjustment, are not multiples of $50, any increase shall be rounded to the next lowest multiple of $50; provided that if the cost-of-living adjustment for any taxable year is 1.000 or less, no adjustment shall be made for that taxable year.

(c) The department shall incorporate necessary changes into the income tax forms, instructions, and withholding tables to effectuate the purposes of this section and may adopt rules pursuant to chapter 91 to effectuate this section.

SECTION 2. Section 231-3, Hawaii Revised Statutes, is amended to read as follows:

"§231-3 Department, general duties and powers. The department of taxation shall have the following duties and powers, in addition to any others prescribed or granted by this chapter:

(1) Assessment: To make any assessment by law required to be made by the department; provided that the assessment shall reflect the cost of living adjustments to the standard deduction, income tax bracket, and personal exemption amounts under section 231- ;

(2) Collections: To be responsible for the collection of all taxes imposed under title 14, except those which by law are to be collected by county treasurers, and for such other duties as are provided by law;

(3) Construction of revenue laws: To construe the tax and revenue laws, the administration of which is within the scope of the department's duties, whenever requested by any officer acting under those laws, or by an interested person;

(4) Enforcement of penalties: To see that penalties are enforced when prescribed by any tax or revenue law of the State (the administration of which is within the scope of the department's duties) for disobedience or evading of its provisions, and to see that complaint is made against persons violating any such law; in the execution of these powers and duties the department may call upon the attorney general or any of the attorney general's deputies, including the county attorneys or public prosecutors, whose duties it shall be to assist in the institution and conduct of all proceedings or prosecutions for penalties and forfeitures, liabilities, and punishments for violation of the laws administered by the department;

(5) Forms: To prescribe forms to be used in or in connection with any assessment, including forms to be used in the making of returns by taxpayers or in any other proceedings connected with the assessment, and to change the same from time to time as deemed necessary;

(6) Inspection, examination of records: To inspect and examine the records of all public officers without charge, and to examine the books and papers of account of any person for the purpose of enabling the department to obtain all information that could in any manner aid the department in discharging its duties under any tax law;

(7) Recommendations for legislation: To recommend to the governor any amendments, changes, or modifications of the laws as may seem proper or necessary to remedy injustice or irregularity in taxation or to facilitate the assessment of taxes;

(8) Report to governor: To report to the governor annually, and at such other times and in such manner as the governor may require, concerning the acts and doings and the administration of the department, and any other matters of information concerning taxation as may be deemed of general interest;

(9) Rules: To adopt such rules as the department may deem proper effectually to carry out the purposes for which the department is constituted and to regulate matters of procedure by or before the department;

(10) Compromises: With the approval of the governor, to compromise any claim where the tax exceeds $50,000 (exclusive of penalties and interest) arising under any tax law the administration of which is within the scope of the department's duties, and to compromise any tax claim where the tax is $50,000 or less (exclusive of penalties and interest) without seeking the approval of the governor; provided that the director shall have the discretion to seek the approval of the governor to compromise any tax claim where the director deems it appropriate; and in each case the department shall post each proposed compromise, as set forth in subparagraphs (A) to (D), on the department's internet website for five calendar days before the director signs the compromise, and there shall be placed on file in the department's office a statement of:

(A) The name of the taxpayer and the amount and type of tax assessed, or proposed to be assessed;

(B) The amount of penalties and interest imposed or which could have been imposed by law with respect to the amount of tax assessed, as computed by the department;

(C) The total amount of liability as determined by the terms of the compromise, and the actual payments made thereon with the dates thereof; and

(D) The reasons for the compromise.

Notwithstanding the provisions of any law making unlawful the disclosure of tax returns or return information, statements on file and included in the department's internet website in respect of compromises shall be open to public inspection;

(11) Retroactivity of rulings: To prescribe the extent, if any, to which any ruling, rule, or construction of the tax laws, of general application, shall be applied without retroactive effect;

(12) Remission of delinquency penalties and interest: Except in cases of fraud or wilful violation of the laws or wilful refusal to make a return setting forth the information required by law (but inclusion in a return of a claim of nonliability for the tax shall not be deemed a refusal to make a return), the department may remit any amount of penalties or interest added, under any law administered by the department, to any tax that is delinquent, in a case of excusable failure to file a return or pay a tax within the time required by law, or in a case of uncollectibility of the whole amount due; and in that case there shall be placed on file in the department's office a statement showing the name of the person receiving the remission, the principal amount of the tax, and the year or period involved;

(13) Closing agreements: To enter into an agreement in writing with any taxpayer or other person relating to the liability of the taxpayer or other person, under any law the administration of which is within the scope of the department's duties, in respect of any taxable period, or in respect of one or more separate items affecting the liability for any taxable period; the agreement, signed by or on behalf of the taxpayer or other person concerned, and by or on behalf of the department, shall be final and conclusive, and except upon a showing of fraud or malfeasance, or misrepresentation of a material fact:

(A) The matters agreed upon shall not be reopened, and the agreement shall not be modified, by any officer or employee of the State; and

(B) In any suit, action, or proceeding, the agreement, or any determination, assessment, collection, payment, refund, or credit made in accordance therewith, shall not be annulled, modified, set aside, or disregarded;

(14) Other powers and duties: In addition to the powers and duties contained in this chapter, the powers and duties contained in other chapters of the law under title 14 administered by the department for levying, assessing, collecting, receiving, and enforcing payments of the tax imposed thereunder, and otherwise relating thereto, shall be severally and respectively conferred, granted, practiced, and exercised for levying, assessing, collecting, receiving, and enforcing payment of the taxes imposed under the authority of those chapters as far as the provisions are consistent with the express provisions of those chapters, as fully and effectually to all intents and purposes as if the same powers and authorities were repeated in those chapters, with reference to those taxes, and all of the provisions shall be applied, construed, deemed, and taken to refer to the taxes imposed under the authority of those chapters, in like manner."

SECTION 3. Section 235-2.4, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) Section 63 (with respect to taxable income defined) of the Internal Revenue Code shall be operative for the purposes of this chapter, except that the standard deduction amount in section 63(c) of the Internal Revenue Code shall instead mean:

(1) $4,000 in the case of:

(A) A joint return as provided by section 235-93; or

(B) A surviving spouse (as defined in section 2(a) of the Internal Revenue Code);

(2) $2,920 in the case of a head of household (as defined in section 2(b) of the Internal Revenue Code);

(3) $2,000 in the case of an individual who is not married and who is not a surviving spouse or head of household; or

(4) $2,000 in the case of a married individual filing a separate return[.];

provided that any standard deduction amount claimed under this section shall reflect the cost of living adjustments under section 231- .

Section 63(c)(4) shall not be operative in this State. Section 63(c)(5) shall be operative, except that the limitation on basic standard deduction in the case of certain dependents shall be the greater of $500 or such individual's earned income. Section 63(f) shall not be operative in this State.

The standard deduction amount for nonresidents shall be calculated pursuant to section 235-5."

SECTION 4. Section 235-51, Hawaii Revised Statutes, is amended to read as follows:

"§235-51 Tax imposed on individuals; rates. (a) There is hereby imposed on the taxable income of (1) every taxpayer who files a joint return under section 235-93; and (2) every surviving spouse a tax determined in accordance with the following table:

In the case of any taxable year beginning after December 31, 2001:

If the taxable income is: The tax shall be:

Not over $4,000 1.40% of taxable income

Over $4,000 but $56.00 plus 3.20% of

not over $8,000 excess over $4,000

Over $8,000 but $184.00 plus 5.50% of

not over $16,000 excess over $8,000

Over $16,000 but $624.00 plus 6.40% of

not over $24,000 excess over $16,000

Over $24,000 but $1,136.00 plus 6.80% of

not over $32,000 excess over $24,000

Over $32,000 but $1,680.00 plus 7.20% of

not over $40,000 excess over $32,000

Over $40,000 but $2,256.00 plus 7.60% of

not over $60,000 excess over $40,000

Over $60,000 but $3,776.00 plus 7.90% of

not over $80,000 excess over $60,000

Over $80,000 $5,356.00 plus 8.25% of

excess over $80,000.

In the case of any taxable year beginning after December 31, 2006:

If the taxable income is: The tax shall be:

Not over $4,800 1.40% of taxable income

Over $4,800 but $67.00 plus 3.20% of

not over $9,600 excess over $4,800

Over $9,600 but $221.00 plus 5.50% of

not over $19,200 excess over $9,600

Over $19,200 but $749.00 plus 6.40% of

not over $28,800 excess over $19,200

Over $28,800 but $1,363.00 plus 6.80% of

not over $38,400 excess over $28,800

Over $38,400 but $2,016.00 plus 7.20% of

not over $48,000 excess over $38,400

Over $48,000 but $2,707.00 plus 7.60% of

not over $72,000 excess over $48,000

Over $72,000 but $4,531.00 plus 7.90% of

not over $96,000 excess over $72,000 Over $96,000 $6,427.00 plus 8.25% of

excess over $96,000.

(b) There is hereby imposed on the taxable income of every head of a household a tax determined in accordance with the following table:

In the case of any taxable year beginning after December 31, 2001:

If the taxable income is: The tax shall be:

Not over $3,000 1.40% of taxable income

Over $3,000 but $42.00 plus 3.20% of

not over $6,000 excess over $3,000

Over $6,000 but $138.00 plus 5.50% of

not over $12,000 excess over $6,000

Over $12,000 but $468.00 plus 6.40% of

not over $18,000 excess over $12,000

Over $21,600 but $852.00 plus 6.80% of

not over $24,000 excess over $18,000

Over $24,000 but $1,260.00 plus 7.20% of

not over $30,000 excess over $24,000

Over $30,000 but $1,692.00 plus 7.60% of

not over $45,000 excess over $30,000

Over $45,000 but $2,832.00 plus 7.90% of

not over $60,000 excess over $45,000

Over $60,000 $4,017.00 plus 8.25% of

excess over $60,000.

In the case of any taxable year beginning after December 31, 2006:

If the taxable income is: The tax shall be:

Not over $3,600 1.40% of taxable income

Over $3,600 but $50.00 plus 3.20% of

not over $7,200 excess over $3,600

Over $7,200 but $166.00 plus 5.50% of

not over $14,400 excess over $7,200

Over $14,400 but $562.00 plus 6.40% of

not over $21,600 excess over $14,400

Over $21,600 but $1,022.00 plus 6.80% of

not over $28,800 excess over $21,600

Over $28,800 but $1,512.00 plus 7.20% of

not over $36,000 excess over $28,000

Over $36,000 but $2,030.00 plus 7.60% of

not over $54,000 excess over $36,000

Over $54,000 but $3,398.00 plus 7.90% of

not over $72,000 excess over $54,000

Over $72,000 $4,820.00 plus 8.25% of

excess over $72,000.

(c) There is hereby imposed on the taxable income of (1) every unmarried individual (other than a surviving spouse, or the head of a household) and (2) on the taxable income of every married individual who does not make a single return jointly with the individual's spouse under section 235-93 a tax determined in accordance with the following table:

In the case of any taxable year beginning after December 31, 2001:

If the taxable income is: The tax shall be:

Not over $2,000 1.40% of taxable income

Over $2,000 but $28.00 plus 3.20% of

not over $4,000 excess over $2,000

Over $4,000 but $92.00 plus 5.50% of

not over $8,000 excess over $4,000

Over $8,000 but $312.00 plus 6.40% of

not over $12,000 excess over $8,000

Over $12,000 but $568.00 plus 6.80% of

not over $16,000 excess over $12,000

Over $16,000 but $840.00 plus 7.20% of

not over $20,000 excess over $16,000

Over $20,000 but $1,128.00 plus 7.60% of

not over $30,000 excess over $20,000

Over $30,000 but $1,888.00 plus 7.90% of

not over $40,000 excess over $30,000

Over $40,000 $2,678.00 plus 8.25% of

excess over $40,000.

In the case of any taxable year beginning after December 31, 2006:

If the taxable income is: The tax shall be:

Not over $2,400 1.40% of taxable income

Over $2,400 but $34.00 plus 3.20% of

not over $4,800 excess over $2,400

Over $4,800 but $110.00 plus 5.50% of

not over $9,600 excess over $4,800

Over $9,600 but $374.00 plus 6.40% of

not over $14,400 excess over $9,600

Over $14,400 but $682.00 plus 6.80% of

not over $19,200 excess over $14,400

Over $19,200 but $1,008.00 plus 7.20% of

not over $24,000 excess over $19,200

Over $24,000 but $1,354.00 plus 7.60% of

not over $36,000 excess over $24,000

Over $36,000 but $2,266.00 plus 7.90% of

not over $48,000 excess over $36,000

Over $48,000 $3,214.00 plus 8.25% of

excess over $48,000.

(d) The tax imposed by section 235-2.45 on estates and trusts shall be determined in accordance with the following table:

In the case of any taxable year beginning after December 31, 2001:

If the taxable income is: The tax shall be:

Not over $2,000 1.40% of taxable income

Over $2,000 but $28.00 plus 3.20% of

not over $4,000 excess over $2,000

Over $4,000 but $92.00 plus 5.50% of

not over $8,000 excess over $4,000

Over $8,000 but $312.00 plus 6.40% of

not over $12,000 excess over $8,000

Over $12,000 but $568.00 plus 6.80% of

not over $16,000 excess over $12,000

Over $16,000 but $840.00 plus 7.20% of

not over $20,000 excess over $16,000

Over $20,000 but $1,128.00 plus 7.60% of

not over $30,000 excess over $20,000

Over $30,000 but $1,888.00 plus 7.90% of

not over $40,000 excess over $30,000

Over $40,000 $2,678.00 plus 8.25% of

excess over $40,000.

(e) Any taxpayer, other than a corporation, acting as a business entity in more than one state who is required by this chapter to file a return may elect to report and pay a tax of .5 per cent of its annual gross sales (1) where the taxpayer's only activities in this State consist of sales; and (2) who does not own or rent real estate or tangible personal property; and (3) whose annual gross sales in or into this State during the tax year is not in excess of $100,000.

(f) If a taxpayer has a net capital gain for any taxable year to which this subsection applies, then the tax imposed by this section shall not exceed the sum of:

(1) The tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of:

(A) The taxable income reduced by the amount of net capital gain, or

(B) The amount of taxable income taxed at a rate below 7.25 per cent, plus

(2) A tax of 7.25 per cent of the amount of taxable income in excess of the amount determined under paragraph (1).

This subsection shall apply to individuals, estates, and trusts for taxable years beginning after December 31, 1986.

(g) All tax rates established in this section shall reflect cost of living adjustments under section 231- ."

SECTION 5. Section 235-54, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) In computing the taxable income of any individual, there shall be deducted, in lieu of the personal exemptions allowed by the Internal Revenue Code, personal exemptions computed as follows: Ascertain the number of exemptions which the individual can lawfully claim under the Internal Revenue Code, add an additional exemption for the taxpayer or the taxpayer's spouse who is sixty-five years of age or older within the taxable year, and multiply that number by $1,040, for taxable years beginning after December 31, 1984. A nonresident shall prorate the personal exemptions on account of income from sources outside the State as provided in section 235-5. In the case of an individual with respect to whom an exemption under this section is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual's taxable year begins, the personal exemption amount applicable to such individual under this subsection for such individual's taxable year shall be zero.

(b) In computing the taxable income of an estate or trust there shall be allowed, in lieu of the deductions allowed under subsection (a), the following:

(1) An estate shall be allowed a deduction of $400.

(2) A trust which, under its governing instrument, is required to distribute all of its income currently shall be allowed a deduction of $200.

(3) All other trusts shall be allowed a deduction of $80.

(c) A blind person, a deaf person and any person totally disabled, in lieu of the personal exemptions allowed by the Internal Revenue Code, shall be allowed, and there shall be deducted in computing the taxable income of a blind person, a deaf person, or a totally disabled person, instead of the exemptions provided by subsection (a), the amount of $7,000[.]; provided that any exemption claimed under this section shall reflect the cost of living adjustments under section 231- ."

SECTION 6. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 4. This Act shall take effect upon its approval and apply to taxable years beginning after December 31, 2006.

INTRODUCED BY:	_____________________________

THE SENATE	S.B. NO.	1025
TWENTY-FOURTH LEGISLATURE, 2007
STATE OF HAWAII