Report Title:

SECTION 1. The purpose of this Act is to address taxation. More specifically, this Act:

(1) Provides for the taxation of the pension income of:

(A) An individual filer with federal adjusted gross income of $100,000 or more;

(B) A joint or surviving spouse filer with federal adjusted gross income of $200,000 or more; and

(2) Makes the deduction for state taxes paid, inoperative for the same taxpayers;

(3) Limits the amount of itemized deductions that may be claimed by the same taxpayers; and

(4) Delays the standard deduction and personal exemption increases approved under Act 60, Session Laws of Hawaii, 2009, but makes the increases permanent.

PART I

SECTION 2. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235-A Taxation of pension income. For taxable years beginning after December 31, 2010, sections 88-91, 235-7(a)(2), and 235-7(a)(3) shall apply only to taxpayers with federal adjusted gross income of:

(1) Less than $100,000 for a taxpayer filing a single return or a married person filing separately;

(2) Less than $150,000 for a taxpayer filing as a head of household; or

(3) Less than $200,000 for a taxpayer filing a joint return or as a surviving spouse."

SECTION 3. Section 88-91, Hawaii Revised Statutes, is amended to read as follows:

"§88-91 Exemption from taxation and execution. The right of a person to a pension, an annuity or a retirement allowance, to the return of contributions, the pension, annuity or retirement allowance itself, any optional benefit or death benefit, any other right accrued or accruing to any person under this part and the moneys in the various funds created under this part are exempted from any tax of the State, subject to the limitations established in section 235-A; and, except as provided in section 88-92 [~~provided~~], shall not be subject to execution, garnishment or any other process and shall be unassignable except as specifically provided in this part [~~specifically provided~~]."

SECTION 4. Section 235-7, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) There shall be excluded from gross income, adjusted gross income, and taxable income:

(1) Income not subject to taxation by the State under the Constitution and laws of the United States;

(2) Rights, benefits, and other income exempted from taxation by section 88-91, having to do with the state retirement system, and the rights, benefits, and other income, comparable to the rights, benefits, and other income exempted by section 88-91, under any other public retirement system[;], subject to the limitations established in section 235‑A;

(3) Any compensation received in the form of a pension for past services[;], subject to the limitations established in section 235-A;

(4) Compensation paid to a patient affected with Hansen's disease employed by the State or the United States in any hospital, settlement, or place for the treatment of Hansen's disease;

(5) Except as otherwise expressly provided, payments made by the United States or this State, under an act of Congress or a law of this State, which by express provision or administrative regulation or interpretation are exempt from both the normal and surtaxes of the United States, even though not so exempted by the Internal Revenue Code itself;

(6) Any income expressly exempted or excluded from the measure of the tax imposed by this chapter by any other law of the State, it being the intent of this chapter not to repeal or supersede any express exemption or exclusion;

(7) Income received by each member of the reserve components of the Army, Navy, Air Force, Marine Corps, or Coast Guard of the United States of America, and the Hawaii national guard as compensation for performance of duty, equivalent to pay received for forty-eight drills (equivalent of twelve weekends) and fifteen days of annual duty, at an:

(A) E-1 pay grade after eight years of service; provided that this subparagraph shall apply to taxable years beginning after December 31, 2004;

(B) E-2 pay grade after eight years of service; provided that this subparagraph shall apply to taxable years beginning after December 31, 2005;

(C) E-3 pay grade after eight years of service; provided that this subparagraph shall apply to taxable years beginning after December 31, 2006;

(D) E-4 pay grade after eight years of service; provided that this subparagraph shall apply to taxable years beginning after December 31, 2007; and

(E) E-5 pay grade after eight years of service; provided that this subparagraph shall apply to taxable years beginning after December 31, 2008;

(8) Income derived from the operation of ships or aircraft if the income is exempt under the Internal Revenue Code pursuant to the provisions of an income tax treaty or agreement entered into by and between the United States and a foreign country; provided that the tax laws of the local governments of that country reciprocally exempt from the application of all of their net income taxes, the income derived from the operation of ships or aircraft that are documented or registered under the laws of the United States;

(9) The value of legal services provided by a prepaid legal service plan to a taxpayer, the taxpayer's spouse, and the taxpayer's dependents;

(10) Amounts paid, directly or indirectly, by a prepaid legal service plan to a taxpayer as payment or reimbursement for the provision of legal services to the taxpayer, the taxpayer's spouse, and the taxpayer's dependents;

(11) Contributions by an employer to a prepaid legal service plan for compensation (through insurance or otherwise) to the employer's employees for the costs of legal services incurred by the employer's employees, their spouses, and their dependents;

(12) Amounts received in the form of a monthly surcharge by a utility acting on behalf of an affected utility under section 269-16.3 shall not be gross income, adjusted gross income, or taxable income for the acting utility under this chapter. Any amounts retained by the acting utility for collection or other costs shall not be included in this exemption; and

(13) One hundred per cent of the gain realized by a fee simple owner from the sale of a leased fee interest in units within a condominium project, cooperative project, or planned unit development to the association of owners under chapter 514A or 514B, or the residential cooperative corporation of the leasehold units.

For purposes of this paragraph:

"Condominium project" and "cooperative project" shall have the same meanings as provided under section 514C-1.

"Fee simple owner" shall have the same meaning as provided under section 516-1; provided that it shall include legal and equitable owners[;].

"Legal and equitable owner", and "leased fee interest" shall have the same meanings as provided under section 516-1[~~; and~~

~~"Condominium project" and "cooperative project" shall have the same meanings as provided under section 514C-1~~]."

PART II

SECTION 5. Section 235-2.4, Hawaii Revised Statutes, is amended by amending subsection (h) to read as follows:

"(h) Section 164 (with respect to taxes) of the Internal Revenue Code shall be operative for the purposes of this chapter, except that [~~sections~~]:

(1) Sections 164(a)(6) and 164(b)(6) shall not be operative for the purposes of this chapter[.]; and

(2) The deductions under sections 164(a)(3) and 164(b)(5) shall not be operative for corporate taxpayers and shall be operative only for the following individual taxpayers:

(A) A taxpayer filing a single return or a married person filing separately with a federal adjusted gross income of less than $100,000;

(B) A taxpayer filing as a head of household with a federal adjusted gross income of less than $150,000; and

(C) A taxpayer filing a joint return or as a surviving spouse with a federal adjusted gross income of less than $200,000."

PART III

SECTION 6. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235-B Itemized deductions; limitations. Notwithstanding any other law to the contrary, from January 1, 2011, to December 31, 2015, itemized tax deductions claimed pursuant to this chapter shall not exceed the lesser of:

(1) The limitation on itemized deductions under Section 68 of the Internal Revenue Code or:

(2) Any of the following that may be applicable:

(A) $25,000 for a taxpayer filing a single return or married person filing separately with a federal adjusted gross income of $100,000 or more;

(B) $37,500 for a taxpayer filing as a head of household with a federal adjusted gross income of $150,000 or more; and

(C) $50,000 for a taxpayer filing a joint return or as a surviving spouse with a federal adjusted gross income of $200,000 or more."

PART IV

SECTION 7. The purpose of this part is to delay the standard deduction and personal exemption increases approved under Act 60, Session Laws of Hawaii 2009, but to make the increases permanent.

SECTION 8. Act 60, Session Laws of Hawaii 2009, is amended by amending section 6 to read as follows:

"SECTION 6. This Act shall take effect upon approval, provided that:

(1) Section 2 shall apply to taxable years beginning after December 31, 2008;

(2) Sections 1 and 3 shall apply to taxable years beginning after December 31, [~~2010;~~] 2012; and

(3) On December 31, 2015, [~~this Act~~] section 2 shall be repealed and [~~sections 235-2.4(a),~~] section 235-51(a), (b), and (c), [~~and 235-54(a),~~] Hawaii Revised Statutes, shall be reenacted in the form in which [~~they~~] it read on the day before the effective date of this Act."

PART V

SECTION 9. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 10. This Act shall take effect upon its approval, and shall apply to taxable years beginning after December 31, 2010; provided that:

(1) The amendments made to section 235-7(a), Hawaii Revised Statutes, by section 4 of this Act shall not be repealed when that section is reenacted on January 1, 2013, by section 3 of Act 166, Session Laws of Hawaii 2007;

(2) Section 235-B, Hawaii Revised Statutes, shall be repealed on January 1, 2016; and

(3) Part IV shall take effect retroactively to December 30, 2010.

THE SENATE	S.B. NO.	570
TWENTY-SIXTH LEGISLATURE, 2011		S.D. 2
STATE OF HAWAII		H.D. 1
		Proposed