Texas Tech University

Dr. Fleischman's Research on Hawaiian Tax Rates Could Cause State Tax Changes

Trevor Bell

March 24, 2015

Gary Fleischman, Ph.D.

Associate Professor of Accounting Gary Fleischman, Ph.D., and fellow researchers - Terrance Jalbert of the University of Hawaii at Hilo (who is also a 1995 graduate of the Rawls College's Ph.D. program in Finance) and Mercedes Jalbert of the Institute for Business and Finance Research - found that Hawaii's current tax rates can result in a tax cliff of 367,100 percent. The article, "Marginal Tax Rates around the Hawaii Itemized Deduction Cliff" which was published in Accounting & Taxation in 2014, looks at Hawaii's state tax rates and its impact on the state's income tax return. The abstract follows:

The State of Hawaii allows paid State taxes as an itemized deduction on the State income tax return. The deduction is available only for individuals with Federal adjusted gross income less than $200,000. Hawaii also limits total itemized deductions to $50,000 for individuals with Federal adjusted gross income of $200,000 or above. These provisions together create a tax cliff that implies extraordinary marginal tax rates. The added dollar of income from $199,999 to $200,000 triggers a loss of the entire tax paid deduction and caps itemized deductions at $50,000. We compute marginal tax rates for adjusted gross income levels around the $200,000 tax cliff. Results indicate marginal tax rates reach levels as high as 367,100 percent. The paper provides taxpayers with concise information regarding the importance of these Hawaii tax cliffs and suggests policy changes.

Due to the drastic findings from this research, both Hawaiian newspapers and Forbes featured Dr. Fleischman and his team's research. This local and national coverage caught the attention of the Hawaii State Legislature, resulting in Hawaii's State House to consider changing tax laws and adopting similar recommendations made in the article under House Bill 83. The bill passed the House Finance Committee by a vote of 15-0 on March 5, 2015. Although deliberations continue, Dr. Fleischman believes there is a good chance that the suggested changes will eventually become law if the Hawaii Senate concurs.

This supports the efforts outlined in the Rawls College of Business Strategic Plan. Learn more about the LEADER 2020 Strategic Plan and follow our progress on Twitter at #RawlsLeads.