LIHU‘E — Despite a day of hand-wringing and following months of rancor, Congress was able to pass a compromise bill Tuesday to keep most tax increases and budget cuts from taking effect, thus throwing the U.S. over the fiscal cliff.
The fiscal cliff — a figurative term with real consequences — gained celebrity status in the last couple of months, and Hawai‘i residents may be wondering how they would have been affected had a compromise not been reached.
One tax increase for everyone was part of the bill: A 2 percent temporary cut in the Social Security payroll tax, originally enacted two years ago to stimulate the economy, expired with the end of 2012. The cut was not renewed.
The Tax Foundation, a non-partisan tax research group based on Washington, D.C., used Census and Internal Revenue Services data to estimate income and deductions for the median two-child family in each of the 50 states.
On average, Hawai‘i residents would have been some of those least affected — ranked 49th among 50 states — in percentage of reduced income due to tax increases and loss of tax credits had the country gone off the cliff.
The foundation’s staff ran the IRS and Census data through their online tax calculation under two scenarios: The 2011 tax law — the latest year that an Alternative Minimum Tax patch was in effect — and the 2013 law, assuming that all Bush-era and Obama tax cuts and AMT remained unchanged.
The median household income for a four-person family in Hawai‘i is $82,973, according to the foundation. If no deal had been reached, a four-person family in Hawai‘i would have seen a 4.16 percent, or $3,453, tax increase in their household income, according to the foundation’s calculations.
The additional tax burden would have been a reflection of an increase of $1,659 in personal income taxes, coupled with a loss of $1,063 in child tax credit and $730 from the AMT patch, according to the foundation.
By contrast, a four-person family in New Jersey would have been affected by a 6.82 percent tax increase on their household income, placing the East Coast state at No 1 in the foundation’s list. Maryland, Connecticut and Massachusetts are immediately below New Jersey, with tax increase on their household incomes of 6.74 percent, 6.62 percent and 6.53 percent, respectively.
However, they are also the only states in which the median household income of a family of four exceeds $100,000.
Hawai‘i, fiscal cliff or not, continues to have the highest individual income tax rate in the nation. According to the website, the personal income tax system consists of 12 brackets. The top bracket, which starts with those making more than $200,000 a year, pay 11 percent of their yearly income to the state.
State residents who have a single income of more than $400,000, and a couple income of more than $450,000 will see their federal tax rate rise to 39.6 percent, up from the current 35 percent.
While the fiscal cliff bill does not specifically address corporate taxes, the foundation ranked Hawai‘i as 32nd nationally among states levying corporate income taxes. In 2010, corporations in Hawai‘i ranked 41st nationally.
For corporations, the tax structure consists of three brackets. The highest rate — for those making more than $100,000 of corporate income — is 6.4 percent.
The state of Hawai‘i charges 4.4 percent in taxes for companies with up to $24,999 of income, and 5.4 percent in taxes for companies with income between $25,000 and $99,999.
In the foundation’s State Business Tax Climate Index, Hawai‘i ranks 37th in the nation.
The index compares the states in five areas of taxation that impact business: Corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes and taxes on property, including residential and commercial property.
The Senate passed their measure, dubbed the American Taxpayer Relief Act of 2012, with an 89-8 vote on after midnight, Washington time, on Tuesday.
Out of the eight senators who voted against the bipartisan compromise, four were Democrats and four were Republicans.
In what was likely his last vote as U.S. Senator, Hawai‘i’s Sen. Dan Akaka voted for the measure, as did Hawai‘i Sen. Brian Schatz, in what was his first vote since replacing Sen. Daniel Inouye.
“The legislation that the U.S. Senate just passed is not ideal but the alternative would be disastrous for the middle class in Hawai‘i,” Schatz said in a statement shortly after his vote. “With this legislation, we can generate some of the needed revenue to fund important programs, and prevent a tax hike on lower and middle-income families.”
After waiting for much of the day Tuesday deciding whether to add amendments to the bill or just pass the measure in a simple up-or-down vote, the House of Representatives passed the measure 257-167 vote late Tuesday night.
Both Hawai‘i House members — Rep. Coleen Hanabusa, D-1st District; and Rep. Mazie Hirono D-2nd District (which includes Kaua‘i) — voted for the measure.
“While not perfect,” Hirono said in a statement, “today’s bipartisan compromise is an important step toward ensuring that our nation’s economy continues to strengthen and improve as we begin the New Year.”
Some of the other features of the bill include: Preventing the expiration of extended unemployment benefits for an estimated 2 million jobless; blocking a 27 percent cut in fees for doctors who treat Medicare patients; stopping a $900 pay increase for lawmakers from taking effect in March and heading off a threatened spike in milk prices.
It would stop $24 billion in spending cuts set to take effect over the next two months, although only about half of that total would be offset with spending reductions elsewhere in the budget.
The non-partisan Congressional Budget Office said the measure would add nearly $4 trillion over a decade to federal deficits, a calculation that assumed taxes would otherwise have risen on taxpayers at all income levels.
The fighting is not over
For all the struggle involved in the legislation, even its passage would merely clear the way for another round of controversy almost as soon as the new Congress convenes.
The U.S. Treasury is expected to need an expansion in borrowing authority by early spring, and funding authority for most government programs set to expire in late March.
• The Associated Press contributed to this report. Léo Azambuja, staff writer, can be reached at 245-3681 ext. 252) or lazambuja@ thegardenisland.com.