Report of the Pfm Group Consulting Llc –
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APPENDIX A: REPORT OF THE PFM GROUP CONSULTING LLC – "State of Hawaii Tax Review Commission: Study of the Hawaii Tax System" State of Hawaii Tax Review Commission Study of the Hawaii Tax System November 14, 2017 PFM Group Consulting LLC BNY Mellon Center 1735 Market Street 43rd Floor Philadelphia, PA 19103 Contents Introduction and Project Background .................................................................................................................. 5 Report Background ......................................................................................................................................... 6 Methodology .................................................................................................................................................... 7 State Background ............................................................................................................................................ 9 Current Revenue Structure ............................................................................................................................... 10 Overview ....................................................................................................................................................... 11 General Characteristics ................................................................................................................................ 11 Relationship of State and Local Revenues ................................................................................................... 33 Primary Revenue Structure Components and Comparison to Other States ................................................ 36 State Taxes Performance ............................................................................................................................. 39 Summary ....................................................................................................................................................... 42 Tax Burden ........................................................................................................................................................ 45 Overview ....................................................................................................................................................... 46 Current Structure Tax Burden ....................................................................................................................... 46 Components and Comparison to Other States’ Burden ............................................................................... 53 Summary ....................................................................................................................................................... 57 Tax Regressivity ................................................................................................................................................ 59 Overview ....................................................................................................................................................... 60 Introduction ................................................................................................................................................... 60 Current Measures of Regressivity ................................................................................................................. 60 Strategies to Reduce Regressivity ................................................................................................................ 68 Summary ....................................................................................................................................................... 69 Possible Revenue Changes .............................................................................................................................. 70 Tax Policy Principles ..................................................................................................................................... 75 Revenue Alternatives .................................................................................................................................... 77 Revenue Strategies/Approaches .................................................................................................................. 78 Economic Impacts ....................................................................................................................................... 112 Summary ..................................................................................................................................................... 120 Observations and Optimal Revenue Alternatives ........................................................................................... 123 Summary ..................................................................................................................................................... 135 Appendices ...................................................................................................................................................... 136 Study of the Hawaii Tax System 2 List of Figures Figure 1: General Fund Revenue Sources, FY2011-2016 ............................................................................... 12 Figure 2: Hawaii Taxes by Type, 2016 .............................................................................................................. 13 Figure 3: Hawaii Tax Revenue Composition (All Funds), 2007-2016 ............................................................... 14 Figure 4: Hawaii Projected Tax Collections (General Fund), 2017-2023 (millions) .......................................... 15 Figure 5: General Excise Tax (General Fund Revenue) 2007-2016 .................. 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Figure 6: Percent of Personal Consumption: Goods and Services ................................................................... 20 Figure 7: Income and Expenditures by Age of Reference Person, 2013 .......................................................... 21 Figure 8: Individual Income Tax (General Fund Revenue) 2006-2016 (millions) ............................................. 24 Figure 9: Transient Accommodations Tax (General Fund Revenue) 2006-2016 (millions).............................. 25 Figure 10: Tax on Insurance Premiums (General Fund Revenue) 2006-2016 (millions) ................................. 28 Figure 11: Public Service Companies Tax (General Fund Revenue) 2006-2016 (millions) ............................. 29 Figure 12: Cigarette and Tobacco Tax (General Fund Revenue) 2006-2016 (millions) ................................... 31 Figure 14: Liquor Tax (General Fund Revenue) 2006-2016 (millions) ............................................................. 32 Figure 15: U.S and Hawaii Local Government Spending by Function, 2014 .................................................... 33 Figure 16: 2014 State and Local Own Source Revenue ................................................................................... 34 Figure 17: Hawaii Revenue Sources, 2015 ....................................................................................................... 37 Figure 18: Revenue Sources, All States, 2015 ................................................................................................. 38 Figure 19: State Tax Burden as a % of Income ................................................................................................ 47 Figure 20: Total Tax Burden as % of Income .................................................................................................... 49 Figure 21: State Share of Total Tax Burden ..................................................................................................... 50 Figure 22: Visitor % of GET vs. Total Visitor Days ............................................................................................ 52 Figure 23: Visitor % of GET vs. Personal Daily Spending ................................................................................ 53 Figure 24: Ratio of General Excise Taxes Paid to Household Income by Income Range, 2014 ..................... 61 Figure 25: Share of Honolulu Households & Total Excise Tax Revenues by Income Range, 2013-2014 ....... 62 Figure 26: Effective Hawaii Income Tax Rate by Adjusted Gross Income Range, 2014 .................................. 63 Figure 27: Share of Total Resident Hawaii Income Tax Liability by Adjusted Gross Income Range, 2014 ..... 64 Figure 28: Paid Property Taxes as a Percentage of Homeowner Income by Income Range, 2015 ................ 65 Figure 29: Share of Homeowners and All Paid Residential Property Taxes by Income Range, 2015 ............. 65 Figure 30: Median Gross Rent, 2015 ................................................................................................................ 66 Figure 31: Median Gross Rent as a % of HH Income, 2015 ............................................................................. 67 Figure 32: % Rent Cost Burdened, Renter Households Making <$20,000, 2015 ............................................ 67 Figure 33: Hawaii Cigarette Tax Rates and General Fund Revenues, 2006-2016 .......................................... 79 Figure 34: General Fund Liquor Tax Revenue, 2012-2016 .............................................................................. 81 Figure 35: Hawaii Population Aged 65+ .........................................................................................................