On March 2, 2010 the Hawaii State House of Representatives passed House Bill 2866 HD1 which allows the State of Hawaii to collect the Estate Tax, or the Death Tax as it is more commonly known.
If approved, this bill will retroactively apply to the estate of any person that passed away in 2010. What this means is the state will tax at rates of up to 55% the assets of our residents life's work, and since it is being applied retroactively many of these people will never have had a chance to see it coming and prepare for it.
This tax unfairly punishes residents, like my parents, former plantation workers, who worked hard all their lives and saved to have something to pass on to their children and grandchildren. I am sure they never imagined that the government could swoop in and effectively claim half of the fruits of their life's work as their own, right off the top before anything is passed on to their family.
This legislation is especially brutal for those that have successfully built a small business that they want to pass on to the next generation of their family.
Consider the example of Joe who manages to get taxed three separate times due to the Death Tax.
Joe is an electrician who recently started his own business. He takes home earnings of roughly $60,000 per year. All of his income is subject to the income tax (1st tax layer).
Joe wants to improve his family’s standard of living, and so he is frugal and saves his money and invests it in diversified mutual funds. Over the course of his life, he invests $500,000 of his income, where it grows to over $1,000,000. Upon selling his stock, Joe owes capital gains taxes on the profit above his original $500,000 (2nd tax layer).
Joe dies after enjoying a good life and nice retirement. Joe leaves his investment returns – along with his house, boat, and other belongings – as an inheritance for his son and daughter. Joe’s business, savings, and other belongings are valued at $7 million. Any inheritance that he leaves in excess of $3.5 million (if he is single) is subject to the Death Tax (3rd tax).
Joe has been taxed three separate times on the same dollar: once when he earned it, again when he invested it and later sold the investment, and again when he died. Is it right for the government to nail Joe three separate times on the same dollar? Shouldn’t Joe pay taxes once and then be done with his obligations to the taxman? When a loved one dies families are often forced to sell off the very business that their loved ones put their heart and soul into building to pay the death tax being assessed by the government. Simply put this practice is cruel and wrong.
The Death Tax mocks the idea of fundamental property rights. It confiscates life-earnings and prevents families from passing a legacy of hard-work and delayed gratification down to the next generation.
The Death Tax is a form of double taxation, which means that it taxes assets which have already been subject to the payroll, income and/or capital gains taxes. The Death Tax is an additional burden on top of other taxes. Every time you receive a paycheck taxes are taken out by the government. If all you ever do is cash that check and put it in the bank, when you pass away, under HB 2866, the government of the State of Hawaii is going to tax it again.
Economist Art Laffer aptly described the perverse incentives of the Death Tax in a recent Wall Street Journal article: “Today in America you can take your after-tax income and go to Las Vegas and carouse, gamble, drink and smoke, and as far as our government is concerned that's just fine. But if you take that same after-tax income and leave it to your children and grandchildren, the government will tax that after-tax income one additional time."
It's not too late to prevent this terrible tax from devastating the life's work of countless Hawaii residents. The bill is in the State Senate right now and your testimony could prevent it from becoming law.
I urge each of you to contact the state senators by emailing sens@capitol.hawaii.gov any message sent to this address will be delivered to all 25 members of the state senate. If you would like to view my floor speech against this legislation visit: http://www.youtube.com/watch?v=fF8VkLTVf9A
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