Beware of misleading assumptions for tax relief

Whenever a policymaker comes up with a proposal to grant a tax preference to a certain group of taxpayers, one should take that proposal with a grain of salt — and examine why said preference is necessary.

There are no more misleading assumptions than those dealing with the need for tax relief for the aged and disabled, as federal, state and county laws are riddled with provisions for tax relief for these taxpayer groups. The aged constantly remind policymakers they are living on fixed incomes and cannot afford higher taxes. As a result, additional exemptions are granted under the real property tax and larger standard deductions are granted under the federal net income tax.

But some of the elderly have accumulated assets during their lifelong careers, paid off their mortgages and no longer have to dress up to go to work. They have raised their kids and sent them off to college and, if they were prudent, they set aside savings for a rainy day and their retirement. While there are certainly those who are poor and, perhaps, have been poor all their lives, that poverty is certainly not a product of their age.

Contrast that with young couple — beginning their careers and perhaps starting a family — that has taken out a mortgage on a townhouse or condo. They are making monthly payments on a car loan, have childcare expenses and their salaries are at the bottom end of the pay scale as a result of their recent entry into the labor force. There are no specific tax breaks for them. While this couple may claim additional exemptions because they have dependent children, they don’t get additional exemptions because of their age, as do the elderly under the income tax law.

Similarly, the disabled are assumed to be less capable than healthy individuals of paying their fair share of taxes. Under state income tax laws, those who are certified disabled may claim additional amounts for the personal exemption and under county real property tax laws, those who are disabled may claim additional amounts for the home exemption. Probably the most presumptive is the treatment accorded under the general excise tax.

Under the general excise tax law, which is imposed for the privilege of doing business in the state, those who are certified to be deaf, blind or disabled are afforded the lesser rate of 0.5 percent on all that person’s gross income, regardless of whether that person was in the business of wholesaling or retailing, the latter of which would otherwise be taxed at the full 4 percent rate. No doubt, when this provision was added to the general excise tax law, lawmakers assumed if one was deaf, blind or disabled in some way, that person probably wouldn’t be able to have a prosperous business enterprise or likely worked at a subsidized job making very little income.

However, as one former tax director related some time ago, there was a disabled person who owned a very large business as a sole proprietor, meaning all income generated was gross income to the disabled person. This business employed hundreds of workers and made millions of dollars of gross income. It also had a number of competitors who were engaged in providing the kind of service this disabled person’s business provided. Because the sole proprietor was disabled, though, the gross income of the business was taxed at 0.5 percent rather than the full 4 percent rate his competitors had to pay on their gross income.

Providing special treatment for the disabled doesn’t stop at taxes, but other privileges are afforded the disabled because policymakers assume they cannot afford to pay their fair share. Such is the case of free metered parking for the disabled. While it is understandable the disabled should be granted parking stalls that are more convenient to an establishment, such as a stall near the front door of a restaurant or grocery store, it does not necessarily mean a disabled person cannot pay a quarter for the privilege of parking his vehicle in a public parking stall. And yet, that privilege is extended to those motorists who have a blue or red placard hanging on their rear view mirror.

One of the best descriptions that gets an audience thinking about the irony of the situation is seeing a parking meter flashing red because the Jaguar has a blue plaque dangling from its rearview mirror. Think about it the next time you get a ticket for an expired parking meter.

Hopefully, the lesson learned is that neither age nor physical disability is an indicator of the ability to pay one’s fair share of operating our government.

Lowell L. Kalapa is president of the Tax Foundation of Hawaii.