HONOLULU (KHON2) — If you received federal relief to help cope during the coronavirus pandemic, prepare for a hefty tax bill — not from the feds, but from the state.
Officials said it all adds up to about $450 million in taxes. Always Investigating explains the impact this has on Hawaii’s businesses and individuals.
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Recent federal COVID-19 relief laws exempted a portion of unemployment benefits from federal taxes and also allowed businesses who needed the Paycheck Protection Program lifeline to deduct their expenses. However, the state has just passed a budget that did not take those figures into account, and officials tell KHON it’s very unlikely they’ll mirror the federal rules.
State taxpayers learned this week that they won’t have an extension to file like the feds are allowing. With Hawaii taxes due in just a few weeks, individuals, businesses and tax preparers are scrambling with huge key details still up in the air.
“We kind of know what the federal rules are,” said Tom Yamachika of the Tax Foundation of Hawaii. “We don’t know what the state rules are because they’re considered by the legislature right now.”
Two big-ticket items still pending are likely to cost the unemployed more than $190 million in state taxes. And businesses that needed a federal rescue grant? They’re probably on the hook for more than $250 million dollars in state taxes. Why? The state is not planning to “conform” — in other words “mirror” — certain tax exemptions and deductions that the IRS is allowing, and it looks like a standalone state bill for unemployment benefit exemptions is doomed for the session.
“The federal government has a right to print money and the state doesn’t. We have to balance our budgets,” said Isaac Choy, director of the Hawaii Department of Taxation. “So every single time we give a tax benefit, like the non-taxability of U.I., or the deductibility of the PPP, the money has to come from somewhere.”
Somewhere individuals and businesses will now have to look in their own pockets, with key legislation that would have given them a break likely dead for the session.
“Currently, it’s safe to assume that we will not be conforming, or we will not be following the same type of relief that the federal government gave to residents,” said Rep. Sylvia Luke, (D) chair of the House Finance Committee.
A clause in the most recent federal rescue package has made legislatures across the country even more gun-shy of passing any more local tax breaks.
“You cannot change pre-existing state tax laws to cut taxes, at least to offset that tax cut with this federal money,” said U.S. Rep. Ed Case, (D) Hawaii. “Our purpose was to make sure that the money that went to state and local governments actually got out there into the community in specific programs. We didn’t want it used simply to reduce taxes or pay down deficits that had existed before COVID-19.”
The unemployment insurance rate-fix bill that staved off a massive hike on businesses was signed in the nick of time before the latest federal act.
“It was signed into law on March 2nd,” Yamachika said, “so one day before the hammer hit. So we just dodged that one by the hair of our chinny chin chin.”
Not all relief money is meeting the same taxable fate as unemployment and the PPP deductions appear destined for.
“If you got a grant or some kind of rent relief, or something like that, those type of subsidies that people got is not taxable for state,” Choy said. “But the things that are traditionally taxable for state are going to continue to be taxed, like unemployment.”
As for the PPP, the grants themselves are nontaxable. It’s whether businesses can also deduct expenses covered by the grant where the feds and the state are diverging. Critics of deductibility of expensing point out it’s kind of a double dip.
“You get the money tax free, you spend it, and you want to take the deduction again,” Yamachika said. “No, it doesn’t work that way.”
Except this one time at the federal level only. Don’t hold your breath for the state to follow suit.
“We’ve been telling people, hey, you know, we’re not going to conform, we’re not going to conform, we’re not going to conform,” Choy said. “I don’t want to be the Grim Reaper here, but there were enough clues there that people should have been aware that there were some tax consequences to this. It shouldn’t have come as a surprise.”