Most of us are very familiar with crosswalks and traffic signals.  We pass a few of them every day.  We might get stopped by a red light from one of them.  But have we ever stopped to think how much one of these things cost?

One of the bills introduced in the recent legislative session, Senate Bill 2004, tells the story of just one signalized crosswalk yet to be built.  (House Bill 2063 is identical.)

The crosswalk is to be located at the intersection of Vineyard Boulevard and River Street in Honolulu, at the edge of Chinatown.  It’s kind of a busy area for cars and people, with Vineyard Boulevard being six lanes of traffic all going Ewa (West, for you non-locals).

Apparently, our lawmakers agreed some time ago that a crosswalk with traffic signals is needed there.  Funds were appropriated for the project back in the Supplemental Appropriations Act of 2014.  At the time, $750,000 was set aside for both design and construction.

Although the 2014 budget act was signed into law on June 26, 2014, the text of Senate Bill 2004 recites that the funds were released in April 2015, ten months later.  That date is significant because the State’s fiscal biennium ended at the end of June 2015, at which point the funds appropriated in the 2014 bill were to lapse.  The Department of Transportation was able to get a contract signed to design the intersection, but not to construct it.  The design work seems to have cost about $230,000.

Because the crosswalk was still needed and wasn’t built yet, lawmakers took up the cause again in the 2016 legislative session and were able to get it included in the Supplemental Appropriations Act of 2016.  This time, the appropriation was for $523,000, which probably was what remained of the originally appropriated $750,000 after the design costs were taken out.

But alas, delays plagued the project once again.  Our Department of Transportation posted a notice on October 10, 2017, requesting bids by November 9.  The work included “installation of traffic signals, underground ducts, traffic/pedestrian signal poles, foundations, controller hardware, curb ramps, BMP, pavement markers, lane extension, electrical installation and connection, and removal of chain link fences.”  (Sounds pretty involved – but would it be different installing any other traffic signal?)

On November 9, 2017, the bids were opened.  Two bids were received, the lower of which was for $816,000.  That’s in addition to the design work that already had been done, putting the total project cost north of $1 million.  Because this new project cost is somewhat larger than the $750,000 originally appropriated for the project, Senate Bill 2004 asks for an additional $352,800 on top of the funds in the 2016 appropriation.  The bill says that “construction costs have increased over the intervening years.”  (That’s an increase of over 13% per year.  I must be in the wrong business.)

The median price of a single-family home, which includes design, construction, electrical work, plumbing, and the dirt on which all of it sits, was $760,000 in 2017 according to Honolulu real estate firm Locations.  That amount of money doesn’t seem to be enough to pay for one crosswalk with a traffic signal.  And a single-family home can be built much more quickly.

Is this the new normal? Is this a signal for the need to raise taxes again? Please tell me that it’s not!

The National Taxpayer Advocate recently produced a “Purple Book” containing her top 50 recommendations for the IRS.  One of them concerned “math error authority,” which brought to mind one of the failings in Hawaii’s tax system.

On the federal side, disputes between the IRS and taxpayers play out through a lengthy process.  The IRS proposes an assessment, the taxpayer responds to it, the IRS finalizes the assessment, and the taxpayer gets to challenge it in court.  The IRS, however, does get a short-cut through the process if it is only correcting a math or clerical error that the taxpayer has made.  The taxpayer is given one notice instead of the two notices given for a regular assessment, and if the taxpayer doesn’t respond there is no court review.

This abbreviated method may be fine for genuine math errors, which are apt to occur in any complicated tax form that isn’t computer generated (and perhaps even some that are).  If the taxpayer has admitted to the existence and amount of all income items but just added them up wrongly, for example, the taxpayer can’t have much of a defense.  But the relative speed and convenience of math error procedures motivates the agency to use them even for issues that aren’t math errors.  “In her reports to Congress,” the National Taxpayer Advocate says, “she has documented circumstances in which the IRS has used math error authority to address discrepancies and mismatches that go beyond simple arithmetic mistakes and have undermined taxpayer rights” – in no fewer than eight annual reports since 2001.

Here in Hawaii, our statutes don’t even give our Department of Taxation math error authority.  If the Department has a beef with a taxpayer, it is supposed to send out a proposed notice of assessment and a final notice of assessment, and give the taxpayer 30 days to respond each time.  But the Department has come up with a document called a “line item adjustment letter,” where it not only corrects math errors but also disallows credit claims, among other things.  “Please call or send correspondence to the Oahu District Office if you have any questions regarding this notice,” it says.  “You may file an amended return with supporting documents or contact the Oahu District Office for the appropriate action to take if you do not agree with the adjustment(s).”

So here are my questions:  First, how is the Department able to use this letter to get around the statutory assessment procedures when it doesn’t even have math error authority?  The IRS has math error authority to fix 17 kinds of errors, all of which are spelled out in statute; IRS has been begging Congress to give it open-ended authority to add other errors by regulation, but Congress hasn’t bought into that idea to date – and for good reason, given the Taxpayer Advocate’s repeated complaints.  Here in Hawaii, simplified procedures may be appropriate for genuine math errors or other issues that are not reasonably subject to dispute, but isn’t that a decision for the Legislature to make as opposed to letting the Department go rogue?  Second, are there any standards for when it is appropriate to use this type of letter to summarily adjust a taxpayer’s account as opposed to going through the assessment and appeal procedures?  Or is one of these letters just sent out when someone in the Department feels like it?  Third, isn’t the letter at least supposed to give an opportunity for the taxpayer to respond before the Department rushes to final judgment and says, “We’re done, and if you don’t like it file an amended return”?  The words “Due Process” come to mind, as in due process required by both the federal and Hawaii constitutions.

As of this writing, the Department is still working on its new income tax system.  Let’s hope the Department and the Legislature come up with a way to clean up this issue in a way that can accommodate situations in which math error authority is appropriate, while preserving taxpayer rights and protections.

One of the new, key components of Trump Tax is a provision important to the vast majority of small businesses.  Practitioners may know it as the Section 199A deduction.

Under Trump Tax, corporations that used to see a maximum tax rate of 35% got that rate slashed to 21%.  About 75% of businesses, however, are not taxed at the corporate rate.  Instead, individuals who own them are taxed on the business profit at individual rates, which can go up to 37% (down from 2017’s maximum of 39.6%, but not much).  We need to remember that corporations are double taxed, in that they are taxed and then pay dividends which are then taxed to the recipients.  But even allowing for double taxation, the corporations seem to get a big break here.

Trump Tax’s answer to this anomaly is Section 199A, which tries to measure how much income has come from business operations and then gives the recipient a 20% deduction for it, which would give those earnings a benefit economically similar to a lower tax rate.

The individual tax rates were designed for most people who are wage earners.  They earn money by providing their services to a business.  Businesses that are service oriented, like law firms, accounting firms, or brokerage houses make their money the same way, and for that reason are not allowed the deduction—at least they aren’t allowed it if they make enough money.  The law provides thresholds and phase-in treatment so that those making smaller amounts of money can take the deduction as well, but those earning too much are out of luck.

Here’s an example.  Kenny, who owns a plumbing business, is married.  His taxable income is $335,000, $300,000 of which is ordinary income that comes from the business after it pays wages of $150,000.  Kenny might deduct 20% of the $300,000, or $60,000.

If Kenny instead owned an accounting firm, his taxable income is 20% of the way through the phaseout range, which for couples is $315,000 to $415,000.  So, only 80% of his business income, or $240,000, is considered.  He may be able to deduct 20% of the $240,000, or $48,000.

(Note that the actual law is quite a bit more complicated.  There are limitations based on W-2 wages that the business paid, for instance, and others that are designed to take account of income already taxed at a lower rate such as capital gains.  Those limitations don’t kick in with the numbers in this example.)

Here in Hawaii, our focus over the years seems to have been to soak the individuals.  Our top individual tax rate is 11%, second highest in the country, while our top corporate tax rate is 6.4%, which is much more on par with what other states are charging corporations.

In the upcoming legislative session, our lawmakers will be asked to conform our Hawaii income tax law to the federal changes that have taken place in 2017.  One decision that they need to make is whether to conform to this provision, section 199A.  Right now, our individual income tax law doesn’t even attempt to distinguish between income that comes from a business and income that comes from wages.  Because we have chosen to tax business income at a much lower rate if the income is earned in a corporation, we should seriously consider adopting section 199A here in Hawaii to give some relief to the 75% of businesses that are not in corporate form, especially the small businesses.