Hawaii Income Tax 2021


Hey everyone, it’s time for another post. Today is going to be a post about Hawaii Income Tax 2021. More specifically, how it will affect current and future doctors.

Hawaii Income Tax

If you live in Hawaii, you’re probably aware that a new tax bill has gone through the Senate:

Hawaii Senate Approves Nation’s Highest Income Tax Rate

The TL;DR is that it would raise income tax rates significantly, making Hawaii the state with the highest income taxes in the nation by a large margin. Excerpt from that article:

California is currently the state with the highest income tax rate in the nation, at 13.3% for individuals earning more than $1 million a year.”

Hawaii’s 16% rate would apply to those earning more than $200,000 a year. The rate would revert to the existing rate of 11% after 2027.”

Before I comment further, let’s look at the current income tax rate for Hawaii:

Hawaii Income Tax

Single Filer
1.40% > $0
3.20% > $2,400
5.50% > $4,800
6.40% > $9,600
6.80% > $14,400
7.20% > $19,200
7.60% > $24,000
7.90% > $36,000
8.25% > $48,000
9.00% > $150,000
10.00% > $175,000
11.00% > $200,000

Married Filing Jointly
1.40% > $0
3.20% > $4,800
5.50% > $9,600
6.40% > $19,200
6.80% > $28,800
7.20% > $38,400
7.60% > $48,000
7.90% > $72,000
8.25% > $96,000
9.00% > $300,000
10.00% > $350,000
11.00% > $400,000

The majority of doctors make more than $200,000. For that reason, the current highest marginal tax bracket for a doctor will be 11%. This doesn’t seem too bad, except you need to account that Hawaii residents all have to pay a general excise tax (GET) on basically everything purchased. Of course, high cost of living and housing prices being sky high don’t help either, but let’s just concentrate on the tax aspect.

If this tax increase goes through as it is, pretty much all doctors will see a 16% tax on every dollar they make over $200,000.

Commentary

First things first. I’m not going anywhere. My family and I like living in Hawaii and even a tax hike as significant as this won’t change that. It would simply be too difficult for my wife to find a new job that she likes as much as her current one. Then to uproot the kids from school, have to sell the house, move, buy a new house, etc. would simply be too costly to make any kind of move worthwhile. That said, after the news of a proposed tax hike broke — I briefly considered it. It’s not because of how significant the tax hike would be in terms of money, but more of “the straw that broke the camel’s back”.

I’ve talked about before but Living in Hawaii and Being a Doctor in Hawaii is not easy. You give up a lot of things to live on an island in the Pacific. For the vast majority of doctors, it is simply not worth it. One of the tipping points for doctors here on Hawaii is having grown up here and the want to “come back home.” As for me, we’ve set down roots here and it would be near impossible for us to move now.

Makes sense….

However, I’ve talked to a few other doctors who were born and raised here and they are seriously considering leaving if this tax hike goes through. If you are a younger doctor without a spouse or kids, you are still “lean and mean” and flexible enough to “start over” somewhere else. I must reiterate that these are doctors who were born and raised here and all of their family is here — and not transplants from the mainland.

Normally, you would think that “oh it’s the shock of a potential tax increase” and they’ll forgot about it in a couple days. Unfortunately, you’re wrong. These individuals are making real contingency plans to leave if this tax hike goes through. If they do leave, it’s doubtful they’ll ever come back to work in Hawaii again. I just want to clarify that these are established physicians who have already paid down the majority (or all) of their student loans.

Ask yourself this now:

What about the newly graduated attendings?

Let’s say you’re in your final year of residency/fellowship. You had planned to take a job in Hawaii. Regardless of whether whether you were born/raised in Hawaii or mainland transplant, I think that this income tax hike may provide some pause. The prototypical young attending coming out of residency/fellowship will probably be saddled with between $200,000 and $300,000 in student loans. (We’re still paying ours back.) Currently, and likely for the foreseeable future, there is no tax relief from paying back these significant loans for someone making a “doctor amount” of money. Then, let’s add in that Hawaii in general has relatively lower payment across all specialties, and you can see why a young doctor might hit the pause button here.

For example, let’s say there is a young attending coming out who would make $250,000 a year in Hawaii. Additionally, they owe $250,000 in student loans, just to split the difference. So this young attending, under the new tax rules would pay 16% on every dollar over $200,000 they would make. Of course, this is in addition to the normal federal taxes of 35% for a Single Filer on every dollar over $207,351. Hawaii becomes a tough (maybe impossible?) sell when they could potentially work somewhere else with a lower tax burden, lower cost of living, and more competitive salaries.

Hmm… that is a tough sell.

Then you have to consider that doctors have been leaving Hawaii for awhile now and it doesn’t seem to be getting any better. According to this article, 5% of the doctor workforce left Hawaii in 2019. Not 5 doctors — 5 percent of the work force. That’s not a small amount. I am unsure what the numbers are for 2020, but I think Coronavirus made things worse. However, if these state income tax hike goes through as written, I would expect three things:

  1. Exodus of currently practicing doctors
  2. Increase in number of retiring doctors
  3. Increase in number of doctors going part time
  4. Decrease in number of new doctors coming to the state of Hawaii to practice

This all spells a huge looming doctors shortage, even more so than was already known and projected before. Even if this state income tax increase does what it says and reverts back to 11% in 2027, the damage will already have been done. That’s 6 years of more doctors leaving, more doctors retiring, more doctors going part time, and fewer doctors coming to replace them. This could have implications on the state of health care for all of Hawaii for many years, if not decades.

Oh man, what’s the solution?

Well, that’s above my head. I am not a politician. I just have a pulse on what the medical community in Hawaii is doing. In general, I think that this blanket Hawaii State Income Tax increase is short-sighted when it comes to keeping doctors on Hawaii as well as trying to attract new doctors. This may be the last straw for some (or many!) to leave Hawaii for good or not come back. If such an income tax increase went into effect as it is, it will have far reaching effects and health care in general will suffer as the doctor shortage will almost certainly worsen significantly.

I guess the real question is, “Is there any plan in place to fix an inevitable Hawaii Doctor Shortage after instituting such an income tax increase?” My guess would be that there isn’t and the effects haven’t even been considered.

Can it be fixed?

I don’t know. Everyone on Hawaii is well aware that the economy has been devastated by COVID-19. Our economy is very dependent on our significant tourism. When that came to a near standstill in 2020, the effects were disastrous. As expected, the government which depends on tourism, its spending, and its taxes will not take in enough money. The expected Hawaii State Government shortfall is expected to be $1.4 billion each year for the next 4 years.

Obviously, the state has to find ways to make up for this shortfall. Budget cuts across the board will be heavy, and this state income tax increase is another way to try to replenish funds.

I understand.

However, I just want the state government to understand what they are doing with this proposed state income tax increase. First of all, the increase is too high (11% to 16%, really?). Additionally, the “floor” is too low. To tax everyone who makes $200,000 by 16% on anything above that is simply too low. Let’s contrast this to the current highest income tax bracket which is California:

(Authors Note: I am excluding New York City’s 12.7% rate, since it is only for a small area of New York State)

California Income Tax:

Single Filer
1.00% > $0
2.00% > $8,932
4.00% > $21,175
6.00% > $33,421
8.00% > $46,394
9.30% > $58,634
10.30% > $299,508
11.30% > $359,407
12.30% > $599,012
13.30% > $1,000,000

Married Filing Jointly
1.00% > $0
2.00% > $17,864
4.00% > $42,350
6.00% > $66,842
8.00% > $92,788
9.30% > $117,268
10.30% > $599,016
11.30% > $718,814
12.30% > $1,000,000
13.30% > $1,198,024

In general, California’s highest tax bracket is 12.3%. Only those making more than $1 million pay 13.3% because of a special 1% mental health services tax is applied to income over $1 million. Someone in California making $250,000 would pay their highest income tax rate of 9.3% on ~ $200,000 ($58,364 to $250,000) and 10.3% for anything made above $300,000. This would make California (the current highest income tax) a much better state for a doctor to practice in than Hawaii (income tax wise) — by a LARGE MARGIN.

Like I said, I understand that there is a shortfall and that money needs to be replenished, but this is not the way.

Wow, why would a doctor want to work in Hawaii then?

That’s just it. They wouldn’t.

In its current form, this income tax increase will cause significant problems to Hawaii Health Care as the doctor shortage will probably reach unsustainable levels rather quickly. I would imagine an overwhelming doctor shortage by 2023 or 2024 if such an income tax increase went through this year. Also, let me be clear, this would not just be a “primary care shortage” which Hawaii has always had. This would be an “all specialty” shortage of doctors.

I didn’t even talk about the additional implications this has on private practice doctors. If you own your own practice and use an S-Corp or some other pass-through entity, you will be paying significantly more taxes as well. This is already on top of having to be general excise tax (GET) for your own practice. Once again, if this state income tax hike goes through, this may be the death knell for private practice doctors in Hawaii. Some may join a larger practice and become employees, but I think many will either retire or just leave — and never come back.

Anything else?

I think I’ve said enough. My hope is that the powers that be take a long hard look at things before implementing sweeping tax bracket changes like this. I really do not think the current proposed income tax increase will go through. However, some form of it will make it through. My gut instinct is that the new highest income tax bracket will be 13% or so — “more reasonable” than 16%, but still the highest income tax in the nation by a large margin. I also think they will probably raise the floor from $200,000 to $400,000 for Single Filers and a similar increase for Married Filing Jointly.

Another possibility is that we may see more brackets be added as well, something like California. 13% for $400,000, 14% for $600,000, 15% for $800,000 and 16% for $1 million or something like that is plausible.

We will see what actually makes it through.

If you have any comments to make, please leave them below. Also, please share this post with your friends if you find it useful/interesting. Lastly, if you feel strongly about this proposed income tax change, I encourage you to write to your local representative.

TL;DR

The proposed income tax increase for Hawaii and my commentary.

Give it a read!

Three Variations of Bunny Sensei

-Sensei

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