REPORT TITLE:
Income Tax Deduction; Children


DESCRIPTION:
Establishes a deduction from gross income equal to 5% of the
taxpayers earned income for each of 2 dependents under the age of
5 and a dependent spouse up to 15% but not to exceed $10,000.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                            617         
HOUSE OF REPRESENTATIVES                H.B. NO.           
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO INCOME TAX.
 


BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  Section 235-7, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "235-7 Other provisions as to gross income, adjusted gross
 
 4 income, and taxable income.(a)  There shall be excluded from
 
 5 gross income, adjusted gross income, and taxable income:
 
 6      (1)  Income not subject to taxation by the State under the
 
 7           Constitution and laws of the United States;
 
 8      (2)  Rights, benefits, and other income exempted from
 
 9           taxation by section 88-91, having to do with the state
 
10           retirement system, and the rights, benefits, and other
 
11           income, comparable to the rights, benefits, and other
 
12           income exempted by section 88-91, under any other
 
13           public retirement system;
 
14      (3)  Any compensation received in the form of a pension for
 
15           past services;
 
16      (4)  Compensation paid to a patient affected with Hansen's
 
17           disease employed by the State or the United States in
 
18           any hospital, settlement, or place for the treatment of
 
19           Hansen's disease;
 

 
Page 2                                         617         
                                     H.B. NO.           
                                                        
                                                        

 
 1      (5)  Except as otherwise expressly provided, payments made
 
 2           by the United States or this State, under an act of
 
 3           Congress or a law of this State, which by express
 
 4           provision or administrative regulation or
 
 5           interpretation are exempt from both the normal and
 
 6           surtaxes of the United States, even though not so
 
 7           exempted by the Internal Revenue Code itself;
 
 8      (6)  Any income expressly exempted or excluded from the
 
 9           measure of the tax imposed by this chapter by any other
 
10           law of the State, it being the intent of this chapter
 
11           not to repeal or supersede any such express exemption
 
12           or exclusion;
 
13      (7)  The first $1,750 received by each member of the reserve
 
14           components of the Army, Navy, Air Force, Marine Corps,
 
15           or Coast Guard of the United States of America, and the
 
16           Hawaii national guard as compensation for performance
 
17           of duty;
 
18      (8)  Income derived from the operation of ships or aircraft
 
19           if the income is exempt under the Internal Revenue Code
 
20           pursuant to the provisions of an income tax treaty or
 
21           agreement entered into by and between the United States
 
22           and a foreign country, provided that the tax laws of
 
23           the local governments of that country reciprocally
 

 
Page 3                                         617         
                                     H.B. NO.           
                                                        
                                                        

 
 1           exempt from the application of all of their net income
 
 2           taxes, the income derived from the operation of ships
 
 3           or aircraft which are documented or registered under
 
 4           the laws of the United States;
 
 5      (9)  The value of legal services provided by a prepaid legal
 
 6           service plan to a taxpayer, the taxpayer's spouse, and
 
 7           the taxpayer's dependents;
 
 8     (10)  Amounts paid, directly or indirectly, by a prepaid
 
 9           legal service plan to a taxpayer as payment or
 
10           reimbursement for the provision of legal services to
 
11           the taxpayer, the taxpayer's spouse, and the taxpayer's
 
12           dependents;
 
13     (11)  Contributions by an employer to a prepaid legal service
 
14           plan for compensation (through insurance or otherwise)
 
15           to the employer's employees for the costs of legal
 
16           services incurred by the employer's employees, their
 
17           spouses, and their dependents; and
 
18     (12)  Amounts received in the form of a monthly surcharge by
 
19           a utility acting on behalf of an affected utility under
 
20           section 269-16.3 shall not be gross income, adjusted
 
21           gross income, or taxable income for the acting utility
 
22           under this chapter.  Any amounts retained by the acting
 
23           utility for collection or other costs shall not be
 

 
Page 4                                         617         
                                     H.B. NO.           
                                                        
                                                        

 
 1           included in this exemption.
 
 2      (b)  There shall be included in gross income, adjusted gross
 
 3 income, and taxable income:  (1) unless excluded by this chapter
 
 4 relating to the uniformed services of the United States, cost-of-
 
 5 living allowances and other payments exempted by section 912 of
 
 6 the Internal Revenue Code, but section 119 of the Internal
 
 7 Revenue Code nevertheless shall apply; (2) unless expressly
 
 8 exempted or excluded as provided by subsection (a)(6), interest
 
 9 on the obligations of a State or a political subdivision thereof.
 
10      (c)  The deductions of or based on dividends paid or
 
11 received, allowed to a corporation under chapter 1, subchapter B,
 
12 Part VIII of the Internal Revenue Code, shall not be allowed.  In
 
13 lieu thereof there shall be allowed as a deduction the entire
 
14 amount of dividends received by any corporation upon the shares
 
15 of stock of a national banking association, qualifying dividends,
 
16 as defined in section 243(b) of the Internal Revenue Code,
 
17 received by members of an affiliated group, or dividends received
 
18 by a small business investment company operating under the Small
 
19 Business Investment Act of 1958 (Public Law 85-699) upon shares
 
20 of stock qualifying under paragraph (3), seventy per cent of the
 
21 amount received by any corporation as dividends:
 
22      (1)  Upon the shares of stock of another corporation, if at
 
23           the date of payment of the dividend at least ninety-
 

 
Page 5                                         617         
                                     H.B. NO.           
                                                        
                                                        

 
 1           five per cent of the other corporation's capital stock
 
 2           is owned by one or more corporations doing business in
 
 3           this State and if the other corporation is subjected to
 
 4           an income tax in another jurisdiction (but subjection
 
 5           to federal tax does not constitute subjection to income
 
 6           tax in another jurisdiction);
 
 7      (2)  Upon the shares of stock of a bank or insurance company
 
 8           organized and doing business under the laws of the
 
 9           State;
 
10      (3)  Upon the shares of stock of another corporation, if at
 
11           least fifteen per cent of the latter corporation's
 
12           business, for the taxable year of the latter
 
13           corporation preceding the payment of the dividend, has
 
14           been attributed to this State.
 
15 However, except for national bank dividends, the deductions under
 
16 this subsection are not allowed when they would not have been
 
17 allowed under section 243 of the Internal Revenue Code, as
 
18 amended by Public Law 85-866, by reason of subsections (b) and
 
19 (c) of section 246 of the Internal Revenue Code.  For the
 
20 purposes of this subsection fifteen per cent of a corporation's
 
21 business shall be deemed to have been attributed to this State if
 
22 fifteen per cent or more of the entire gross income of the
 
23 corporation as defined in this chapter (which for the purposes of
 

 
Page 6                                         617         
                                     H.B. NO.           
                                                        
                                                        

 
 1 this subsection shall be computed without regard to source in the
 
 2 State and shall include income not taxable by reason of the fact
 
 3 that it is from property not owned in the State or from a trade
 
 4 or business not carried on in the State in whole or in part),
 
 5 under section 235-5 and the other provisions of this chapter,
 
 6 shall have been attributed to the State and subjected to
 
 7 assessment of the taxable income therefrom (including the
 
 8 determination of the resulting net loss, if any).
 
 9      (d)  (1)  For taxable years ending before January 1, 1967,
 
10           the net operating loss deductions allowed as carrybacks
 
11           and carryovers by the Internal Revenue Code shall not
 
12           be allowed.  In lieu thereof the net operating loss
 
13           deduction shall consist of the excess of the deductions
 
14           allowed by this chapter over the gross income, computed
 
15           with the modifications specified in paragraphs (1) to
 
16           (4) of section 172(d) of the Internal Revenue Code, and
 
17           with the further modification stated in paragraph (3)
 
18           hereof; and shall be allowed as a deduction in
 
19           computing the taxable income of the taxpayer for the
 
20           succeeding taxable year.
 
21      (2)  (A)  With respect to net operating loss deductions
 
22                resulting from net operating losses for taxable
 
23                years ending after December 31, 1966, the net
 

 
Page 7                                         617         
                                     H.B. NO.           
                                                        
                                                        

 
 1                operating loss deduction provisions of the
 
 2                Internal Revenue Code shall apply, provided that
 
 3                there shall be no net operating loss deduction
 
 4                carried back to any taxable year ending prior to
 
 5                January 1, 1967.
 
 6           (B)  In the case of a taxable year beginning in 1966
 
 7                and ending in 1967, the entire amount of all net
 
 8                operating loss deductions carried back to the
 
 9                taxable year shall be limited to that portion of
 
10                taxable income for such taxable year which the
 
11                number of days in 1967 bears to the total days in
 
12                the taxable year ending in 1967.
 
13           (C)  The computation of any net operating loss
 
14                deduction for a taxable year covered by this
 
15                subsection shall require the further modifications
 
16                stated in paragraphs (3), (4), and (5) of this
 
17                subsection.
 
18      (3)  In computing the net operating loss deduction allowed
 
19           by this subsection there shall be included in gross
 
20           income the amount of interest which is excluded from
 
21           gross income by subsection (a), decreased by the amount
 
22           of interest paid or accrued which is disallowed as a
 
23           deduction by subsection (e).  In determining the amount
 

 
Page 8                                         617         
                                     H.B. NO.           
                                                        
                                                        

 
 1           of the net operating loss deduction under this
 
 2           subsection of any corporation, there shall be
 
 3           disregarded the net operating loss of such corporation
 
 4           for any taxable year for which the corporation is an
 
 5           electing small business corporation.
 
 6      (4)  No net operating loss carryback or carryover shall be
 
 7           allowed by this chapter if not allowed under section
 
 8           172 of the Internal Revenue Code.
 
 9      (5)  The election to relinquish the entire carryback period
 
10           with respect to a net operating loss allowed under
 
11           section 172(b)(3)(C) of the Internal Revenue Code shall
 
12           be operative for the purposes of this chapter; provided
 
13           that no taxpayer shall make such an election as to a
 
14           net operating loss of a business where such net
 
15           operating loss occurred in the taxpayer's business
 
16           prior to the taxpayer entering business in this State.
 
17      (e)  There shall be disallowed as a deduction the amount of
 
18 interest paid or accrued within the taxable year on indebtedness
 
19 incurred or continued, (1) to purchase or carry bonds the
 
20 interest upon which is excluded from gross income by subsection
 
21 (a); or (2) to purchase or carry property owned without the
 
22 State, or to carry on trade or business without the State, if the
 
23 taxpayer is a person taxable only upon income from sources in the
 

 
Page 9                                         617         
                                     H.B. NO.           
                                                        
                                                        

 
 1 State.
 
 2      (f)  Losses of property as the result of tidal wave,
 
 3 hurricane, earthquake, or volcanic eruption, or as a result of
 
 4 flood waters overflowing the banks or walls of a river or stream,
 
 5 or from any other natural disaster, to the extent of the amount
 
 6 deductible, under this chapter, not compensated for by insurance
 
 7 or otherwise, may be deducted in the taxable year in which
 
 8 sustained, or at the option of the taxpayer may be deducted in
 
 9 equal installments over a period of five years, the first such
 
10 year to be the calendar year or fiscal year of the taxpayer in
 
11 which such loss occurred.
 
12      (g)  In computing taxable income there shall be allowed as a
 
13 deduction:
 
14      (1)  Political contributions by any taxpayer not in excess
 
15           of $250 in any year; provided that such contributions
 
16           are made to a central or county committee of a
 
17           political party whose candidates shall have qualified
 
18           by law to be voted for at the immediately previous
 
19           general election; or
 
20      (2)  Political contributions by any individual taxpayer in
 
21           an aggregate amount not to exceed $1,000 in any year;
 
22           provided that such contributions are made to candidates
 
23           as defined in section 11-191, who have agreed to abide
 

 
Page 10                                        617         
                                     H.B. NO.           
                                                        
                                                        

 
 1           by the campaign expenditure limits as set forth in
 
 2           section 11-209; and provided further that not more than
 
 3           $250 of an individual's total contribution to any
 
 4           single candidate shall be deductible for purposes of
 
 5           this section.
 
 6      (h)  In computing taxable income there shall be allowed a
 
 7 deduction from gross income for taxpayers who have qualified
 
 8 dependents under age five, or a qualified dependent spouse during
 
 9 the entire twelve months of the taxable year.  The amount of the
 
10 deduction shall be equal to five per cent of the taxpayer's
 
11 earned income for each of two qualified dependents plus five per
 
12 cent for a qualified spouse but not more than fifteen per cent,
 
13 or $10,000, whichever is less.  Taxpayers with taxable incomes
 
14 over $30,000, computed before the deduction in this section,
 
15 shall reduce the amount of allowable deduction for each qualified
 
16 dependent by $5 for each $100 of taxable income over $30,000 in
 
17 any taxable year.
 
18      For the purposes of this section:
 
19      "Qualified dependent" means an individual who is a dependent
 
20 of the taxpayer as defined in section 152 of the Internal Revenue
 
21 Code and is under the age of five who does not receive aid or
 
22 assistance under Part A or Part E of the Social Security Act.
 
23      "Qualified dependent spouse" means a spouse who files a
 

 
Page 11                                        617         
                                     H.B. NO.           
                                                        
                                                        

 
 1 joint return with the taxpayer, qualifies as a dependent of that
 
 2 taxpayer  under the Internal Revenue Code, and the taxpayer also
 
 3 claims a deduction for a qualified dependent.
 
 4      The allowable deduction and limits in this subsection shall
 
 5 be adjusted annually by the director to reflect the annual cost-
 
 6 of-living change."
 
 7      SECTION 2.  New statutory material is underscored.
 
 8      SECTION 3.  This Act, upon its approval, shall apply to
 
 9 taxable years beginning after December 31, 1998.
 
10 
 
11                           INTRODUCED BY:  _______________________