Marginal Tax Rates Around the Hawaii Itemized Deduction Cliff

The State of Hawaii allows paid State taxes as an itemized deduction on the State income tax return. The deduction is available only for individuals with Federal adjusted gross income less than $200,000. Hawaii also limits total itemized deductions to $50,000 for individuals with Federal adjusted gross income of $200,000 or above. These provisions create a tax cliff that implies extraordinary marginal tax rates. The added dollar of income from $199,999 to $200,000 triggers a loss of the entire tax paid deduction and caps itemized deductions at $50,000. We compute marginal tax rates for adjusted gross income levels around the $200,000 tax cliff. Results indicate marginal tax rates reach levels as high as 367,100 percent. The paper provides taxpayers with concise information regarding the importance of these Hawaii tax cliffs and suggests policy changes