Taxing Government Largesse
by Tom Yamachika, President, Tax Foundation Hawaii
We’ve recently found out that the City & County of Honolulu is going to take 10,000 applications from vulnerable people and families who need help paying rent or utility bills. So, it’s a good time to review the tax rules applicable to payments like these so recipients don’t get nasty surprises from the tax agencies.
Usually, when people receive money or something else of value and don’t have to pay it back, it’s considered “income.” Taxes are imposed against income. In Hawaii, we have the net income tax and general excise tax among others. But there is an exception, not written into the statute books, for “general welfare” payments. To qualify, a payment must (1) be made pursuant to a governmental program, (2) be for the promotion of the general welfare (that is, based on need), and (3) not represent compensation for services.
In Tax Information Release 2020-06, our Department of Taxation says that it will generally respect the federal tax treatment for purposes of our income tax. For GET, it says that although GET normally applies to amounts received by a business that replace income, it will not enforce GET against PUA payments, forgiven loans under PPP, and EIDL grants.
Under this definition, individual applicants who receive aid from the City & County of Honolulu shouldn’t be taxable on the aid received even though those applicants’ bills are being paid for them. But what about the landlords and utility companies, since the payments are being made from the City & County directly to them? General welfare treatment doesn’t extend to the landlords and utility companies because they are still providing the use of realty, goods, or services and are getting paid for it. As the Department explains: “Landlords are subject to GET on these amounts whether the payments are received from the tenants or directly from the agency that administers the relief program on behalf of the tenant.” The same reasoning applies to income tax, federal and state.
In the legislative session that just ended, there was much debate about unemployment compensation. The federal government, in the American Rescue Plan Act, decided to exempt up to $10,200 of unemployment compensation received in 2020. Hawaii decided not to use that exclusion, making unemployment compensation taxable. (Actually, because the American Rescue Plan Act is a 2021 law, the Legislature wouldn’t normally even consider conforming to that provision until the 2022 legislative session, but was debating it this time because it applied to 2020 income.)
But what about the general welfare exclusion for such payments? They seem to satisfy all three criteria, namely that the payments are not for actual work, are based on need, and come from a government agency. The problem is that there is a federal law, Internal Revenue Code section 85, that specifically says that unemployment compensation is taxable gross income. Hawaii’s income tax law conforms to the federal law in that respect. Laws that are black and white supersede tax agency practices and positions, or at least are supposed to. Thus, people who received unemployment compensation will have to pay income tax on it even though the federal government will exclude some of it.
In times of need, the government gives, and sometimes it takes back as well. We hope that this summary will be helpful for the people and companies involved.