A proposal to jack up the top rates for state capital gains taxes on businesses and wealthier individuals cleared an important hurdle Monday by winning unanimous approval in the Senate Ways and Means Committee.

The state House has already approved a similar version of House Bill 133, which suggests the measure has a good chance of passing this session. The state Tax Department estimates the higher capital gains tax rates would funnel more than $57 million extra into the state treasury next year.

The measure has been embraced by some of the more liberal activists in state politics as a way to make the state tax system more progressive by getting wealthier residents to pay more.

The capital gains tax is imposed on the profits from sales of capital assets such as houses, stocks, bonds or jewelry. The current top capital gains tax rate is 7.25%, which critics point out is a lower tax rate than many Hawaii residents pay on their wages and salaries.

House members take their oath of office on opening day of teh 2021 legislature.
House members take their oaths of office on opening day of the 2021 Legislature. Both the House and Senate have given tentative approval to an increase in the top capital gains tax rate. Cory Lum/Civil Beat/2021

A new version of HB 133 as amended in the Ways and Means Committee on Monday would increase the top capital gains tax rate to 9% for individuals, and increase the top rate from 4% to 5% for corporations.

The House draft of the same bill features the same rate increase for individuals, but would not increase the corporate capital gains rate.

The measure is supported by the Hawaii State Teachers Association, and both the education and labor caucuses of the state Democratic Party.

“The federal Tax Cuts and Jobs Act gave a tremendous tax break to literally the richest among us,” HSTA wrote in its testimony to lawmakers. “The state can now recapture some of those federal tax savings by raising the percentage of our state tax on capital gains.”

The extra money from the capital gains rate increase “will bring revenue into our state to support our social services that provide necessary support to those experiencing … homelessness, domestic violence, lack of basic needs, mental illness, and other rising community issues exacerbated by the pandemic,” wrote Christy MacPherson, director of a coalition of social service organizations called PHOCUSED.

House Finance Committee Chairwoman Sylvia Luke said last month that increasing the capital gains tax rate seems to be more palatable to House Democrats than some other tax proposals that were floated this year, including an abortive plan to increase state income taxes on wealthier residents.

But the Tax Foundation of Hawaii warns the capital gains increase will hurt Hawaii’s fragile economy as it struggles to emerge from the pandemic.

“A tax increase of any magnitude would send many companies, especially smaller ones, out of business taking with them the jobs the community so desperately needs at this time,” said the Tax Foundation in its written testimony.

Opponents of the bill include the Chamber of Commerce Hawaii and the Hawaii Association of Realtors.

“Hawaii has the highest cost of living compared to other states,” wrote Ken Hiraki, director of government affairs for the realtors. “At a time where our economy and individuals are hurting and businesses are closing, HAR believes it is not prudent to increase the capital gains tax rate.”

But Ways and Means Chairman Donovan Dela Cruz said in an interview that “we’re obviously in a budget crunch.”

The measure now goes to the full Senate for a floor vote. If it is approved there, the House and Senate will need to work out which draft of the bill should become the final version.

The House would have the option of agreeing to the Senate version of the bill, or the House and Senate could refer the measure to a conference committee to try to work out their differences on the measure.

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