Despite an unprecedented $1.6 billion federal bailout of state government earlier this month, the state Senate is again eying a substantial package of tax increases designed to squeeze Hawaii’s wealthiest residents to help pay the state’s bills.

The Senate Ways and Means Committee gave unanimous approval Tuesday to proposed amendments to House Bill 58 to wring more revenue out of both the state inheritance tax and the state conveyance tax. The bill would also suspend a variety of state excise tax exemptions.

Seconds later, Committee Chairman Donovan Dela Cruz asked the committee to reconsider that action to allow more time to finalize some technical details in the bill. The committee then walked back its vote, which is now scheduled for Thursday morning.

On Monday the same committee approved House Bill 133, which would increase the state capital gains tax on profits from sales of capital assets such as houses, stocks, bonds or jewelry. That measure would initially raise an extra $57 million a year for the state.

House members gather on the floor before opening day of the 2021 legislature.
House members gather on the floor before opening day of the 2021 legislature. Despite a huge federal bailout of state finances, lawmakers are considering increasing taxes on wealthier residents and investors. Cory Lum/Civil Beat/2021

The push for those tax increases comes in the wake of an extraordinary injection of cash into state government with passage of the federal American Rescue Plan Act. That act provided $1.6 billion to shore up state finances, and hundreds of millions of dollars more to help Hawaii cope with the pandemic.

The latest Senate tax proposals were panned by the Chamber of Commerce Hawaii, which warned that “the enactment of broad tax increases during an economic recovery phase will undermine efforts made to turn Hawaii’s economy around.”

“Hawaii’s business community is at a critical point — where any additional business taxes could mean the difference between closing their doors, bankruptcy, or laying off employees,” according to written testimony submitted by the chamber.

But the tax proposals won support from some left-leaning activists who argue that the wealthy received enormous tax cuts under the Tax Cuts and Jobs Act of 2017. Backers of the bill see this as an opportunity for the state to claim some of that tax savings now being enjoyed by the rich.

Nicole Woo, director of research and economic policy for Hawaii Children’s Action Network Speaks, said cutting government spending during a recession would “further harm our already injured economy.”

Instead, “it makes sense to ask those who are fortunate enough to be doing well in this economy to pay more, in order to prevent cuts to critical government services that so many struggling working families have come to rely on,” Woo wrote.

The proposed conveyance tax increase in the bill would apply to sales of non-owner occupant properties worth $4 million or more. Properties worth more than $4 million would see their conveyance tax double, while the tax on sales for more than $6 million would triple, and sales of properties worth more than $10 million would quadruple.

The changes to the state inheritance tax portion of the bill would reduce the amount of inheritance that is exempt from the state inheritance tax from $5.49 million now to $3.5 million if the bill passes.

When asked why the state would increase taxes immediately after benefiting from a huge federal bailout, Dela Cruz replied in a written statement that the state has some large debts looming.

They include $750 million that Gov. David Ige borrowed last year to help cover state operating costs, and hundreds of millions of dollars in payments that are due for future health care benefits for state employees and retirees.

The state has also borrowed $723 million to help pay unemployment benefits to jobless workers. Technically it is Hawaii’s employers who are obligated to repay that money. However, House and Senate leaders say the state should cover that debt because the state shut down tourism during the pandemic, triggering business closures and layoffs.

The state House budget proposal would repay the $750 million that Ige borrowed and also pay the unemployment debt on behalf of Hawaii’s employers, but it does not rely on any significant tax increases, according to House Finance Committee Chairwoman Sylvia Luke.

Instead, the House budget proposal relies largely on “raiding” special funds, or grabbing money from funds that were set up with their own income streams to finance specific government activities.

The House budget proposal would also raise about $160 million by stripping out funding for vacant state positions.

That tactic has alarmed some state department heads, who say they need those positions to operate. Luke acknowledged many of those positions are actually necessary for government to function, and said funding for many of them will be restored later.

Ige’s proposed budget, which was developed before the federal bailout, also did not rely on any significant tax increases. However, it did impose deep cuts on state departments and on government contracts with social services agencies.

The governor’s budget set aside money to repay the $750 million the administration had borrowed, but did not include money to repay the unemployment debt owed by Hawaii’s employers.

The House has already given preliminary approval to an increase in the state capital gains tax, and also advanced House Bill 445 to modify the way the state inheritance tax is applied.

The latest draft of the House measure does not specify how large an inheritance would need to be before the state tax kicks in, so it is unclear what impact that bill would have.

The House earlier this month rejected a proposal by the Senate to increase the state income tax on higher income residents.

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