As Hawaii lawmakers approach the midpoint of this year’s session, they are positioning a variety of tax increase bills for passage later in the session, just in case they are needed.

But whether those tax hikes finally pass this year will depend largely on what happens in Washington, D.C.

If the new COVID-19 pandemic aid package being negotiated in Congress this week is generous, there will be less pressure on Hawaii lawmakers to raise state taxes. But if the federal aid package turns out to be more stingy, the Legislature may go on a hungry hunt for money.

There is a bill to increase state income taxes, bills that would boost the state inheritance tax, and bills to increase the state capital gains tax. There is a proposal to suspend excise tax exemptions and increase the corporate income tax, bills to tax e-cigarettes, and bills to increase taxes on car rentals.

Man sleeps bathed in the golden sunrise rays on the Capitol lawn.
Lawmakers at the Hawaii State Capitol are readying tax increases in case a federal relief package fails to make it through. Cory Lum/Civil Beat

Passage of many or most of those measures may depend on the heft of the new federal aid package, and the restrictions that Congress writes into the new law.

For example, if the new package provides a sizable lump of cash for the state to spend as it wishes, Gov. David Ige and lawmakers say that will ease the state’s immediate money woes.

That federal aid package is so important that the state House and Senate have adjusted their internal deadlines to give the House Finance Committee an extra week to digest the final federal product and its impact on the state budget, said Senate President Ron Kouchi.

“We’re expecting Congress to act, and so before some of the decisions are going to be made I think we’ll get an idea of what federal help might be possibly coming,” Kouchi said. “And certainly what the Congress does, and President Biden, is going to have a significant impact on those kind of revenue decisions in the budget.”

Even if the federal bailout covers most of the state budget shortfall for the next two years, economists expect Hawaii’s economic recovery will take four years, Kouchi said.

“We need to keep some vehicles in play for consideration and long-range planning,” he said.

On the other hand, Kouchi pointed out that lawmakers have already dismissed some high-profile tax proposals.

The Legislature rejected Ige’s proposed sugary beverage tax — the bills never got a hearing in the Senate or the House — and a measure to impose a 10-cents-per-drink liquor surcharge appears to be failing in the Senate.

As lawmakers deliberate those tax increases, another key factor will be the assessment of the local economy by the state Council on Revenues, which is scheduled to meet Monday. The council is responsible for predicting state tax collections each year, and those predictions form the basis for the state budget.

Carl Bonham, one of the more outspoken members of the council, told the Civil Beat editorial board last month the new federal stimulus package will likely be comparable in size to the enormous CARES Act aid package last year.

“There’s a lot of money there for Hawaii,” he said, which will provide a big boost to the local economy.

At the same time, Bonham expects demand for travel will rapidly ramp up in the months ahead as more people are vaccinated, and the COVID-19 case counts across the country continue to drop.

“There’s clearly pent-up demand,” said Bonham, who is executive director of the University of Hawaii Economic Research Organization, or UHERO.

February visitor arrivals approached 30% of pre-pandemic levels, and Bonham predicted visitor counts will “double, triple, quadruple those in the summer.”

Visitors to Oahu’s Waikiki Beach with Diamond Head in the background.
Waikiki Beach was still seeing numerous visitors when this photo was taken a year ago. Tourism is starting to pick up again, with economists predicting even more of an uptick by summer’s end. That would ease the strain on the state budget. Cory Lum/Civil Beat

If other members agree with Bonham, the council may increase its projections for state tax collections in the years ahead. That would mean more money for the state, and could slow the momentum of the tax bills.

However, some advocates contend now is the time for lawmakers to adopt “progressive revenue solutions” that would increase taxes on the state’s wealthiest residents.

A group of 33 nonprofits and other organizations that make up the Hawaii Tax Fairness Coalition last month urged lawmakers to adopt a package of tax measures that they calculate would raise between $547 million and $969 million a year for the state.

Those groups contend that the Great Recession demonstrated that cutting state spending during an economic downturn actually prolongs the slump. They also want lawmakers to make the state tax system more equitable by increasing the share of the tax burden borne by the wealthy.

Those groups, which include the Hawaii Democratic Party and the Hawaii Appleseed Center for Law & Economic Justice, say the Legislature should raise income taxes on the state’s highest-earning residents, increase the state capital gains tax rate and increase the inheritance tax.

And a number of those coalition proposals are advancing. The state House on Thursday approved bills to raise the inheritance or estate tax, and also voted to increase the state capital gains tax.

Hours later, the Senate Ways and Means Committee unanimously approved an amended version of Senate Bill 56 to increase state income taxes on Hawaii residents with the highest incomes.

“We’re getting better news, and we’re hoping that we can see a better economic recovery as the way that we get out, as opposed to the philosophy of trying to tax your way out of the problem we’re in.” — Senate President Ron Kouchi

The latest draft of that bill would increase the top personal income tax rate by 5% for single taxpayers who earn more than $200,000 per year, and for married filers with combined incomes of $400,000 or higher.

State Tax Director Isaac Choy told Ways and Means Committee members that measure alone would raise on the order of $100 million extra per year for the state treasury during the seven years the higher rates would be in effect.

That same bill would also increase the state capital gains tax, increase the state corporate income tax and also boost the state conveyance tax, which prompted Hawaii Tax Foundation President Tom Yamachicha to dub it the “Enola Gay” bill.

“You might remember from the history books that Enola Gay was the name of the aircraft that dropped the first atomic bomb on the City of Hiroshima in World War II,” Yamachika told lawmakers in written testimony. “Here, of course, the bill’s destination isn’t Japan; it’s the pocketbooks of us, the taxpayers.”

Yamachika warned lawmakers Thursday that one way or another, increasing income tax rates for wealthier residents will likely affect less affluent taxpayers. The wealthy — business owners, for example — will raise prices on goods and services to recoup the extra taxes they must pay, he said.

Kouchi said it’s too early to tell which proposals win final approval from lawmakers when the session wraps up next month, but he said any broad-based tax increases “would be probably more harmful than helpful at this point.” Lawmakers want to avoid them, he said.

“We’re getting better news, and we’re hoping that we can see a better economic recovery as the way that we get out, as opposed to the philosophy of trying to tax your way out of the problem we’re in,” Kouchi said. “That’ll be difficult.”

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