Tax increase proposals have become pretty scarce at the State Capitol by the midpoint of this election-year session, and even the tax bills that made it this far may be endangered.

The reasons for that are partly political — every member of the state House and Senate must stand for reelection this year if they want to remain in office — and partly because the state is sitting on a mammoth cash surplus that makes it pretty tough to justify any kind of tax increase right now.

The two major tax bills that are still moving would increase the maximum state capital gains tax rate, and impose a new “carbon tax” on consumption of fossil fuels including gasoline and jet fuel. Lawmakers say they are keeping those bills moving to allow further discussion, but acknowledge this is an awkward time to boost taxes.

State residents already pay some of the highest combined state and local taxes in the nation, according to the Tax Foundation, with Hawaii ranking third behind New York and Connecticut.

Out Capitol opens to the public after being closed due to Covid-19 pandemic.
Proposals for a new carbon tax and an increase in the state capital gains tax are still alive at the Legislature, but the outlook for both of them is tentative at the midpoint of the session. Cory Lum/Civil Beat/2022

Proposals for tax increases are kicked around at the Legislature every year. In fact, two years ago at this time the Legislature faced a state budget crisis triggered by the pandemic that had lawmakers debating proposals ranging from increasing Hawaii’s income and excise taxes to boosting taxes on cigarettes and rental cars.

But the budget picture has changed dramatically since then, with the state economy bouncing back so quickly that state tax collections are booming. The state now has so much money that Gov. David Ige proposed in December that the Legislature stash $1 billion in the state’s “rainy day” budget reserve fund.

Since then the state Council on Revenues has issued new tax collection projections that suggest the state will receive $890 million more over the next 16 months than Ige had anticipated when he made his unprecedented proposal to bank $1 billion.

Given that financial picture, the justifications offered up this year for the tax increase proposals are aimed more at reshaping social and environmental policy than raising revenue.

For example, the House is scheduled to vote on House Bill 1507 this week, which would increase the maximum state capital gains tax rate from 7.25% to 11%. That measure would also make permanent the earned income tax credit for lower income families, and make the credit refundable to provide an extra financial boost to those families.

Supporters say the crux of the issue is fairness. Currently wage earners can be taxed at a rate of up to 11%, while capital gains are taxed at no more than 7.25%. According to the Hawaii Alliance for Progressive Action, “the capital gains tax loophole is a tax break for the richest and most privileged people in Hawaii.”

The state Tax Department calculates that boosting the top capital gains tax rate would allow the state to collect an extra $100 million a year or more even after deducting the cost of providing a more generous earned income tax credit.

House Finance Chair Sylvia Luke participates in Civil Cafe 2022.
House Finance Chairwoman Sylvia Luke Cory Lum/Civil Beat/2022

But House Finance Chairwoman Sylvia Luke said she doesn’t particularly like the tactic of bundling the EITC together with the capital gains tax increase “only because I think there’s a commitment to make EITC permanent and refundable, and capital gains is a separate item.”

Revamping the EITC is part of lawmakers’ drive this year to provide help to working families, including increasing the minimum wage. Lawmakers are committed to overhauling the earned income credit to make it permanent and more generous whether the capital gains tax increase passes or not, she said.

In fact, the House is expected to vote this week on a separate bill that combines the earned income tax credit proposal with an increase in the state minimum wage. That measure, House Bill 2510, would increase the minimum wage to $18 per hour by 2028.

In the Senate, Ways and Means Chairman Donovan Dela Cruz says the capital gains tax proposal “might be hard, because we have lots of revenues. It may be difficult.”

“There are lots of people who want equity and fairness, but at the same time we do have lots of revenues,” he said.

The outlook for the proposed carbon tax seems even less promising.

The Hawaii Tax Review Commission last year listed creating a carbon tax its top recommendation, and the House voted 46-3 to approve a carbon tax proposal in House Bill 2278 last week. The measure is now pending before the Senate.

Ways and Means Chair Donovan M. Dela Cruz during hearing on funding emergency appropriations in response to future COVID-19 Coronavirus health concerns in Hawaii.
Ways and Means Chair Donovan Dela Cruz Cory Lum/Civil Beat/2020

But Dela Cruz has declined to hold a hearing this year on a Senate bill that would impose a carbon tax on aviation fuel, which suggests he isn’t ready to embrace the whole carbon tax idea just yet.

He predicted lawmakers “will have a good discussion” on the carbon tax idea this year, adding: “We want to move toward a clean environment and dealing with global warming. We just have to look at all the tools.”

“You’re balancing that with the global warming issue, the climate crisis, and the potential revenue,” Dela Cruz said.

Hawaii policy makers have debated the benefits of a carbon tax for years, and the state Senate approved a carbon tax proposal in 2020 only to see it die without getting a hearing in the state House.

The bill passed by the House this year would increase the existing state barrel tax on imported oil to discourage the use of fossil fuels and reduce emissions and pollution. A portion of the extra tax revenue would then be refunded to taxpayers through a tax credit.

The state Tax Department estimates that bill would raise an extra $165 million for the state in 2024 even after deducting the cost of the tax credit, and that tax windfall would increase to more than $300 million by 2028.

Luke also has her doubts about the measure.

“That’s something that the House passed for discussion. I’m not sure at the end it will pass,” Luke said of HB 2278. “I think, whether it’s that or some type of a green fee, I think there’s a lot of interest in having an additional tax on fossil fuel, but it’s part of the larger discussion, so I’m not really sure of the outlook this year.”

Top of mind for many people is war in Ukraine, she said, which is already putting upward pressure on world oil prices and the cost of gasoline at the pumps in Hawaii.

If gas prices shoot up because of a carbon tax and that hurts working people, “even if it’s good environmental policy, how it’s going to impact the working family, I think we have to calculate all that in.”

Ige’s most notable tax proposal for the year was to refund $100 to all Hawaii taxpayers and their dependents, but that proposal died in both the House and Senate early in the session.

As for the state’s huge cash surplus, Dela Cruz said some money ought to be tucked away in the “rainy day” emergency budget reserve fund. But Ige’s proposal to deposit $1 billion into the rainy day fund was also rejected by lawmakers minutes after Ige floated the idea in his State of the State speech in January.

“You’ve always got to be prepared for the next pandemic or the next incident,” Dela Cruz said.

But exactly how much money should be diverted into the fund needs to be balanced against the state’s other needs, he said.

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