The proposed legislation would offer relief for Hawaii workers but also would reduce state tax collections at an uncertain time.
One of the most far-reaching and important bills on Gov. Josh Green’s agenda this year will get its first hearing in the state House on Tuesday, a measure designed to offer near-term, targeted tax relief to Hawaii’s working families.
But Green’s plan to reduce state income taxes for many residents will also take a bite out of the state’s second-largest source of tax collections. It is a proposal that involves a degree of fiscal risk at a time when Hawaii and the rest of the nation still face alarming inflation rates and a possible recession.
The Green administration calculates that House Bill 1049 would reduce state tax collections by $312.7 million in the year ahead by adjusting state income tax rates and more than doubling the standard deduction for income tax purposes for local residents.
The bill is part of a larger package of proposals Green has dubbed the “Green Affordability Plan,” which the administration describes as “the largest tax reduction in the history of the state.”
The cost of the bill wouldn’t cripple state government — the administration projects the state general fund will rake in more than $10.3 billion in taxes next fiscal year — but things can change quickly in Hawaii’s roller-coaster economy. If there is a recession, today’s rosy revenue projection could prove to be wrong.
HB 1049 is slated to get its first public hearing before the House Education and Economic Development committees at 2 p.m. Tuesday. Apart from the income tax overhaul, the measure also includes a tax credit of up to $500 for public or private school teachers to help cover their out-of-pocket classroom expenses.
The bill would also link state income tax brackets, personal tax exemptions and standard deductions to a cost-of-living index, a change that would help prevent or moderate state income tax increases as the cost of living goes up.
The same bill would also increase the renters’ state tax credit for the first time in decades, increase the food excise tax credit and upgrade the state earned income tax credit to make it more generous.
This seems like a reasonable time for tax relief, given that the state ended the last fiscal year with a hefty $2.6 billion surplus. But that surplus was largely caused by a one-time surge of federal spending related to the coronavirus pandemic, and state lawmakers don’t expect that federal generosity to continue. A recession could still leave the state scrambling to pay its bills.
Last year, then-chair of the House Finance Committee Sylvia Luke, who is now lieutenant governor, advised her colleagues to direct any extra money toward one-time expenses such as construction projects, rather than spend it on open-ended initiatives such as a state worker hiring spree that would increase the cost of government year after year.
Arguably, any significant tax cuts such as Green is proposing would fall into the latter category because they would reduce state revenues and make it more challenging to balance the budget in the years ahead.
Senate Ways and Means Committee Chairman Donovan Dela Cruz voiced essentially the same concerns earlier this year, noting the budget surplus is a one-time windfall. He suggested using the surplus to invest in infrastructure to speed construction of affordable housing and hold down development costs.
All of that will influence how lawmakers look at those proposed tax cuts, the largest of which is Green’s income tax proposal.
Green introduced his tax package in his State of the State address last month, stressing that it would benefit all taxpayers, and include new tax credits for child and elder care as well as improvements that would make the state earned income tax credit more generous.
Put simply, the complete package would amount to “one extra paycheck a year,” Green told reporters after his speech.
House Finance Committee Chairman Kyle Yamashita was noncommittal about whether his committee would hold a hearing if Green’s tax proposals are approved by the Education Committee. “We’ll look at it,” he said.
He said he is keeping an eye on Hawaii’s troublingly high rate of inflation as he thinks about the budget.
“This is something that we’ve never seen before, so I want to study it a little bit more,” Yamashita said of the inflation trend.
If inflation forces consumers in Hawaii or the mainland to pull back on their spending, Hawaii could lapse into a recession. Yamashita warned that state finances could tank just as quickly as they soared.
House Speaker Scott Saiki was more blunt, saying in an interview Friday that this year the House intends to amend the tax code by passing a more generous earned income tax credit — period.
The EITC exclusively benefits lower-income working families, and Saiki said any tax relief should be directed toward “those who are most in need” including the so-called ALICE families, which stands for asset limited, income constrained, employed.
A report by Aloha United Way in 2018 found that 42% of Hawaii households were below the “ALICE threshold,” or the average income needed to afford the basic cost of living in the state. An update in 2022 found the situation has worsened, with 44% now below that threshold.
Saiki also said any tax changes should be “very simple.” He said he has already met with Green and raised concerns that the 30 pages of tax changes in HB 1049 are too complex, and that Green’s income tax proposal would apply to all taxpayers rather than just the neediest.
“He understands. He sees the value in adjusting the EITC,” Saiki said, adding that will be the House position this year.
Green’s income tax proposal has a companion measure in the Senate, but neither the Senate Education Committee nor the Ways and Means Committee has scheduled a hearing on it so far.
Dela Cruz pointed out in an interview Thursday it is still early in the session and the Senate has plenty of time to consider Green’s proposals. But Dela Cruz is also focused on how the tax cuts might affect state government finances in the future.
One strategy for making the package more attractive to lawmakers would be to create new tax brackets for the state’s wealthiest taxpayers to raise additional revenue, which would offset the cost of tax breaks for lower-income residents, he said.
“If it ends up being revenue neutral because you’re creating additional brackets on top, then I think that’s something that we could have a more fruitful discussion about,” Dela Cruz said.
Lawmakers’ handling of Green’s other tax proposals have been mixed. The House Consumer Protection and Commerce Committee last week killed the governor’s proposal to increase the state liquor tax.
Restaurant and retail industry lobbyists complained at the hearing on the bill that a tax increase now would hurt local businesses, and would result in more black market alcohol sales.
That liquor tax increase would have netted the state an extra $17 million per year, but committee Chairman Mark Nakashima shelved HB 1084 without any discussion.
On Friday, the House Economic Development and Health Committees easily approved Green’s proposal to eliminate the state excise tax on groceries, feminine hygiene products and over-the-counter medicines. Prescription medicines are already exempt from the tax.
Ending the excise tax on food and medicine was one of Green’s most prominent campaign promises in last year’s election. However, the excise tax is the state’s largest single source of tax revenue, and lawmakers have traditionally been wary of approving exemptions that would reduce that flow of cash.
The administration’s excise tax cut proposal would reduce state tax collections by an estimated $119.1 million per year. Rep. Sam Kong was the only committee member to vote against HB 1050 on Friday. The measure now goes to the House Finance Committee for further consideration.
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