By Kevin Dayton 

Much attention has focused this year on backpedaling by Democrats at the State Capitol from the income tax cuts they approved in 2024, but lawmakers are also contemplating a variety of new taxes on activities ranging from real estate transactions to performing arts events.

In the past two weeks the state House has also given preliminary approval to bills that would increase the state capital gains tax, increase liquor taxes and impose a new tax on sales of gasoline-powered vehicles — and forwarded each of those proposals to the Senate.

The House also backed a bill for a ballot question that would ask Hawaiʻi voters to amend the state constitution to allow the state to impose a property tax surcharge on investment properties to help finance public education. Currently the constitution allows only the counties to levy property taxes.

It is unclear if the Senate will buy into many of those ideas in an election year, a time when lawmakers are usually wary of angering the public by raising taxes.

However, the House and Senate both gave preliminary approval last week to similar versions of a bill to ramp up the state conveyance tax on real estate sales to non-owner occupants. Those votes suggest that idea may have momentum.

Most of the tax proposals approved by House Democrats this year were roundly criticized by House Republicans in floor debates last week.

“This strikes me as the continuation of Hawaiʻi’s Democrat machine,” said House Minority Floor Leader Diamond Garcia. “Their way to continue dealing with issues and problems is to further increase taxes.”

House Finance Committee Chair Chris Todd told Civil Beat that most of the tax bills advancing this year are aimed at people with very high incomes, or the visitor industry. He considers them “options on the table” for the Legislature to use to preserve the 2024 income tax cuts for everyone else.

There is “a pretty substantial hole in the budget,” he said, and “at some point we’re going to have to come to an agreement between the House, the Senate and the administration about what that figure is, and how we get there.”

Money Problems

The backstory for all of this tax talk is the state’s fiscal situation, which suddenly looks shaky.

Two years ago the House and Senate voted unanimously for a multibillion-dollar series of income tax cuts for all Hawaiʻi tax filers that was to roll out over eight years, an achievement legislators proudly declared to be the largest tax cut in state history. Gov. Josh Green promptly signed that tax cut bill into law.

State taxpayers have already benefited from the first three phases of those income tax reductions — in 2024, 2025 and this year — but Green is now proposing the state “pause” the next five years of scheduled tax cuts.

The problem, Todd said, is the experts’ projections of state tax collections in the years ahead have been revised downward by $3.5 billion, mostly as “a direct result of global uncertainty, declining consumer confidence and worrying trends in our tourism-based economy.”

At the same time state expenses are projected to increase, Todd said in an interview. That is partly because state government must hire new employees to handle tasks the federal government is offloading on the states, and also to cover costs such as negotiated pay raises for public workers in the years ahead.

Rather than suspend the scheduled tax cuts for everyone as Green proposed, the House and Senate each crafted bills this year that seek to preserve the scheduled income tax cuts for low- and moderate-income households, while suspending the tax cuts or actually increasing taxes for households with the highest incomes.

The House proposal in House Bill 2306 would leave in place the scheduled increases in the standard deductions that all income tax filers claim, but suspend a series of adjustments in income tax brackets that were part of the 2024 tax package. Suspending those changes in the tax brackets would reduce the taxpayer savings from the 2024 tax cuts in the years ahead.

At the same time, the House proposal in HB 2306 would increase the top marginal income tax rates for the wealthiest Hawaiʻi taxpayers in the top three income tax brackets.

Todd said Monday if that proposal passes in its current form, it would allow the state to balance the budget without any other tax increases. But it is too soon to say if the Senate will accept the House plan.

The Senate is proposing some similar changes in Senate Bill 3125, which would also maintain the scheduled increases in the standard income tax deductions from the 2024 law.

However, the Senate draft differs from the House version because it would also increase the tax brackets for lower- and middle-income taxpayers as called for in the 2024 tax package.

In other words, under the Senate proposal low- and middle-income taxpayers would enjoy the full benefits from the tax bracket and tax deduction changes in the 2024 tax package, while wealthier taxpayers would see less benefit.

For high-income families, instead of seeing the increases in the tax brackets called for in the 2024 law, their tax brackets would be frozen. That would apply for individuals making $175,000 or more; for heads of households making more than $260,500 and for and joint filers making $350,000 or more.

That would effectively halt any state income tax savings those high-income taxpayers would have enjoyed from the changes in the tax brackets under the 2024 law.

Liquor Tax, Capital Gains, Property Tax

Also moving through the Legislature is a measure to overhaul and increase the state liquor tax in a way the state Tax Department estimates could boost tax collections by almost $30 million a year.

House Bill 1991 was opposed by craft brewers from across the state as well as the Chamber of Commerce Hawaii and the Retail Merchants of Hawaii, which argued the tax increase would hurt small businesses at a time when local companies are struggling with high operating costs.

The bill is backed by the Hawaii Substance Abuse Coalition and the Hawaiʻi Public Health Institute, which cited studies showing increasing taxes on alcohol reduces consumption. The last Hawaiʻi liquor tax increase was in 1998.

Proposals to increase the state capital gains tax surface at the Legislature almost every year, and this year lawmakers advanced House Bill 1850 in an effort to boost that tax on profits from the sale of assets such as real estate, stocks or bonds.

That measure would increase the maximum state capital gains tax on individuals from 7.25% to 9%, and boost the maximum capital gains tax for corporations from 4% to 5%. Supporters said it would raise $44 million or more each year for the state.

The Tax Foundation of Hawaii warned in written testimony that “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.”

But Nicole Woo, director of research and economic policy for the Hawaiʻi Children’s Action Network, said Hawaiʻi is one of only nine states that tax capital gains at a lower rate than the tax rate on ordinary working people’s incomes. She said the bill would close that “loophole.”

Another tax initiative this year would amend the state constitution to authorize the Legislature to impose a surcharge on residential investment properties to help finance Hawaiʻi’s public education system. Currently the Hawaiʻi constitution allows only the counties to levy property taxes.

House Bill 2147 proposes to put a question on the ballot this fall asking Hawaiʻi voters to authorize that state surcharge for schools on investment properties valued at $3 million or more. The measure was approved by the state House on March 6, but has not yet been scheduled for a hearing in the Senate.

A similar proposal was approved by lawmakers in 2018 but struck down by the state Supreme Court before the public could vote on it. The court ruled that year the proposed ballot question was not clear on exactly what property would be subject to the new tax and how the revenue would be spent.

HB 2147 is backed by the Hawaiʻi State Teachers Association and the Education Caucus of the Hawaiʻi Democratic Party, which contend the bill will help address “chronic underfunding” of the state’s public education system.

It was opposed by Andrew Kawano, director of the city’s Department of Budget and Fiscal Services, who reminded lawmakers that the counties rely primarily on property tax revenues to fund city and county operations.

The measure “has the potential to weaken long-term fiscal stability and negatively affect municipal bond ratings” for the city, Kawano wrote.

Read the full story here.