Pause versus Stop

by Tom Yamachika, President, Tax Foundation Hawaii

In 2024, we in Hawaii became the beneficiaries of Act 46 (House Bill 2404) which the Governor’s office called the “largest income tax cut for working families in the state’s history.”  In odd-numbered years up to 2031, the bill jacked up the standard deduction; in even-numbered years, the bill substantially broadened the existing rate brackets so that lower rates would apply to more taxpayers.  At the time, the Governor’s office claimed that “the state income taxes paid by working class families will fall by 71 percent by 2031.” 

To back up its claims, State officials set up taxcuthawaii.org, which contains a calculator projecting residents’ tax savings between 2024 and 2031.  A family of four making $60,000, for example, was projected to have an increase in take-home income of $15,182 over the period, an increase of 85%.

But recently, the Governor told us in his State of the State address:

In 2025, the federal government’s severe cuts and other actions took over $3 billion out of our state’s economy, leaving us with an unforeseen budget shortfall.

So to meet all of our responsibilities and our commitment on affordability, I am proposing that there be no changes to our tax cuts in 2026 – these and all previous tax cuts will be completely preserved — but that we pause the tax cuts planned for 2027 through 2029.

This proposal will bring back $1.8 billion for critical services ….

(Transcription courtesy of Hawaii Public Radio.)

“Pause,” he said.  “For 2027 through 2029.”

House Bill 2306 and Senate Bill 3125, the legislative bills introduced by his office to accomplish this, however, say something else.  They don’t delay the scheduled cuts by three years or five years.  They propose to repeal the cuts, as in get rid of them for good.  That isn’t pressing the “Pause” button, it’s hitting “Stop.”

If that is not what we as citizens want, we should let our legislators know.  The legislators are considering the bill now, and have the opportunity to amend the bill so that it better tracks what the Governor promised us.  Or legislators can amend it to say something else or kill it altogether.  If, for example, we are able to find substantial money in funds that the State already has but isn’t using, then maybe we don’t need to hit “Stop” or even “Pause.”

For those who benefit from the refundable credit for household and dependent care services necessary for gainful employment, the bill adds some new wrinkles including debarment provisions.  If a taxpayer’s claim for credit is disallowed, the taxpayer isn’t allowed to claim the credit for two years.  If the disallowance is due to fraud, the debarment period is ten years.

What the bill isn’t so clear about, however, is what happens if there is a partial disallowance.  Suppose a taxpayer claimed $1,000 in credits, is audited, and the credit amount is adjusted to $900 because the taxpayer added some receipts wrong or couldn’t produce some receipts although the taxpayer clearly remembers spending the money.  That’s a disallowance of $100 – does that trigger the two-year debarment so that the taxpayer can’t claim anything at all for the succeeding two years?

This and other tax drama will be center stage at our Legislature this year.  Enjoy the show!