A Taxing Debate

by Tom Yamachika, President, Tax Foundation Hawaii

We have written earlier this year about the Administration’s bill to “pause” (actually, stop) the planned tax cuts that were to happen in years 2027 and beyond.

The House and Senate money committees heard that bill independently.  Both committees opted to make substantial modifications to it before moving it forward.  What will likely follow will be a bit of negotiating, most of which will occur behind closed doors, which will result in adoption of the House version, the Senate version, the Administration version, or some hybrid of the three.  Whichever version is adopted will, of course, define our State income taxes for the next several years.

So let’s take a closer look at the contenders.

House Bill 2306 House Draft 1 scuttles the scheduled bracket changes for 2027 and 2029, as was done in the Administration version.  In addition, effective 2027, the bill proposes to keep the 2025 brackets but raise the tax rate on the top three brackets from 9%, 10%, and 11% to 10%, 11%, and 12% respectively.  The changes kick in for single taxpayers making $225,000 in taxable income or joint filers making $450,000.  However, the bill proposes to keep the scheduled changes to the standard deduction amount and not cancel them as was done in the Administration bill.

The House Finance Committee explained:  “Your Committee finds that the tax relief scheduled to take effect pursuant to Act 46, Session Laws of Hawaii 2024, particularly the income tax bracket amendments, would provide significant benefits to a broad base of taxpayers but create substantial, recurring reductions in general revenues during a time of mounting fiscal pressures.  By repealing portions of the scheduled income tax relief at this time, this measure protects the State's long-term fiscal stability.  Your Committee further finds that this measure proposes instead tailored tax relief to low- and moderate-income families by enhancing and extending previous enhancements to the Household and Dependent Care Services Tax Credit and extending enhancements to the Earned Income Tax Credit and Food/Excise Tax Credit.”

On the other side of the ring is Senate Bill 2518 Senate Draft 1.  That version keeps some of the planned cuts for 2027 and 2029, but for single filers making $175,000 and joint filers making $350,000, it imposes the brackets as we have them now:  an 8.25% bracket starting at $350,000 (joint), a 9% bracket starting at $450,000, a 10% bracket starting at $550,000, and an 11% bracket starting at $650,000.  This bill also proposes to keep the scheduled changes to the standard deduction amount and not cancel them.

In addition, this draft would get rid of many of the business-related tax credits that now exist in the income tax law:  the Renewable Energy Technologies Income Tax Credit, Capital Goods Excise Tax Credit, High Technology Business Investment Tax Credit, Renewable Fuels Production Tax Credit, Technology Infrastructure Renovation Tax Credit, Ship Repair Industry Tax Credit, and Tax Credit for Research Activities.

The common thread here is that both money committees appear to be preserving the benefit of the scheduled tax cuts for the working families but don’t have much sympathy for the wealthy.  Where “working families” stop and “the wealthy” starts is, of course, a matter of debate.  The House seems to start it for a couple making $450,000, while the Senate would start it at $350,000.  This great taxing debate is now playing out at the Legislature.  If you have an opinion on the matter, better talk to your legislators now.  Once the measure becomes law, it’s too late.