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Gov. Josh Green Is Poised To Sign A Big Income Tax Cut. But Can Hawaii Really Afford It?

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Gov. Josh Green Is Poised To Sign A Big Income Tax Cut. But Can Hawaii Really Afford It?

May 28, 2024 | 7:39 am ET
By Kevin Dayton/Civil Beat
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The Senate Ways and Means Committee and House Finance Committee met last month to announce provisions in the new state budget. The tax cuts offered in House Bill 2404 would reduce state tax collections by $7 billion over the next eight years, making it increasingly difficult to finance other priorities such as affordable housing and the Maui wildfire recovery. (Chad Blair/Civil Beat/2024)
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The Senate Ways and Means Committee and House Finance Committee met last month to announce provisions in the new state budget. The tax cuts offered in House Bill 2404 would reduce state tax collections by $7 billion over the next eight years, making it increasingly difficult to finance other priorities such as affordable housing and the Maui wildfire recovery. (Chad Blair/Civil Beat/2024)

Gov. Josh Green seems certain to sign into law the whopping state income tax cut of 2024, a bill that is expected to reduce the state tax burden for a median-income Hawaii family by nearly $20,000 over the next seven years.

Without a doubt that would provide welcome relief to Hawaii’s hard-pressed working families. But the proposed tax cut also raises questions about how lawmakers will balance the state budget in the years ahead.

Given the state’s uncertain finances, skeptics also wonder if lawmakers may simply reverse themselves and raise taxes later. That happened with an income tax cut lawmakers approved in 1998, only to backtrack later and raise income taxes again as Hawaii felt the pain of the Great Recession.

Income tax collections are the state’s second-largest source of revenue, and lawmakers announced this month the tax relief contained in House Bill 2404 would reduce state tax collections by an extraordinary $5 billion over the next six years.

Large as that number sounds, it understates the full impact of the bill because the measure would dramatically increase personal deductions and adopt new tax brackets and rates that would then become permanent.

That means the impact of the bill on state tax collections and the budget would grow each year. For example, the Tax Department projected earlier this month that HB 2404 would reduce state tax collections by more than $7 billion over the next eight years.

That gives pause to former Democratic Senate Majority Leader Gary Hooser, who worries lawmakers may be moving too aggressively to reduce state tax collections.

“Cutting taxes, there’s a price to pay for it,” Hooser said. “Services have to get cut, or you don’t spend money on education, or park preservation, or any number of services — mental health, affordable housing. I mean, the money doesn’t come out of nowhere.”

He cited a litany of problems in his own Kauai community, including the need for public school improvements and the lack of drug treatment. “It appears we have enough money to get through next year, but $5 billion is a lot of money,” Hooser said.

“I’m not sure if the governor and the House and Senate leadership feel the urgency that exists in the community,” he said. “It’s real, the lack of housing and these problems. We need to get on it, and it costs money.”

Meanwhile the state faces some unusual financial demands, including a need for money to fund the Maui fire recovery effort. Unprecedented federal support during the pandemic allowed the state to accumulate enormous cash surpluses in recent years, but that won’t continue.

Another complication is upcoming negotiations between the state and the public employee unions, which are scheduled to begin this summer.

Contracts for all public workers — from teachers and nurses to janitors and road crews — will expire next year. If the state has less money to spend, that certainly will affect the bargaining for new contracts.

Randy Perreira, executive director of the Hawaii Government Employees Association, described the provisions of HB 2404 as “a tremendous cut in taxes that will benefit a lot of taxpayers,” including many of his members.

He said the union is still studying the implications of the measure, and is “trying to assess now the impact on the state revenue picture, and how it will impact our economy and what this will mean in a collective bargaining sense.” HGEA is the state’s largest union, with nearly 37,000 members.

Green proposed his own income tax cut bill this year, but his original plan would have cost the state less than $150 million a year in lost revenue over the next few years. What the Legislature actually produced goes far beyond what the governor had in mind.

The final version of HB 2404 would increase the standard deductions for taxpayers from the current $4,400 for joint filers to $8,800 for tax filers next year, and then increase that standard deduction in a series of steps until it reaches $24,000 in 2031.

It would grant similarly large expansions in the standard deductions for single filers, heads of households and married couples filing separately.

The new tax brackets would eliminate state income taxes for the lowest-paid joint filers earning less than $19,200, and increase that amount in a series of steps. By 2031 the measure would would eliminate the state income tax for joint filers earning less than $38,400.

The measure would provide comparable benefits for the lowest-paid single filers, heads of households and married couples filing separately.

The new tax brackets would also help middle- and high-income filers by adjusting upward the incomes that trigger higher tax rates.

The top state income tax rate would remain at 11% under HB 2404, but starting next year the top 11% tax rate would kick in only for joint filers who earn more than $650,000. Today, that top tax rate of 11% applies to joint filers who earn more than $400,000.

Hawaii now has the second-highest income tax on working families of any state, but would abruptly become the state with the fourth-lowest income tax on working families once HB 2404 takes full effect in 2031, according to Tax Department data.

House Finance Chair Kyle Yamashita, one of the main architects of HB 2404, said the bill is aimed at working families.

“Everybody’s struggling, everybody’s leaving the state, so this was an attempt to shift the burden,” he said, noting that it will mostly help people at the middle-income levels and below.

The state minimum wage will increase to $18 per hour by 2028, which works out to annual earnings of $37,400 at the very bottom of the wage scale. If nothing is done to adjust the state income tax brackets, the lowest-paid workers in the state would end up paying middle-class income tax rates, Yamashita said.

The income tax is paid entirely by local people — not tourists — and “I think this is the correction that was needed,” Yamashita said.

Yamashita said lawmakers consulted with the Green administration on individual elements of the bill before it was announced publicly in late April, but the administration was not briefed in advance on what the entire final package would be.

Green said during an interview on Hawaii News Now’s “Spotlight Now” program on May 14 that the tax cuts were “much larger than we had even envisioned, which I think is great.”

Green declined requests for an interview last week on the tax bill, but made it quite clear he plans to sign the bill. In fact, he implored the public during the HNN interview to spend the savings from the income tax break in Hawaii. “Do not go to Vegas with this tax break, please,” he said.

Green described the bill as “a super stimulus,” but also said he is developing a plan to “streamline government.” That generally means some sort of spending cuts, and Green mentioned plans to abolish positions in state government that have been vacant for years. “There should be some savings there,” he said.

When asked if the tax bill could trigger deep budget cuts in the years ahead, Yamashita’s answer was “not necessarily.”

“There’s time for us to adjust to these things,” Yamashita said.

The budget is based on projected revenues, Yamashita said, “so we don’t know if that’s true or not. It may be more, it may be less, and the Legislature no matter what, at the end of the day will have to deal with whatever is before us.”

He noted the state will pay hundreds of millions of dollars in pandemic hazard pay for public workers, and the tax cut would also give residents even more money to spend. That extra spending could boost excise tax collections, and experts are also anticipating a construction boom, which may also generate extra excise tax revenue for the state.

And while the tax changes look huge when taken as a whole, Yamashita noted they would be phased in over time, and would not take full effect until 2031. “Time will tell,” he said.

Senate Ways and Means Committee Chair Donovan Dela Cruz, another major player in developing the tax bill, did not respond to a request for an interview last week.

When asked about the impact of the bill on the budget, the governor’s office issued a written statement last week that “it has constitutional mandate to balance the budget which takes into account large proposals like this.”

Former state tax director Isaac Choy joked that as a high-end tax payer himself he is “appreciative” of HB 2404, and predicted the state will not hit serious budget problems for the next two years or so even with the tax cuts.

But looking at state government finances in the longer term, “I think some adjustments are going to have to be made,” he said.

Apart from budget cuts, another option for lawmakers might be to limit the revenue losses from the tax cut by doing more tinkering with the tax code.

In fact, Yamashita described the tax changes as “a work in progress.”

“I still believe that our whole tax structure needs to be re-looked at, and that discussion will happen in the future,” he said. Yamashita warned earlier this year the state may one day take away the excise tax surcharge revenue that now flows to the counties.

Lawmakers have reversed course before on income tax breaks. The last major state income tax cut was passed by the Legislature in 1998 in an attempt to jazz up what was a weak state economy at the time.

Former Gov. Ben Cayetano said in an interview he insisted on that tax cut over the objections of the public worker unions and some key lawmakers as a way to stimulate the local economy, and to help Hawaii’s working people.

That 1998 tax bill was more modest than what Green is considering today, and it reduced the top state income tax rate from 10% down to 8.25%. It was expected to cost the state about $240 million per year.

But lawmakers raised income taxes again in 2009 when the Great Recession hit. Lawmakers said they were forced to raise taxes to avoid dire state budget cuts, and they overrode the veto of then-Gov. Linda Lingle to pass Act 60.

Act 60 raised the top income tax rates for individual tax filers earning more than $150,000, and created new tax brackets for residents with the highest incomes to capture more revenue. The new top tax rate imposed by Act 60 was 11%, which still applies today to individuals earning more than $200,000.

Hooser supports that approach, arguing for higher conveyance taxes, higher hotel room taxes and higher income taxes on the wealthy.

“We don’t have an exodus of billionaires and millionaires leaving Hawaii because the taxes are too high,” he said.

But the statement from the governor’s office dismissed the option of future tax increases on locals. “The Governor is committed to prioritizing policies that make Hawaii more affordable,” it said. “The Green administration is not considering tax increases for residents.”