Green Wants To Make Targeted Changes To Hawaii’s Tax Code. Will The Legislature Go For It?

Gov. Josh Green is asking the Legislature for tax increases aimed at the ultra-wealthy and smokers along with his earlier proposals for income tax relief to help working families, but both requests may be a tough sell in this election year.

It’s the latest addition to his package of credits and adjustments to the state income tax system that are intended to help Hawaii residents who are struggling to get by. Two of Green’s tax proposals passed last year, and Green is advancing two more this year.

But Green has also introduced proposals to increase the cigarette tax, boost the state conveyance tax on sales of luxury homes and impose a new “green fee” on tourists to help the state cope with climate change.

Lawmakers tend to be leery of any tax increase in an election year, and variations of each of Green’s proposed increases have been considered and discarded by the Legislature before.

Lawmakers are generally happier to dish out tax cuts in an election year, as they did in 2022 when they approved a tax rebate of hundreds of dollars per person for lower-income families. But cutting taxes may be difficult to do this year.

House Speaker Scott Saiki said lawmakers have two large looming issues to consider before they embrace any sort of tax relief plan. The first is how much the state must allocate to help Maui recover from the destruction of the Aug. 8 wildfires, an amount Saiki says is still unknown.

The second issue is how much the state owes its public workers in hazard pay from the coronavirus pandemic, which is also unsettled. Arbitration decisions have found that thousands of state and county employees are owed back hazard pay by contract, but how much is owed has not yet been determined.

The final cost of those items will be key as lawmakers assemble a new budget and calculate how much uncommitted money may be available to cover the cost of any tax breaks.

Patterns in state tax collections are another major variable because fluctuations of just one percentage point amount to about $100 million that the state could collect — or cannot collect, if the trend is downward.

Tom Yamachika, president of the Tax Foundation of Hawaii and a longtime observer of the Legislature, said he has learned to pay particularly close attention to decisions the House makes on tax policy in election years.

That’s because all 51 members of the House must stand for reelection every two years, and elections can sometimes affect decision-making at the State Capitol.

The governor’s office declined a request for an interview but sent a statement Thursday saying the tax increases Green has proposed are “targeted and promote a solid public policy: visitors paying a fee to help climate initiatives; luxury homeowners or investment owners pay more conveyance tax to help our rental and affordable housing; cigarette smokers to help fund cancer research.”

“Election year or not, the Governor believes these still are solid policies,” the statement said.  

Tax Breaks

Green’s most sweeping tax proposal is House Bill 2404 and Senate Bill 3093, which would give income tax breaks to state residents. Neither the House or the Senate versions of the bill are scheduled for a hearing yet, but lawmakers have time to take them up in the weeks ahead.

Those bills would adjust state income tax brackets upward by 10% — meaning some people would be taxed at lower income tax rates than if there were no adjustment — and would index the tax brackets to the Urban Hawaii Consumer Price Index starting next year.

That indexing would cause the brackets to automatically be adjusted upward with inflation, which would help prevent or moderate state income tax increases as the cost of living and incomes go up.

The same measures would also significantly increase the value of the state child or dependent care income tax credit, and make that credit available to far more Hawaii families than it is today.

Green said in his State of the State speech last month those tax changes are needed “so that working families with keiki can afford to live in Hawaii and our next generation can have a future here.”

The measure would cost the state an estimated $87.4 million this fiscal year in lost revenue and would reduce state income tax collections by more than $104 million next fiscal year and by nearly $130 million the following year, according to the administration.

Saiki said he would rather see other income tax reforms, including entirely eliminating the lowest state income tax brackets. That would immediately provide relief to Hawaii’s lowest-income taxpayers because they would no longer be subject to state income tax or have wages withheld for that tax, he said.

He also said he would like to see an increase in the standard taxpayer deduction, which would provide some degree of relief to everyone. But Saiki said Green’s idea of indexing tax brackets for inflation “is something that we should consider,” and will be in the mix as well this year.

Senate Ways and Means Committee Chairman Donovan Dela Cruz, who has significant influence over state spending and tax policy, did not respond to a request for comment on the governor’s tax bills.

Robert Perkinson, associate professor of American Studies at the University of Hawaii Manoa, said Green’s proposed child and dependent tax credit proposal deserves lawmakers’ support.

He contends the “big hole” in social services in the U.S. is the lack of infrastructure to take care of small children, the elderly and people with disabilities.

“It’s killing middle-class families that people have to choose whether to go back into the workforce because child care is unavailable or so expensive,” Perkinson said. “It’s killing middle-class families when they have little kids at home, and an elderly relative who needs a ton of care.”

Perkinson also endorsed a proposal for a $25 climate-impact fee being levied on visitors who check into hotels or transient vacation rental units.

That fee is expected to raise $68 million a year, money Green wants to use to cope with the impacts of climate change and finance a disaster recovery fund or disaster insurance. The House Energy and Environmental Protection Committee will hold a hearing on that measure on Tuesday morning.

The state should avoid taxing tourism so much that the market will be depressed, Perkinson said, “but that really does not seem to be happening. We do not seem to be near that.”

“Making Hawaii a more beautiful, more protected environment that is more resilient to climate change and has better infrastructure and a better social welfare system is better for the visitor industry, because it makes the visitor experience nicer,” he said.

Similar proposals for green fees failed in each of the last two legislative sessions. Saiki and representatives of the visitor industry have instead advocated for a plan to charge fees to tourists that are site specific, meaning tourists pay the charge when they visit specific locations in Hawaii.

Lawmakers funded development of an application that could eventually be used to collect those user fees from visitors, but Saiki acknowledged that approach would mostly be voluntary on the part of the tourists.

Another drawback: Given that the fee as envisioned by the House would essentially be a voluntary charge and would not require that every tourist pay, the new app is unlikely to generate as much money as Green’s proposed blanket fee for all tourists.

If lawmakers do follow Green’s lead and approve a fee that would be imposed on people as they check into hotels, Saiki said it will be important to levy that same fee on people when they stay in transient vacation rentals.

Tax Increases

There has already been movement this year on Green’s proposal to increase the conveyance tax on sales of homes worth more than $6 million. The tax increase would also apply to sales of homes worth more than $2 million if the new owners do not qualify for the homeowners’ property tax exemption.

The governor’s plan would commit 10% of the revenue collected by the tax at the higher rate to help fund transit-oriented development, including along the Honolulu rail line.

Green’s proposed conveyance tax increase was rejected by two Senate committees on Thursday after the Hawaii Association of Realtors testified the increased tax “will negatively impact the housing market in Hawaii and lead to an increase in the cost of housing.”

But the idea remains alive because two House committees voted Wednesday to advance Green’s bill, which is House Bill 2364. The Tax Department calculates the measure would raise an extra $7.4 million to $9.6 million a year over the next several years to develop infrastructure for transit-oriented development.

The Green administration said in a written statement the bill targets “luxury homes and those homes that will not likely be owner/occupant-residences, but investment, secondary or vacation homes.”

The extra revenue will help increase the state’s inventory of affordable rental housing to provide more housing options, according to the administration.

Lawmakers have repeatedly rejected similar proposals to increase the conveyance tax over the years. The Legislature did approve a conveyance tax increase bill in 2021, but then-Gov. David Ige vetoed the measure.

Another Green tax measure advancing in the House is House Bill 2504, which would increase the state cigarette tax from $3.20 per pack today to $3.60 per pack starting July 1.

The extra money raised by the tax increase would be used to fund Hawaii cancer research, increasing its share of the state tax take to 80 cents per pack from 40 cents per pack.

That bill is backed by the state Department of Health, which said cigarette smoking remains the leading cause of preventable death nationally, and is linked to heart disease, cancer and stroke, which were the leading causes of death in Hawaii in 2021.

The Green administration said in a statement that in recent years the cigarette tax revenue has declined as fewer people smoke, which has reduced the revenues flowing to the Hawaii cancer research special fund.

The cancer center used revenue bonds to borrow more than $100 million, and the decline in the cigarette tax collections “jeopardizes the revenue stream for debt service for the revenue bonds and impacts the availability of resources for Cancer Center operations,” according to the administration.

The Retail Merchants of Hawaii opposed the bill, saying many of its members already operate on thin profit margins, and increasing the tobacco tax “may potentially force some of them to close.”

A higher price for cigarettes would also make them a more attractive target for shoplifters, the Retail Merchants said in written testimony.

“Struggling To Get By” is part of our series on “Hawaii’s Changing Economy” which is supported by a grant from the Hawaii Community Foundation as part of its CHANGE Framework project.