Hawaii lawmakers consider raising taxes on the rich

State lawmakers are normally cautious about raising taxes in an election year, but 2020 could be the exception.

An array of proposed tax increases are still on the table at the midpoint of this year’s 60-day legislative session, including a bill to significantly increase the state income tax on Hawaii’s wealthiest residents to collect an extra $61 million a year.

On the other end of the wealth spectrum, lawmakers have proposed a package of tax changes to help “working families” that may have some populist appeal, including a new refundable earned income tax credit to help the working poor, and a plan to increase a tax credit for lower-income families to offset the impact of the state’s excise tax on food.

It’s too early to tell which of those proposals might emerge from the legislative scrum when the session ends in May, but fears about the impact of the coronavirus scare on the state economy may make lawmakers extra cautious about adopting any proposals that would decrease state tax collections.

University of Hawaii economics professor emeritus James Mak noted in a blog post last week that lawmakers are debating general excise tax credits for various groups this year, and wondered: “With the coronavirus posing a potentially serious threat to the state’s economy, is this a good time to contract the GET base further with the proposed tax breaks?”

But the proposed tax increases may be a different story. Tax Foundation of Hawaii President Tom Yamachika, who has years of experience tracking bills through the state Capitol, said bills to boost taxes usually originate in the Senate and are killed in the House, whose members must stand for re-election every two years.

This year, some of the major tax bills originated in the House, “which is a little bit concerning,” Yamachika said.

A prime example is the proposed income tax increase for Hawaii residents with the highest incomes. House Bill 2385, introduced by House Speaker Scott Saiki, would increase the top state income tax rates from 11% today to 12% or 13% for the highest earners.

During floor debate last week, House Finance Chairwoman Sylvia Luke said the bill is about “the taxing of the very rich.” The proposed new higher tax brackets would apply only to joint filers with taxable incomes of more than $500,000 a year, and to people who file as heads of households with taxable incomes of more than $375,000.

However, the bill would also increase state income taxes by more modest amounts for single filers who have taxable incomes of more than $100,000, and for joint filers who have taxable incomes of more than $200,000. The new rates would take effect Jan. 1.

“It’s never a good time to deal with tax changes,” said Luke, who described the bill in technical terms. The state needs to adopt new income tax brackets because there are quite a few brackets at the lower income levels, but not nearly as many for high-income taxpayers, she said.

The bill was approved by the state House last week, with Reps. Lynn DeCoite, Sharon Har, Sam Kong, Lauren Matsumoto, Bob McDermott, Val Okimoto, Calvin Say, Cynthia Thielen, James Tokioka and Gene Ward voting against it, and Rep. Richard Creagan absent.

The Tax Foundation warned that a higher income tax burden would encourage residents to leave Hawaii. “To what lengths will we go to chase people out of our state?” he said in written testimony.

“We recommend that lawmakers think long and hard before further raising the income tax rates that have put Hawaii on the map for the wrong reasons,” the Tax Foundation said in its testimony. “This bill, if enacted, will reinforce the image that Hawaii is a poor place to live, work and invest, underscoring the poor business climate.”

Yamachika said the foundation is “much more comfortable” with Senate Bill 3124, which would eliminate state income tax entirely for people who have less than $12,000 in taxable income, while increasing tax rates for middle-income taxpayers.

INCREASED RATES

The Senate bill would increase rates for single and married taxpayers filing jointly with taxable income of more than $48,000, and for heads of households with taxable incomes greater than $54,000. It would not increase the tax rates on the top earners in the state.

That bill passed the state Senate unanimously last week, and Yamachika said it would not raise any additional money for the state.

“In my opinion, we really shouldn’t be going after the people on the lowest end of the income spectrum,” Yamachika said. “It costs more than it’s worth.”

Other proposals that have been quietly moving through the Legislature include House Bill 1990, which would add another half-percent surcharge to the state’s general excise tax. Oahu residents are already paying a half-percent excise tax surcharge that generates about $280 million a year to finance construction of the Honolulu rail project.

The proposed new “state improvement” surcharge would be used to fund construction of highways and educational facilities, and also to pre-pay retirement health care costs for public workers and tuck more money away in the state’s hurricane reserve trust fund.

The bill passed the House on Feb. 27 with Reps. Stacelynn Eli, Cedrick Gates, Troy Hashimoto, Daniel Holt, Lisa Kitagawa, Nicole Lowen, Matsumoto, McDermott, Sean Quinlan, Thielen, Chris Todd and Ward voting against it.

“I think if people figure out it’s a (general excise) tax hike, they’re gonna scream, because that’s what it is — it’s a G.E. tax hike, and I don’t believe it’s going to be temporary,” Yamachika said.

The measure was supported by state Superintendent of Education Christina Kishimoto, who said in written testimony the bill would enable the DOE “to continue to improve learning environments across the state to meet the needs of a modern, 21st Century school design that accommodates our students’ educational needs.”

TAX ON OIL

Another measure that may prove controversial is Senate Bill 3150, a proposed carbon tax. Carbon taxes are primarily designed to discourage the use of fossil fuels to slow the pace of climate change, and the bill warns that “climate change is the most critical issue confronting the state of Hawaii.”

The measure would increase the state barrel tax on oil to effectively set a price of $40 per metric ton of carbon dioxide emissions in 2021, and then incrementally increase the tax rate over time until the rate would be equivalent to $80 per metric ton of carbon in 2030.

It would also create a new refundable tax credit for lower-income taxpayers to try to offset the impact of the carbon tax.

The state Hawaii Climate Change Mitigation and Adaptation Commission supported the bill, arguing “the commission believes that putting a price on carbon is the most effective single action that will achieve Hawaii’s ambitious and necessary emissions reduction goals.”

But the bill received a chilly reception during a hearing in the Senate Ways and Means Committee on Feb. 27. State Sen. Lorraine Inouye cited estimates that the carbon tax would add 25% to the cost of jet fuel next year and would also jack up the price of gasoline and the fuel oil used to produce electricity.

“In Hawaii, we’re already struggling with some of the highest kilowatt-per-hour pricing in the world,” she said. “Raising the price for electricity certainly would further increase the cost of living for Hawaii’s working families.”

The measure passed the full Senate on Monday with only Inouye and Sen. Donna Mercado Kim voting against it. It now goes to the House for further consideration.

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Check out status of legislative bills as they hit the halfway point:

How major bills fared at th… by Honolulu Star-Advertiser on Scribd