Hawaii Senate approves nation’s highest income tax

A bill that would increase Hawaii’s income tax to the highest in the nation for the state’s top earners passed the full Senate on Tuesday by a near-unanimous vote.

Senate Bill 56 was approved 24-1. Sen. Gil Ri­viere (D, Heeia-Laie-Waialua) was the lone no vote, while Sen. Les Ihara (D, Moiliili-­Kaimuki-Palolo) voted yes but with reservations. The proposed legislation will now move to the House of Representatives, where it will likely face resistance.

The proposed legislation would impose a 16% tax on individuals earning more than $200,000 a year, heads of households earning more than $300,000 and joint filers earning more than $400,000. The income brackets are currently taxed at 11%.

If the bill ultimately passes, Hawaii will overtake California as the state with the highest income tax. California’s rate is 13.3% on those earning more than $1 million.

The measure also includes increases to the capital gains tax, corporate tax and taxes on high-end real estate sales.

The bill cites the state’s plummeting tax collections brought about by the coronavirus pandemic as the rationale for the tax increases. By the end of last year, Hawaii officials were estimating the state would have a budget shortfall in excess of $2 billion. The tax increases would expire after 2027.

The measure has attracted support from local unions for government workers, including teachers, social service organizations and progressive public-policy organizations worried about furloughs of government workers and possible cuts to programs such as AIDS services and housing assistance for the poor.

“It makes sense to ask those who are fortunate enough to be doing well in this economy to pay more, in order to close the deficit without slashing the critical government services that so many struggling working families have come to rely on,” wrote Nicole Woo, director of research and economic policy for the Hawaii Children’s Action Network Speaks! — a nonprofit that advocates for children and families — in testimony supporting the proposed tax hikes.

However, a federal aid package is expected to largely plug the state’s budget hole. The American Rescue Plan Act, which is poised to pass Congress, would provide Hawaii with more than $6.1 billion in funding. The package includes an estimated $1.6 billion to bolster the state’s budget.

The proposed tax increases have attracted opposition from the business sector. The Hawaii Chamber of Commerce said if the measure passes it will “reinforce the image that Hawaii is a poor place to live, work and invest” and “undermine efforts made to turn Hawaii’s economy around.”

The Tax Foundation of Hawaii warned that income tax hikes would ultimately put a drag on Hawaii’s economy.

There have been efforts in the past to increase income taxes for the state’s highest earners, but they’ve typically been part of an effort to restructure the tax burden to assist lower-income households. By contrast, Senate Bill 56 is focused on revenue generation with no associated tax break for the lower income brackets.

That could make it a tough sell in the House.

House Finance Chairwoman Sylvia Luke said she couldn’t say at this point whether the House will entertain the measure. But in the past, she said the House has taken “the approach that we are looking at policies as equity, as opposed to revenue, because any tax increase also has consequences.”

But any attempt to create a more equitable tax system for low- and middle-income households in the form of lower taxes is off the table this year. The American Rescue Plan Act prohibits states from providing tax relief if they accept the federal aid.

Luke said that provision has scuttled a lot of proposals in the House, including a measure that would extend the earned income tax credit for low-income workers. A bill that would exempt unemployment benefits from the state income tax has also been deferred.

“That is definitely out the window,” said Luke.