After weeks of saying the newest round of federal relief funds can’t be used to cover tax breaks of any kind, including relief for low-income workers and the unemployed, state lawmakers are now poised to use nearly half of the $1.6 billion allocated to the state under the American Rescue Plan Act to provide tax relief to Hawaii businesses.
The state budget, which is expected to receive a final vote in the House and Senate on Tuesday, allocates more than $700 million in rescue plan funds to shield businesses from tax increases incurred by this past year’s soaring unemployment rates.
The move has angered critics, including labor union leaders, who say more should have been done to help the state’s working class and unemployed.
“It’s a disservice to Hawaii,” said Eric Gill, financial secretary-treasurer of Unite Here Local 5, which represents 12,000 hospitality, health care and food service workers in Hawaii.
“The Legislature is playing games with the money and playing games to benefit the wealthiest among us.”
Gill said the tourism industry in Hawaii comprises some of the largest corporations in the world, which don’t need the tax relief.
As Hawaii’s unemployment rate climbed this past year amid the coronavirus pandemic, government-imposed lockdowns and demise of tourism, the state’s unemployment compensation trust fund, which is supported by businesses and used to pay jobless benefits, was quickly depleted.
The state took out a federal loan last year to continue paying out unemployment claims, but businesses were on the hook to repay that money in the form of higher taxes. The automatic tax increases are designed to ensure the trust fund is replenished. The state is opting to absorb the entire amount of the approximately $740 million loan.
Gov. David Ige, top lawmakers and business interests have said it makes sense to provide tax relief to businesses during the recession, particularly in Hawaii where so many businesses have struggled to survive amid the reeling economy. Not only would the tax relief help businesses stay afloat, they’ve argued, it would also help employers hire back workers, providing an overall boost to the economy.
Last year, other states used money from the Coronavirus Aid, Relief, and Economic Security Act, the federal aid package enacted under former President Donald Trump, to replenish their unemployment compensation trust funds and prevent taxes on businesses from going up. But the practice raised some degree of partisan debate, with Republicans supporting the tax reductions for businesses and some Democrats arguing the money should go directly to the most needy.
When President Joe Biden signed the American Rescue and Recovery Plan into law on March 11, the federal guidance tied to the relief package seemed to prevent such practices. States were told they were prohibited from using the funds to offset, directly or indirectly, tax cuts.
Shortly thereafter, House Finance Chairwoman Sylvia Luke said that all the tax relief bills moving through the Legislature were most certainly dead for the year, including a bill that would exempt unemployment compensation from state taxes and a bill that would extend the earned income tax credit, which provides tax breaks to low-income workers.
The measures were quickly shelved, angering supporters who argued the federal guidance didn’t automatically derail the bills. Indeed, the federal government had said that states could still enact tax cuts so long as they generated additional revenue elsewhere to cover the costs. Unions lobbied hard for the Legislature to revive the bill exempting jobless benefits from unemployment taxes and another bill that would raise the minimum wage, which was also shelved.
But Luke (D, Punchbowl- Pauoa-Nuuanu) and other House leaders were resolute that the federal guidance prohibited federal relief funds from being used to cover tax breaks and said it would be too hard to raise taxes in other areas to make up for the shortfall. The bill exempting unemployment compensation from state taxes was expected to cost the state about $190 million. The cost of the earned income tax credit is about $18 million a year.
Rep. Roy Takumi (D, Pearl City-Waipio-Pearl Harbor), who was backing a House bill to exempt jobless benefits from state taxes, said that in the end the federal restrictions really weren’t relevant as to whether the state could give workers and the jobless tax relief. He had pushed for the Legislature to divvy up the money, giving businesses $500 million, rather than the full tax relief, and using the rest to cover tax relief for the unemployed.
Takumi said a lot of residents who were pulling down unemployment couldn’t afford to have the state taxes withdrawn last year and now owe hundreds of dollars they still can’t afford to pay.
“Obviously, the Legislature in its wisdom decided to give 100% relief to the business community and zero relief to the jobless,” he said wryly. “That’s a moral decision, not a financial decision.”
Meanwhile, state leaders say they are waiting on more federal guidance to make sure they can use the federal funds to cover the costs of replenishing the trust fund. But a review of the federal requirements indicates it’s likely a moot point for Hawaii.
The Legislature earlier this year fast-tracked the bill that lowered unemployment taxes for businesses, sending it to Ige’s desk in February, well before the state budget was finalized.
Ige signed the bill March 2. Federal requirements say states are only forbidden from using the federal funds to cover tax cuts that were implemented since March 3.
“The timing does seem interesting, doesn’t it?” said Takumi when asked about the date.
Ige didn’t respond to questions about whether the bill was rushed to avoid the impending federal restriction on American Rescue Plan Act funds.
At the time, state leaders said the bill was being expedited because the state labor department provides businesses with rate calculations in mid-March, though unemployment taxes for the quarter aren’t due until April 30.
Luke said it was likely just a coincidence.