Hawaii is now on a path to go from being almost the most burdensome state for income taxes to one of the least.
Gov. Josh Green signed a bill into law Monday that will usher in the biggest cumulative tax cut in Hawaii history.
The new law, stemming from House Bill 2404, will reduce taxes for households by 10%, to 72%, depending on income, in steps over eight years and provide an estimated $5.6 billion in total savings.
Green described the legislation as tremendous tax relief that will help increase spending in the local economy and reduce pressure prompting many residents to leave the state because Hawaii’s cost of living is the highest in the country.
“This is a historic day,” he said during a bill-signing ceremony in his office at the state Capitol. “This is the largest tax break that we’ve had in history for our working families. … This had to happen. We had to cut taxes for our people.”
Green also signed a bill that will exempt doctors from paying state general excise taxes on services to patients with Medicaid, Medicare and TRICARE starting in 2026.
Under the new income tax law, Hawaii will move from having the second-highest to the fourth-lowest income tax burden among states, according to Green.
The legislation doubles the standard deduction starting with the 2024 tax year and then keeps raising it every two years through 2030. The new law also adjusts tax brackets, which determine the amount of tax owed by income level, every two years from 2025 to 2031.
Some lawmakers and public-interest organizations have questioned whether the state can afford such tax cuts and criticized the bill for not excluding high-income households.
Green said the projected revenue decline from the tax cuts will not be paid for by reducing government services. He said he intends to propose eliminating positions in state government that have been vacant for more than four years as a way to free up revenue that is included in the annual state budget even when positions aren’t filled.
“We will work with the Legislature going forward to make sure the budget is right-fit,” he said, adding that the vacancy rate in state jobs is 30%.
Including wealthier households in the tax cuts is a good idea, Green said, because it will contribute to more spending in the local economy along with the cuts for moderate- and lower-income households.
“We’re trying to stimulate the economy at all levels,” he said.
Green said the new law will deliver the biggest relative reductions to households with lower incomes. Tax cuts, he said, will be between 63% and 72% for people earning $22,000 to $62,000 a year, while people with the highest incomes will see reductions of 10% to 15%.
The governor also said 40% of households, because they have lower incomes, will pay no Hawaii income tax by 2031, up from 25% currently.
Because people with higher incomes have higher tax bills, their savings will be bigger in dollars than for people with less income.
Seth Colby, the state Tax Department’s research and planning officer, said high income earners currently pay around 60% of all income tax collected and that this will grow under the new tax law to around 75% or 80%.
“What was unique about this tax reduction is … it’s really focused on the lower income,” Colby said during the ceremony.
According to Green, tax savings for a person earning $75,000 annually would rise from $995 in the first year to $2,372 by 2031, and for a married couple earning $150,000 with two dependents, the savings would rise to $4,712 from $1,975.
Green pitched similar tax legislation in 2023 to lawmakers, and commended the Legislature for delivering this year.
State Sen. Sharon Moriwaki, vice chair of the Senate Ways and Means Committee, focused on state finances, called the bill a systemic solution addressing the rising cost of living driven in large part by inflation.
Moriwaki (D, Waikiki-Ala Moana-Kakaako) said Hawaii’s income tax system hasn’t been adjusted for inflation since 1978. “This bill is historic,” she said during the ceremony.
State Rep. Kyle Yamashita, chair of the House Finance Committee, said at the ceremony that one of the motivations for passing the bill was to keep people earning the minimum wage from moving into higher tax brackets and retaining less income.
The Legislature in early 2022 passed a bill for raising Hawaii’s hourly minimum wage, which was then $10.10, in four steps every other year. It is now $14, and rises to $16 in 2026 and then to $18 in 2028.
“As we know, minimum wage is going to be going up, and we have to make these adjustments,” said Yamashita (D, Pukalani-Makawao- Ulupalakua). “Otherwise, we’ll be overtaxing them.”
The other bill signed Monday, Senate Bill 1035, achieves something Green, a physician and former legislator, said he first worked on as a lawmaker in 2006.
SB 1035 aims to increase the availability of health care for lower-income patients with federal Medicaid, Medicare and TRICARE insurance by exempting such service from Hawaii’s general excise tax.
Doctors typically don’t get fully reimbursed by Medicaid, Medicare and TRICARE but also can’t pass GET on to such patients under federal law. That has led some doctors to stop serving such patients.
The exemption taking effect in 2026 will benefit doctors in private practice and is estimated to reduce state GET collections by $70 million to $84 million a year. Doctors at nonprofit health care organizations don’t pay GET.
State Sen. Lorraine Inouye (D, Hilo-Pepeekeo) introduced the bill in 2023 on behalf of doctors in her community who have been pushing for the exemption for several years.
“SB 1035 seeks to provide essential relief to our health care providers and, ultimately, to the patients they serve and the patients who are at risk of or who have already lost their primary care,” she said during Monday’s ceremony.
Green, who has been an emergency room doctor in rural parts of Hawaii island, said that at one time 51% of the island’s residents relied on Medicaid, and that statewide about 465,000 people currently have Medicaid and about 300,000 have Medicare.
State Rep. Mark Nakashima (D, Hamakua-Hilo) said enacting SB 1035 will reduce financial burdens on doctors, including dentists, serving people at the lowest income levels.
“Especially with our state’s aging population, this becomes even more critical,” he said.
TAX CUTS HIGHLIGHTED BY THE GOVERNOR
>> People earning $22,000 to $62,000 a year will receive a reduction of 63% to 72%.
>> People with the highest incomes will see a reduction of 10% to 15%.
>> Forty percent of households, because they have lower incomes, will pay no Hawaii income tax by 2031.
