Hawaii – Poised to Have the Highest Income Taxes in the United States

Brick wall with the word tax

By: T. Jeffersonian

A bill that would increase Hawaii’s income tax to the highest in the nation for the state’s top earners passed the full State Senate on March 9, 2021 by a near-unanimous vote. Senate Bill 56 was approved 24-1. State Senator Gil Riviere (D, Heeia-Laie-Waialua) was the lone no vote, while State Senator Les Ihara (D, Moiliili-Kaimuki-Palolo) voted yes but with reservations.

The proposed legislation will now move to the State House of Representatives, where it will likely face resistance. There have been efforts in the past to increase income taxes for the state’s highest earners, but these efforts have typically been part of efforts to restructure the tax burden to assist lower-income households. Senate Bill 56 is specifically focused on revenue generation with no associated tax break for the lower income tax brackets. Because there is no tax relief for the lower-income tax brackets, this will make Bill 56 a tougher sell in the House.

While considering Bill 56, the House will be prohibited from considering any attempt to create a more equitable tax system for low and middle income households in the form of lower taxes. The American Rescue Plan Act, also known as the $1.9 trillion Stimulus Package, prohibits states from providing tax relief if they accept the federal aid. Hawaii is accepting the federal aid.

The Senate approved legislation imposes a 16 percent 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. These income brackets are currently taxed at 11 percent. If the bill ultimately passes the State House, Hawaii will overtake California as the state with the highest income taxes in the nation. California’s current tax rate is 13.3 percent on those earning more than $1 million.

The legislation also includes increases to the capital gains tax, corporate tax,
and taxes on high-end real estate sales. All tax increases will expire in 2027, however, Hawaii has a demonstrated track record of extending tax increases long-term. The bill’s proponents cite the state’s plummeting tax collections brought about by the Coronavirus pandemic as the rationale for the tax increases. Hawaii government officials estimate the state will have a budget shortfall of nearly $2.4 billion by the end of 2021. However, the recently passed American Rescue Plan Act, will provide Hawaii with more than $6.1 billion in funding which includes an estimated $1.6 billion to short up the state’s expected $2.4 billion budget shortfall.

The measure has also attracted support from local unions for government workers,
including teachers, social service organizations, and progressive public-policy
organizations. These organizations are worried about furloughs of government workers and possible cuts to programs such as health services and housing assistance for the poor. Advocates in favor of the legislation, argue that the bill 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 upon.

This argument unfortunately abrogates the fact that many of the services which struggling working families have paid for during 2020, were not provided by the state government due to coronavirus restrictions. The rich and poor equally were forced to fend for themselves in the absence of these services.

The proposed tax increases have attracted opposition from the business sector. The
Hawaii Chamber of Commerce agrees that if the measure passes, it will reinforce the image that Hawaii is a poor place to live, work, and invest and undermines the efforts being made to turn Hawaii’s economy around and to create pandemic-resistance economic resiliency as Hawaii builds back better.

Forbes in 2020, ranked Hawaii as the least business friendly state in the Union. This tax hike will further cement that ranking and an unfriendly business image.
Sadly, this tax increase was anticipated. It is simply another vain attempt by Hawaii
Democrats to be Robinhood. They are merely shooting fish in a very captive barrel. This will be another nail in the lid of Hawaii’s enduring and increasing fiscal liability coffin. The highest wage earners being targeted are our small business owners.

A couple making $400,000 annually, could now pay an extra $20,000 in state taxes annually. This is $20,000 that could be spent by that family to hire one minimum wage, full-time employee for one year or to give substantial pay increases to existing workers. 23 percent of Hawaii residents work more than one job weekly. Two 40-hour per week jobs at our $10.10 minimum wage per hour, earns a family of two or one individual more ($42,016 annually) than will one full-time job at $15 per
hour ($31,200 annually).

Faced with higher taxes, higher income earners will invest their earnings in such manners so that they cannot be taxed. Unfortunately, investing the earnings in
such manners also means they cannot be liquidated without penalty and thus used to pay for jobs and services which fuel economic growth quickly from the bottom-up. These income tax hikes will ultimately put a drag on Hawaii’s economic recovery and economic diversification efforts post the pandemic.

We still do not know the full transformative effects on business and family life post the pandemic. We already know that regardless, 40 percent of the jobs today, will not exist in 10 years. What we do not know yet is how many Hawaii residents will continue to work remotely or how many Hawaii families will homeschool or provide their own after-school child care services. Hawaii residents have been forced to make do without the services for a year already. Faced with higher taxes, why not continue pandemic coping strategies and save money? Pandemic induced business and family transformations will likely lead to less need for government provided services. Lack of participation for these services will eventually lead to their earmarks as government cost-cutting targets. Government workers are going to lose their jobs post-the-pandemic. To make up for the increased taxes, small business owners will raise
prices for the goods and services that they offer in order to account for the higher taxes that they will pay. I

n 2019, in Hawaii before the pandemic, the purchasing power of $1 dollar stood at .84 cents. This was the lowest purchasing power of $1 dollar anywhere in the Union. This tax hike together with rising gas prices after the pandemic will make the purchasing power of $1 dollar in Hawaii go further down. All Hawaii residents, expect maybe our politicians and their political financiers, are going to get poorer because of this tax hike. This tax hike is quite simply the worst idea. It will drain adverse effects down throughout all of Hawaii’s income tax brackets. It will be felt by all Hawaii residents, except the most elite amongst us.

It is the wrong thing to do at the wrong possible time. It is an experimental cure doomed to fail from the very beginning. In addition, the $1.9 trillion dollar stimulus only adds mere weeks to Hawaii’s terminal fiscally liable illness. Only deregulation, privatization, economic diversification, and additional revenue streams such a lotteries, casinos, and legalized cannabis will permanently cure this fiscally dying state.