Bill That Just Cleared Hawaii Senate Would Create Highest Income Tax Level in US

Hawaiʻi could be on track to set the highest state income tax level in the country.

The Hawaiʻi State Senate passed Senate Bill 56 on March 9, which aims to address a multi-billion dollar shortfall in state revenue through a number of different tax and rate increases.

The measure, introduced by Senator Stanley Chang (District 9 – O´ahu), would impose a 16% tax on individuals earning more than $200,000 a year, up from the current rate of 11%.

Further, it would increase the capital gains rate from 7.25% to 11% and impose a single rate for the corporate income tax at 9.6%. The bill would also repeal certain GET exemptions from July 1, 2021, until June 30, 2023.

And finally, SB 56 would increase conveyance taxes for the sale of properties valued from $1 million to $2 million to 0.6%; from $2 million to $4 million to 1%; and so on. The highest bracket that conveyance taxes would raise is $10M and above to 2%.

Individual filers making less than $200,000 would not be subject to any state income tax increase.

“With a budget shortfall of over $2 billion, we need to look at various ways to generate much needed revenue for our state,” Sen. Chang said in a statement. “In order to avoid future furloughs and layoffs for state workers, we need to consider every option to prevent disruptions to essential government services.”

Gov. David Ige had announced the state’s intention to furlough several workers for two days per month beginning in 2021. However, he postponed that action until at least the summer with the passage of a $900 billion coronavirus aid package in December.

President Joe Biden on Thursday signed into law a $1.9 trillion relief package, which includes direct funding to state and county governments that can be used to address budget shortfalls.

The developments make the prospect of furloughs less necessary, especially as the Hawai´i Safe Travels Program continues to usher more and more visitors back to the state as COVID-19 vaccination rates climb daily nationwide.

Governor David Ige said earlier this week that a vaccine passport program could be a reality in Hawai´i as soon as May, adding that he expects a return to some sort of pre-pandemic normal by mid- to late-summer of this year.

Federal dollars and signs of an imminent rebound for the economy could give pause to legislators who would have otherwise pushed for the revenue-generating tax hikes.

However, multiple sources in the state capitol have told Big Island Now that the political context to raise taxes on wealthy individuals and corporations, creating what many legislators have championed as “tax fairness,” is not likely to prove more favorable than it is now. That reality will continue to afford the tax increases momentum, even as more than $6 billion in federal aid will soon flood into Hawai´i, along with more visitor dollars every month.

The measure passed third reading in the Senate Wednesday and will advance to the State House of Representatives for consideration.