Menu
Tax Notes logo

Hawaii Senate Approves Income, Corporate Tax Increases

Posted on Mar. 12, 2021

A Hawaii Senate bill that would create a top marginal income tax rate of 16 percent is heading to the House of Representatives for consideration.

The legislation, S.B. 56, would also increase the state's capital gains tax rate and its corporate income tax. It was approved by the Senate March 9 by a vote of 24 to 1.

Beginning in 2021 and ending January 1, 2028, the bill would increase from 11 percent to 16 percent the top-tier income tax rate on personal income over $200,000 for individual filers, $400,000 for joint filers, and $300,000 for head-of-household filers. The rate would be the highest top marginal personal income tax rate of any state.

The bill would also increase the state tax on capital gains from 7.25 percent to 11 percent and replace the corporate tax rate schedule with a single, higher 9.6 percent rate. It would also make other changes, including temporarily suspending some exemptions from the general excise tax — Hawaii's sales tax — between July 1, 2021, and June 30, 2023, and increasing the state’s conveyance tax on the sale of properties worth $4 million or more. 

Backers of the legislation argue that generating additional revenue will help the state avoid significant budget cuts resulting from the COVID-19 recession, which has significantly affected the state's revenues.

“The Legislature is contemplating a budget for the fiscal biennium” that includes cuts that would “increase human misery as well as slow economic recovery,” according to March 2 testimony on the legislation by the progressive Hawai’i Budget and Policy Center. “The revenue raisers proposed in SB56 would require a greater contribution from higher earning individuals and companies, many of whom have experienced no job loss and even profited over the past year with stock market gains and Hawaiʻi’s surging real estate prices.”

The center also noted in its testimony that higher earners in the state are subject to an effective tax rate of 8 percent under existing tax law and that “Hawai’i’s millionaires paid taxes at an effective rate of just 6.8 percent of their adjusted gross income, according to reporting by the State Department of Taxation,” making it reasonable to increase the top personal income tax rate through 2027. 

However, opponents argue that the higher tax would harm the state’s economy, imposing new costs as businesses and their owners are seeking to recover from the effects of the COVID-19 pandemic.

“The enactment of a broad tax increase during an economic recovery . . . will undermine efforts made to turn Hawaii’s economy around,” the Chamber of Commerce Hawaii wrote in March 2 testimony.

“Hawaii's business community is at a critical point," according to the chamber. "Any additional mandates could mean the difference between closing their doors, bankruptcy, or laying off employees.”

Tom Yamachika with the Tax Foundation of Hawaii told Tax Notes that with regard to the tax increases contained in the bill, the “expectation is that not all of it will pass.” He also said the legislation’s prospects depend in part on how bad the state’s budget situation is projected to be, which in turn is partly dependent on the amount of federal aid the state will get from the federal COVID-19 stimulus package signed into law by President Biden (D) March 11. 

“I think what’s going to happen is in the next two or three weeks, the fiscal situation will become clearer, and lawmakers will make a decision about what kinds of revenue enhancements . . . or cost-cutting measures they want to approve,” Yamachika said. “Measures like this will be on the table at that time.”

Copy RID