Most Hawaiʻi residents will likely see lower income taxes next year due to a measure recently passed by the state Legislature.
However, some advocates are concerned that those changes could also limit tax assistance for those who need it the most.
Lawmakers are calling it the biggest tax cut in the state’s history: about $5 billion over the next five years.
Who benefits?
The Legislature’s goal is to lower the cost of living. The new tax structure will eliminate the bottom five tax brackets by 2029. Adjustments to other brackets decrease taxes further.
However, Nicole Woo of the Hawaiʻi Children’s Action Network explained that broad cuts will benefit top earners versus those with lower incomes.
“For example, a family with an income of $1.5 million in 2031, they'll be getting a tax cut of $12,800 per year. Meanwhile, lower-income families making $14,000 a year, they'll get $469,” she said.
“$469 is a lot of money to those low-income families, but the bulk of the dollars are going to be going to higher-income households.”
Devin Thomas, senior policy analyst at Hawaiʻi Appleseed, had hoped that tax cuts or deductions would have been more targeted toward helping lower-income families.
“The more effective way to do it is to give people a targeted tax credit and there are several right now in the books, right? You have the earned income tax credit and refundable food excise tax credit,” Thomas said.
“Those are a much more efficient means of cutting taxes for a specific group of people because you can set what the parameters are, you can say this is going to apply to people up to a certain income amount and beyond that, it gets cut off," he continued.
Woo said increasing the standard tax deductions will help lower-income earners. Research shows that itemized deductions are mostly used by wealthier taxpayers.
But the cost of the tax cuts concerns some advocates. An analysis by the Institute on Taxation and Economic Policy estimated an initial annual revenue loss of $656 million, that balloons to close to $1.5 billion by 2030. That's about 10% of the state's total budget.
The analysis used the most recent data from the Council of Revenues so it could change over the years. However, it also showed that when the cuts are fully implemented, 43% of the tax breaks would go to the top 20% of earners, specifically those making over $147,000 a year.
Thomas was concerned that due to the large cuts, future lawmakers would be less accepting of more targeted tax cuts that Hawaiʻi Appleseed and other advocacy groups are pushing for.
“We're sort of at a loss for how to proceed because this bill alone will take a huge amount of tax revenue away from the state,” he said. “It's unclear what the appetite is going to be for further tax cuts next year.”
Changes to the bill this session
It wasn’t always the case that the bill would create the largest tax cut in the state’s history. Through most of the legislative session, the bill contained a one-time modest tax cut to income tax and increased allowed deductions.
It also had a section that corrected a mistake from last session regarding a law passed in 2023 that expanded the child and dependent care tax credit.
When the 2023 Legislature passed a bill to significantly increase the maximum amount taxpayers could claim for their dependent care expenses, they did not increase the percentage of the care expenses that could be claimed. That renders it nearly impossible for people to access the extra funds.
This section was cut from the measure toward the end of the legislative process.
“Last session, the Legislature passed some of the largest increases to tax credits for working families that anyone can remember... Those were really targeted at working class, lower-income families so that was great and that really will help struggling families afford to live here,” Woo said.
“This year, there’s a second bill and it's kind of going in a different direction," she said.
A 'big win' for lawmakers
In the end, the public did not have the chance to testify on a vast majority of the cuts. That’s because the measure was drastically altered in the final days of the legislative session during the conference process, where public testimony is not accepted.
Colin Moore, a political scientist with the University of Hawaiʻi, explained that it’s not uncommon for measures to change during conference.
Also, because it’s an election year, it’s common for lawmakers to want to clinch big legislative wins.
“Flyers write themselves. I mean, big legislators want to go back to their districts with big wins, and this is a big one. They want to have something that they can put on the headline of their campaign flyers that is something that is a real, concrete win and this is one of them,” Moore said.
“I think you often do see bills that are popular, they're more likely to pass going into a reelection year and if this hadn't been a reelection year, maybe the Legislature would have wanted to give these tax cuts another look," he said.
The measure is part of Gov. Josh Green’s tax plan, and it awaits his final approval.
