Governor. Josh Green signed the largest income tax cut in state history into law Monday, giving final approval to a measure that is expected to deliver higher wages for many Hawaii workers as soon as early next year.
Green told a gathering of attendees, media and others at the state Capitol that the tax cut is a crucial part of his administration’s plans to make Hawaii more affordable and help curb the flow of people leaving the islands.
The administration projects that the new law will reduce the state income tax for 70% of working-class families and eliminate the state income tax entirely for about 40% of all taxpayers in the State by 2031.
“These are the changes we needed to make because we’ve seen an exodus of people who are living paycheck to paycheck,” Green said. “We’ve seen an exodus of these people going to the mainland, working families, because they just can’t afford to pay their rent. »
House Finance Committee Chairman Kyle Yamashita said House Bill 2404 — now Act 46 — would reduce the tax burden on a middle-income Hawaiian family by nearly $20,000 over the next seven years. It will also reduce state tax revenues by a total of $5.6 billion by 2031, according to Green.
State Tax Director Gary Suganuma said his department would change the tax withholding tables used to calculate the amount of money taken from each paycheck for taxes, and that employees should begin to receive more take-home pay in every paycheck in January.
The state Tax Department offers a downloadable “take-home pay calculator” that residents can use to estimate the impact of the new tax law on their own paychecks.
HB 2404 would increase standard taxpayer deductions from the current $4,400 for joint filers to $8,800 for tax filers next year, then increase that standard deduction in a series of steps until it reaches $24,000 in 2031.
It would grant equally large expansions of standard deductions for single filers, heads of household and married couples filing separately.
It would also eliminate the state income tax for the lowest-paid filers and adjust all state income tax brackets to account for inflation.
The governor also signed a more modest tax measure Monday that will eliminate the state excise tax on medical and dental services for people who receive benefits under Medicaid, Medicare or the TRICARE program for military, retirees and their dependents.
The measure is Act 47 and will reduce state tax revenue by $77.5 million in fiscal year 2027, which will be the first full fiscal year after the tax break takes effect. The Tax Department expects to reduce tax revenue by $81 million the following year.
Green predicted that the tax breaks “will bring more providers to our citizens, that’s extremely important.”
The huge income tax cut, in particular, has some observers fearing that the state will later resort to deep budget cuts to balance the state budget, or that it will forgo major projects which he must undertake urgently.
Nicole Woo, director of research and economic policy for the nonprofit Hawaii Children’s Action Network Speaks, said that given the large revenue loss from the income tax cut, “We are concerned about how partners will fill this gap.”
The tax cut will reduce state collections by more than $1.4 billion in fiscal year 2032, according to the Tax Department, and this reduction in collections will continue indefinitely into the future.
“We are concerned that necessary services will face cuts and necessary improvements will not be funded in the future,” she said. “We look forward to discussing with our delegates how they will fill this budget hole without cutting social services, public education and all those other things needed in our community.
The new law also provides significant tax cuts for wealthier Hawaii residents “who really don’t need them,” Woo said.
But Green said “we will not cut services,” in part because he predicts the tax cut will boost the state’s economy. A larger economy would result in an increase in other types of tax revenue, such as the general excise tax.
“Individuals who work paycheck to paycheck will spend every dollar at local businesses, on their rent, on their cars, on their health care needs. They will spend it here on their families, on their children’s school books, they will spend it all right here at home,” he said.
Green also said he expects that cutting income taxes will mean residents will have more money and be able to rely less on Medicaid and other costly social programs.
“As we support people’s quality of life and their ability to pay and survive on their own, a lot of these other programs will save money, so we’re being smart about it,” he said. he declared.
However, Green also said his administration has begun a “thorough analysis of costs that we have on the books that maybe shouldn’t be on the books.” Specifically, he said about 30 percent of jobs in the state are vacant and unspent wages often result in year-end surpluses of hundreds of millions of dollars.
For positions that haven’t been filled in three or four years, Green said he wants to either raise wages for essential state jobs to finally attract workers to fill them, or “make sure that we let’s reduce some of the excess costs.”
“We plan to present a budget to the Legislature next year with fewer positions overall to get rid of some of what has been seen as waste,” he said.
He also noted that the administration was pushing to “get more resources, in many cases, from travelers.”
Green campaigned on a plan to impose a new “green fee” on arriving tourists to help tackle climate change and the impacts of the millions of tourists who come here every year, but the idea remained blocked in Parliament at during each of the last three years. sessions.
