Julia Chirkova
By Andrew Gomes, The Honolulu Star-Advertiser, (TNS)
The future of Hawaii’s planned income tax reductions, scheduled to extend through 2031, is now at the center of a significant legislative debate, poised for a crucial showdown in the state Legislature. At the heart of this contention lies a legislative proposal put forth by Governor Josh Green in January, which seeks to repeal annual tax cuts designated for taxpayers from 2027 through 2031. Governor Green’s administration argues that this revenue preservation is critical to offset projected federal cutbacks anticipated over the coming years.
The legislative process has seen distinct approaches emerge from the House and Senate committees responsible for state finances. In early March, these committees pursued divergent paths to retain a substantial portion, if not all, of the scheduled tax breaks. Their strategies aimed to preserve these benefits for all but the highest-income households, by amending existing legislative proposals. However, this divergence has led to a situation where only one key piece of legislation now remains to determine the fate of these tax cuts.
Initially, House Bill 2306, as amended by the House Finance Committee, proposed preserving two out of the remaining five years of scheduled tax cuts. However, this bill recently failed to meet a procedural deadline in the Senate, effectively stalling its progress. This leaves Senate Bill 3125 as the primary vehicle through which lawmakers will decide whether the next five years of income tax breaks will be scaled back, and if so, to what extent and for which segments of the population.
Divergent Legislative Paths Emerge
The Senate Ways and Means Committee took a significant step on March 5 by amending Senate Bill 3125. Their proposed changes aimed to maintain tax relief for all taxpayers by enacting standard deduction increases slated for 2028 and 2030. Furthermore, the Senate’s draft sought to preserve tax relief for the majority of filers, excluding only high-income individuals, through tax bracket reductions scheduled for 2027, 2029, and 2031. To bolster state revenue, this version of the bill also included a provision to repeal seven commercial tax credits across various industries, including renewable energy, high technology, and ship repair.
However, the landscape shifted dramatically on April 7 when the House Finance Committee introduced a new draft for Senate Bill 3125, essentially replacing its original contents. This House-amended version largely mirrored the approach taken in their earlier proposal, House Bill 2306. It proposed keeping the standard deduction increases for 2028 and 2030 but advocated for the repeal of tax bracket reductions in 2027, 2029, and 2031 for all income levels. To generate additional revenue, the House draft introduced a measure to increase the tax rate by 1 percentage point on an upper tier of income for taxpayers falling within the state’s three highest tax brackets, effective in 2027.
Representative Chris Todd, Chair of the House Finance Committee, expressed optimism that a compromise could be reached through a House-Senate conference committee. "I think there’s actually a ton of value in the Senate proposal," he remarked during the April 7 public hearing on the bill. "And I think going into conference, I think there’s enough time that we figure it out, and we will find a balance that I think can keep much more of the income tax plan in place, particularly for pretty much 80, 90, 95% of people. So that’s the goal going in."
Administration Voices Concerns Over Revenue Shortfalls
During the same April 7 hearing, members of Governor Green’s administration voiced strong opposition to not fully repealing the upcoming tax cuts. Seth Colby, Director of the state Department of Budget and Finance, stated that Governor Green’s original proposal was designed to generate approximately $600 million by fiscal year 2029-30, a sum deemed necessary to balance the state’s mandated six-year financial plan.
Colby emphasized that the revenue projections from both the House and Senate proposals fall significantly short of this required amount. "As you guys are considering different alternatives, we are happy to work with you," he stated. "But our concern is that we need to balance the financial plan, and that is why we need some kind of revenue enhancement. If we do not have that, then… we need to balance the financial plan with reductions in cost, which would be very painful."
The governor’s current six-year financial plan, submitted to the Legislature in January, projects that state spending will exceed revenue in the current fiscal year, which concludes on June 30, and in each of the subsequent three fiscal years. It anticipates that revenue will surpass spending only in fiscal years 2030 and 2031. Under this financial plan, the state would be compelled to utilize unspent budgeted funds, contributing to an annual "carry-over balance." This balance is projected to decline from an estimated $2.1 billion at the commencement of the current fiscal year to $891 million by the end of fiscal year 2029, before beginning to rebound.
Concurrently, Hawaii’s Emergency and Budget Reserve Fund, commonly known as the "rainy day" fund, is forecasted to grow from $1.6 billion in the current fiscal year to $1.9 billion by fiscal year 2031.
Governor Green has asserted that a complete repeal of the annual tax cuts from 2027 to 2031 is essential to preserve $1.8 billion in state revenue. This measure is also intended to partially offset nearly $3 billion in anticipated state revenue losses attributed to recent federal government actions, which include changes in federal tax policy and potential reductions in federal grants. Will Kane, a senior advisor to Governor Green, has informed lawmakers that taxpayers have already benefited from approximately 70% of the tax reductions enacted in 2024. Consequently, the governor’s plan would effectively nullify the remaining 30% of a tax-cut package that was widely promoted as the most substantial tax relief for Hawaii residents in the state’s history.
The governor’s proposal also includes extending the sunset date for an enhanced state earned income tax credit and a food/excise tax credit from 2027 to 2032. Additionally, it aims to triple the value of the child and dependent care tax credit, at an estimated cost of $600 million to the state. Notably, both the House and Senate drafts of the tax relief bills also include provisions for expanding tax credits designed to benefit low-income households.
Navigating Towards Agreement Amidst Fiscal Pressures
Both Representative Chris Todd (D, Hilo-Keaau-ÂAinaloa) and Senator Donovan Dela Cruz, Chair of the Senate Ways and Means Committee, have expressed reservations about Governor Green’s proposal, viewing it as an excessive burden on taxpayers. Senator Dela Cruz, in a speech delivered on the Senate floor on March 10, articulated this sentiment: "Addressing the uncertainties we face is a shared responsibility, and the state must tighten its belt before asking the taxpayers to do so."
Lawmakers are actively pursuing spending reductions through various legislative avenues, including the state budget bill. These efforts encompass measures such as eliminating funding for long-vacant state positions, reallocating surplus balances from numerous special funds, and cutting appropriations from programs where funding has previously lapsed. This multi-pronged approach to fiscal management has garnered support from various community organizations, although preferences are divided between the proposals advanced by the House and Senate.
Younghee Overly, representing Indivisible Hawaii, testified during the April 7 hearing on Senate Bill 3125, advocating for a balanced approach between increasing tax revenue and reducing state expenditures. "I think we have to do everything," she stated. "We have to raise tax revenue. We also have to tighten the belt. I don’t think it’s one or the other."
Devin Thomas, director of tax and budget policy at the Hawaii Appleseed Center for Law and Economic Justice, expressed a preference for the House’s proposed plan. "We believe that that will be a much better way of raising the revenue the state needs to plug all the holes that will be caused by incoming federal spending cuts," Thomas commented at the hearing.
Conversely, Ted Kefalas, director of strategic campaigns for the Grassroot Institute of Hawaii, suggested to House Finance members that the Senate’s plan represented a more pragmatic compromise compared to Governor Green’s initial proposal. "I think a lot of people have framed this as either we eliminate the income tax cuts or get rid of essential services, but there are ways to avoid doing both," Kefalas explained. "The money is there if you-all look hard enough. Families across Hawaii have had to tighten their belts during inflation, and so we think that the government needs to do the same in this situation."
The next procedural step for Senate Bill 3125 involves a vote by the 51-member House of Representatives. Following this, the bill will advance to a House-Senate conference committee. Representative Todd anticipates that this committee will work towards finalizing a compromise draft before the conclusion of the current legislative session, which is scheduled to adjourn on May 8. This upcoming negotiation period will be critical in determining the ultimate impact of these fiscal decisions on Hawaii’s taxpayers and its long-term financial stability.
The debate over Hawaii’s tax policy is intrinsically linked to the state’s broader economic outlook and its capacity to fund essential public services. The scheduled tax cuts, enacted with the intention of stimulating the economy and providing relief to residents, now face scrutiny against a backdrop of potential federal revenue reductions and the imperative to maintain fiscal health. The outcome of this legislative process will have far-reaching implications for households, businesses, and the state’s ability to address future challenges.
The analysis of the state’s financial plan reveals a projected deficit in the coming fiscal years, necessitating difficult choices. The governor’s proposal to repeal tax cuts aims to bridge this gap without resorting to drastic spending cuts, which could impact vital public programs and services. However, legislative leaders and advocacy groups have raised concerns about the fairness and necessity of such a broad rollback of tax relief, especially for middle and lower-income families.
The proposed amendments to Senate Bill 3125 reflect the ongoing effort to find a middle ground. The Senate’s initial approach of preserving tax relief for most while seeking revenue elsewhere, and the House’s subsequent revision, highlight the competing priorities and perspectives within the Legislature. The inclusion of provisions to bolster tax credits for low-income households in both the House and Senate drafts indicates a shared commitment to protecting vulnerable populations, even amidst fiscal austerity.
The projected impact of federal actions on Hawaii’s revenue is a significant factor driving this debate. Changes in federal funding streams, tax policies, or economic stimulus measures can have a ripple effect on state budgets. Governor Green’s administration is attempting to proactively address these potential shortfalls, ensuring the state’s financial resilience. However, the proposed method of achieving this resilience—by reversing previously enacted tax cuts—is proving to be a point of contention.
The differing viewpoints on the magnitude of the revenue shortfall and the most equitable means of addressing it underscore the complexity of fiscal policymaking. While the administration emphasizes the need for substantial revenue preservation to maintain essential services, legislative bodies and some advocacy groups are pushing for more targeted revenue-generating measures and a more cautious approach to cutting taxes. The ultimate decision will likely involve a delicate balancing act, weighing the immediate needs of the state budget against the long-term economic well-being of its residents. The upcoming conference committee negotiations will be pivotal in shaping this balance and defining the future of Hawaii’s tax landscape.
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