The fate of scheduled Hawaii income tax breaks through 2031 is headed for a showdown at the state Legislature.
Leaders in the state House and Senate are expected to soon hash out differences over legislation put forth in January by Gov. Josh Green, who wants annual tax cuts slated for 2027 through 2031 repealed for all taxpayers in order to preserve revenue Green said is needed to offset federal cutbacks over several years.
House and Senate committees focused on state finances pursued different paths in early March to preserve more or all of the scheduled tax breaks for all but the highest-income households by amending a pair of bills proposed by Green, and now only one bill remains pending.
House Bill 2306, which the House Finance Committee amended to preserve two out of the remaining five years of tax cuts, recently stalled after not meeting a procedural deadline last week to be taken up in the Senate.
That leaves Senate Bill 3125 as the vehicle to decide whether the next five years of tax breaks should be scaled back, and if so, then to what degree and for whom.
Swapping drafts
The Senate Ways and Means Committee on March 5 amended SB 3125 to keep tax relief for all taxpayers with standard deduction increases slated for 2028 and 2030, and preserve relief for everyone but high-income filers through tax bracket reductions in 2027, 2029 and 2031. To generate extra revenue, the Senate’s draft of the bill also called for repealing seven commercial tax credits in industries that include renewable energy, high technology and ship repair.
But on April 7, House Finance replaced the contents of SB 3125 with a new draft to mainly reflect its draft of HB 2306 — keeping standard deduction increases in 2028 and 2030 but repealing tax bracket reductions in 2027, 2029 and 2031 for everyone, and generating extra revenue by adding 1 percentage point to the tax rate on an upper tier of income for taxpayers in the state’s three highest tax brackets effective in 2027.
Rep. Chris Todd, House Finance chair, anticipates that a compromise can be reached in a House-Senate conference committee.
“I think there’s actually a ton of value in the Senate proposal,” he said near the end of 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.”
Some pushback
At the same hearing, members of Green’s administration opposed not fully repealing the tax cuts ahead.
Seth Colby, state Department of Budget and Finance director, said during the hearing that Green’s proposal was designed to provide roughly $600 million by fiscal year 2029-30 needed to balance a required six-year financial plan.
Colby said the House and Senate proposals don’t come close to delivering the same estimated necessary revenue.
“As you guys are considering different alternatives, we are happy to work with you,” he said. “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.”
Colby said the governor’s current six-year financial plan sent to the Legislature in January projects spending will exceed revenue in the current fiscal year, which ends June 30, and in each of the next three fiscal years before revenue exceeds spending in the 2030 and 2031 fiscal years.
Under this financial plan, the state would tap unspent budgeted funding that helps create an annual “carry-over balance.”
This balance is estimated to fall from $2.1 billion, when the current fiscal year began, to $891 million by the end of the 2029 fiscal year, and then start to rise again.
At the same time, the state’s Emergency and Budget Reserve Fund, also known as the “rainy day” fund, is projected to grow from $1.6 billion this fiscal year to $1.9 billion in the 2031 fiscal year.
Green has said that a total repeal of annual tax cuts from 2027 to 2031 is needed to preserve $1.8 billion in state revenue and partly offset nearly $3 billion in anticipated state revenue losses due to recent federal government actions.
Will Kane, a senior adviser to Green, has told lawmakers that taxpayers have already received 70% of the tax reductions enacted in 2024. That means the governor’s plan would scrap 30% of the tax-cut package framed as the biggest tax cut for Hawaii residents in history.
The governor’s proposal also would extend a sunset date for an elevated state earned income tax credit and a food/excise tax credit to 2032 from 2027, and triple the size of a child and dependent care tax credit at an estimated cost of $600 million to the state. The House and Senate drafts of the tax relief bills also called for expanding tax credits for low-income households.
Seeking agreement
Todd (D, Hilo-Keaau-Ainaloa) and Sen. Donovan Dela Cruz, who chairs the Senate Ways and Means Committee focused on state finances, both view Green’s plan as an unnecessarily big burden on taxpayers.
“Addressing the uncertainties we face is a shared responsibility, and the state must tighten its belt before asking the taxpayers to do so,” Dela Cruz (D, Mililani-Wahiawa-Whitmore Village) said during a March 10 speech on the Senate chamber floor.
Reductions in state spending are being pursued by lawmakers through the state budget bill and other legislation in ways that include eliminating funding for long-unfilled state jobs, taking excess balances from numerous special funds, and cutting appropriations from things where funding has previously lapsed.
This approach has drawn support from community organizations, though preferences are split between House and Senate proposals.
Younghee Overly, who testified during the April 7 hearing on SB 3125 representing Indivisible Hawaii, expressed a desire for a balance between higher tax revenue and lower spending.
“I think we have to do everything,” she said. “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, said he prefers the House 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 said at the hearing.
Ted Kefalas, director of strategic campaigns for the Grassroot Institute of Hawaii, told House Finance members that he views the Senate plan as a more meaningful compromise to what Green proposed.
“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 said. “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 step for SB 3125 is for the 51-member House to vote on the bill, which would then set it up for House-Senate conference committee negotiations that Todd expects will result in a final draft before the end of this year’s legislative session scheduled for May 8.
