Hawaii Counties Fight To Keep Excise Tax As Lawmakers Advance Other Relief Measures
Measures that won preliminary approval in the House Finance Committee would increase standard deductions and adjust tax brackets for inflation.
Several bills designed to ease the state income tax burden on Hawaii residents, including one that would increase the standard income tax deduction, received preliminary approval Tuesday from the House Finance Committee.
Another bill advanced by the committee attempts to index state income tax brackets to inflation, and to lighten the state income tax burden for some of Hawaii’s lowest-income residents.
Meanwhile, a key state lawmaker aimed a blunt, public warning at county officials who hope to continue receiving money from the excise tax surcharge that now funds the Honolulu rail project and many transportation projects in the other counties.
In the years ahead the state may instead take that money for its own purposes, including funding public education and social programs, said House Finance Chairman Kyle Yamashita.
Yamashita, whose position gives him considerable influence over state spending and tax policy, held a public hearing Tuesday on to divert the revenue from that excise tax surcharge from the counties to the state starting in 2031.
Could The Money Be Used Better?
He suggested that if the state takes the excise tax surcharge away from the counties, “we possibly at some point in time would be able to lower the income tax and adjust it to where it’s a little more progressive and helping the middle and lower ends of the groups.”
The half-percent excise tax surcharge was originally imposed on Oahu in 2007 to provide funding for the Honolulu rail project, and over the years was expanded to include each of the counties. Revenue from the surcharge is earmarked for rail on Oahu and for other transportation projects on the other islands.
The surcharge generated $326 million for Honolulu in fiscal year 2023, $70 million for Hawaii County, and $35 million for Kauai County that same year, according to state Tax Department Deputy Director Kristen Sakamoto. The surcharge on Maui did not take effect until the start of this year.
The tax is currently scheduled to end at the end of 2030.
The bill to instead continue the surcharge and redirect the revenue to the state starting in 2031 was by Hawaii County Mayor Mitch Roth, Kauai County Mayor Derek Kawakami and a variety of other critics.
Kawakami said his administration wants the surcharge to be made permanent to fund Kauai infrastructure projects. Roth said the excise surcharge money allowed the Big Island to double the amount of road miles it paves.
“If we didn’t have that money, we wouldn’t be able to do that,” Roth said. “To me, it’s like robbing Peter to pay Paul.”
Nearly a dozen other people submitted testimony opposing the bill because the excise surcharge is regressive, meaning it weighs most heavily on people at lower income levels.
In the end Yamashita deferred action on the excise tax bill, which means it is almost certainly dead for this session.
Increasing Standard Deductions
Instead, Yamashita and the Finance Committee advanced House Bill 2779, which would increase the standard deductions for state income tax purposes in a series of steps. The larger deductions would reduce the amount of taxable income for tax filers.
Yamashita amended the bill so the first increase in the deductions will not kick in until 2026, citing uncertainty surrounding the state budget in the wake of the Aug. 8 Lahaina wildfire disaster.
The committee also approved , which in a series of steps to allow lower-income taxpayers to pay less while increasing the state income tax on some residents at the highest income levels.
If the bill passes, those changes would also be delayed until after 2026.
Also winning preliminary approval from the Finance Committee Tuesday was , a package of tax changes introduced by Gov. Josh Green.
That bill as introduced would adjust state income tax brackets upward by 10% — meaning some people would be taxed at lower-income tax rates than without an adjustment — and would index the tax brackets to the starting next year.
The same measure would also significantly increase the value of the state child or dependent care income tax credit, and make that credit available to far more Hawaii families than it is today.
Leaving Details For Later
Yamashita said Tuesday he would amend the bill to remove the link to inflation, and leave blank percentages and dollar amounts in the bill. Leaving those kinds of values blank is routine at the Legislature during the session, with lawmakers filling in the details later as measures advance. The bills now go to the full House for a vote.
Yamashita also used the hearing to air a view of state and county tax policy that the counties may find alarming.
He said Hawaii has some of the lowest property taxes in the nation, which effectively encourages out-of-state investors to buy property here. About 30% of residential properties statewide are now owned by outside buyers and that is driving up real estate prices, he said.
Yamashita argued that property taxes in Hawaii should be higher to reduce the incentives for out-of-state buyers, and said the counties can shield local property owners from that extra property tax bite by increasing homeowner exemptions.
“If we do not make these kind of changes at the state and county level, we will continue to have this exit,” he said. “We are going to still continue to see people leave until we address this appetite from out of state to buy our residential properties.”
In fact, Yamashita said he wants to see a comprehensive overhaul of the entire state tax structure, which he said “is actually causing the high cost of living, is actually causing the exit of our local people because it’s too expensive to live here.”
One possibility: “We stop giving the counties money, and then they have to make that shift,” he said.
That could involve taking away the excise tax surcharge and perhaps even the hotel room tax that is now levied by the counties, he said, effectively forcing the counties to boost property taxes.
The Hawaii County mayor disagreed.
“People are struggling to get by already. If you’re raising the property taxes, it’s going to make it even more difficult for these people to get by,” Roth said in an interview.
Roth said Hawaii County already has specific property tax classifications for people with expensive second homes and vacation rentals.
“I just left a business owner who was saying that because of our taxes here, it’s difficult for him to make a living,” he said. “When you look at all the taxes that get put together, it’s very difficult for local people, families to survive, and so this is not the time to be raising out taxes, especially on our local people.”
“Struggling To Get By” is part of our series on “Hawaii’s Changing Economy” which is supported by a grant from the as part of its CHANGE Framework project.
