Hawai鈥榠 House Finance Chair Has Plans For Big Changes In The Tax Code
Rep. Kyle Yamashita has been talking about shifting millions of dollars in tax surcharge revenue from the counties back to the state.
Kyle Yamashita is one of the most powerful lawmakers in Hawai鈥榠, and he aims to make sweeping changes in the way Hawai鈥榠 taxes its residents and visitors. In fact, he’s already set the pieces in motion.
Last spring Yamashita, who is chairman of the House Finance Committee, engineered the largest tax cut in Hawai鈥榠 history. The eye-popping impact of that tax cut startled some of his colleagues — and alarmed others — because it will reduce total state tax collections by nearly $8 billion over the next eight years.
To hear Yamashita tell it, there is much more to come. In a floor speech shortly before the tax cut bill passed May 1 in a unanimous election-year vote, Yamashita described the measure as “a foundational piece in restructuring our tax code.”
Some observers are taking him at his word, and believe this year’s unprecedented state income tax cut was designed to steer Hawai鈥榠 down a radical new path. They believe the tax cut may become a political lever Yamashita will use to pry loose hundreds of millions of dollars in excise tax revenue from the city and counties.
But critics say that would cause a fiscal crisis and political pain for the counties, and could threaten the long-term prospects for the Honolulu rail project.
With the departure of former House Speaker Scott Saiki this year, the media-shy Yamashita has emerged as the most experienced lawmaker among the top House leaders. He has a firm grip on his chairmanship, one of the most powerful positions in the Legislature that gives him the political muscle to finally push ahead with his tax plans.
‘An Elaborate Game Of Chess’
Hawai鈥榠 has , and Yamashita has long believed property taxes here should be higher. He contends the ultra-low property taxes encourage out-of-state investors to buy homes here, which drives up prices and squeezes locals out of the market.
But the Legislature does not set property tax rates, which are controlled entirely by the city and counties. However, in a public hearing at the State Capitol in February, Yamashita suggested a radical workaround to solve that problem: “We stop giving the counties money, and then they have to make that shift.鈥
Some observers suspect that may be exactly what Yamashita, a veteran Maui lawmaker, has in mind.
Colin Moore, a University of Hawai鈥榠 Manoa political scientist, said it seems clear the huge state income tax cut approved by lawmakers and Gov. Josh Green this year will cause a dramatic loss of revenue in the years ahead. Moore expects the state will need to make up the difference by grabbing money from elsewhere.
An obvious target for that kind of revenue raid is the half-percent tax surcharge that now flows from the state to the counties. That surcharge generates about $400 million a year annually for rail and other county transportation projects, including more than $300 million a year in construction funding for the Honolulu rail project.
expires at the end of 2030, and Yamashita publicly warned the counties at the February hearing they should not assume they will continue to receive it.
Yamashita again mentioned the excise tax surcharge issue during the May floor debate on the income tax cut, saying the surcharge revenue “has to be part of the discussion going forward as far as how we mix that into our tax policy going forward.”
If the state does claw back the excise tax surcharge money to replace what was lost to the income tax cut, Moore said counties will be put in a tight spot.
The mayors and councils may then come under pressure to raise property taxes to make up for the lost revenue, which is exactly what Yamashita has said they ought to do. Yamashita suggested earlier this year the counties could use property tax exemptions to shield local homeowners from property tax increases.
“I don’t think there’s a lot of political risk here for legislators if they want to push it forward, but it’s going to create a crisis for the counties that could be very politically costly for them,” Moore said. “It’s quite an elaborate game of chess.”
The city would come under particularly intense pressure if the state diverts the excise tax surcharge revenue for its own needs after 2030. That would end state financial support for construction of the Skyline rail project, jeopardizing plans to continue building the rail line to Ala Moana and beyond
Shifting The Burden
Yamashita did not respond to a request for an interview for this article, but he has publicly outlined a policy rationale for exactly this kind of overhaul of the state tax code.
Last March he that Hawai鈥榠 should not be relying so much on state income taxes. Wealthy people can simply shift their residencies to another state without an income tax to avoid paying, so Yamashita argued income taxes are better suited for use by the federal government.
“The state should be more into consumption taxes, and the counties should be more in, like, property and we tax you on your wealth,” Yamashita said in the March meeting. Many other states use that approach, he said.
He said in an interview after the income tax cut passed that he does not foresee a state budget crisis, at least not in the near term.
“Budget crises are created by economic situations, so not necessarily based on this,” he said of the tax cut. “I think this is a correction that was needed.”
He noted the cost of the tax cuts will be phased in over time, with the loss in income tax collections increasing each year.
The state will forego only about $240 million because of the tax cut this fiscal year, but the annual impact to the state in lost tax collections will climb to more than $1.26 billion by 2030, according to state Tax Department projections. Yamashita said that long roll out gives the state time to adjust its finances.
When asked directly if the income tax cut was a first step in implementing the larger tax overhaul that he wants, Yamashita replied: “Could be. Could be. I still think we need to relook at our tax structure and see who we are taxing and make sure that it’s more fairly appropriated, or spread.”
Conventional wisdom says sales taxes similar to Hawai鈥榠’s excise tax are highly regressive because they hit low-income people harder. The logic is poorer people pay a larger share of their limited incomes on sales taxes, while wealthier people contribute a comparatively trivial fraction of their larger incomes on those taxes.
But Yamashita and his supporters frame the tax debate differently. House Majority Caucus Leader Chris Todd said he has been particularly concerned about the impact of state income taxes.
“Generally speaking, the problem with income tax in our state is that it really just hammers local working class families, but also local residents in general,” Todd said. The state Tax Department calculates that locals pay 92% of state income taxes in Hawai鈥榠.
By contrast, Hawai鈥榠 residents pay only about 70% of excise taxes, Todd said, meaning visitors are carrying more of the excise tax burden.
Todd noted non-residents also pay a significant share of the property taxes collected in Hawai鈥榠. He said there needs to be “a broader conversation around the tax codes that includes the counties.”
“It’s a major structural problem,” Todd said. “I think our tax code was set up to fail. I think it largely benefits large landowners, which is why we have the lowest property taxes in the entire country. We would be much better off shifting some of these state tax burdens toward other forms of taxation that target non-residents and the wealthier class.”
Yamashita’s overall mission is “to try and shift that tax burden away from local working class families, and do so in a responsible way that targets more non-residents, but also folks who have decided to park assets here and are not really contributing here in our state.”
As for this year’s income tax cut, Todd doubts it is large enough to cause a state fiscal crisis. Overall state income taxes make up only about a third of the state’s annual tax collections, and Todd said the income tax cut reduces that revenue stream by only a fraction.
The Political Play
The counties certainly will lobby hard to retain the excise tax surcharge money. In that sense, the crowd-pleasing income tax cut this year was the easiest part of the tax changes Yamashita has been contemplating.
Kaua鈥榠 Mayor Derek Kawakami previously served in the Legislature and considers Yamashita to be a friend, but the two have a long-running disagreement over Yamashita’s belief that the counties should rely less on state support, and more on property taxes.
Kawakami contends the state and counties ought to be collaborating to serve the taxpayers, who rely on both. If the plan is to cut state taxes and take money from the counties, Kawakami said, “that’s sort of the age-old saying of robbing Peter to pay Paul, isn’t it?”
In many ways this is an old debate because the Legislature and county leaders have squabbled for decades over tax revenue. But if Yamashita is using the income tax cut to create a crisis to gain the upper hand in that long-running dispute, that would be a new wrinkle.
“If he’s thinking about the sunset date on the general excise tax, it’s going to be crippling to the building industry, because we can show you the data where the money is going,” Kawakami said. “It’s going to roads, it’s going to infrastructure” including road resurfacing, and public transportation.
Actually, Yamashita has done more than merely think about it. He at the start of the last legislative session to strip the city and counties of the excise surcharge tax revenue after 2030, but then shelved the idea after the counties
Honolulu Managing Director Michael Formby urged lawmakers to defer the bill, explaining the city “intends to focus on future extensions to U.H. Manoa and Kapolei Center in the near future, critical phases aimed at maximizing utility and ridership of the multimodal system.”
Today the excise surcharge provides most of the $10 billion in construction funding for the city rail project, and it is unclear how any future rail extensions would be possible without it.
Kawakami said Yamashita “has always been willing to at least listen and be reasonable.” He also noted new House Speaker Nadine Nakamura is a former Kaua鈥榠 County managing director and a former county council member who understands county issues.
But if the excise tax surcharge revenue is actually stripped away from the counties, he said, “it seems like we’re all going to be in the world of hurt.”
At the state level, Todd said “basic math” suggests lawmakers will have to find a way in the next two to three years to recoup some of the revenue lost to the income tax cut. He said close coordination is needed between the different levels of government on this.
“What we don’t want is for there to be a lack of communication in terms of what we’re trying to do, because we really need the state and counties to work in conjunction on these broader issues of tax equity,” he said.
“Part of that conversation around shifting tax burden to non-residents — that can’t be done exclusively at the state,” Todd said.
He added: “We can’t just continue doing what we’re doing. It’s not working.”
