Testimony: SB2242 aims to hike both income and capital gains taxes

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration on Feb. 2, 2022, by the Hawaii Senate Committee on Ways and Means.

To: Senate Committee on Ways and Means
       Sen. Donovan M. Dela Cruz, Chair
       Sen. Gilbert S.C. Keith-Agaran, Vice Chair

From: Grassroot Institute of Hawaii
           Joe Kent, Executive Vice President


Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on SB2242, which seeks to create additional tax brackets, thus raising the state’s top income tax rate from 11% to 13%. 

If enacted, this bill also would increase the capital gains tax from 7.25% to 11% and hike the corporate income tax rate and income tax rates on investment companies and real estate investment trusts from the graduated rates of 4.4%, 5.4% and 6.4% to a flat 9.6%.

The purported rationale for this bill is to address the economic damage caused by the COVID-19 crisis, especially the state’s high cost of living and unemployment. However, the strategy pursued here is perplexing and demonstrates a willful refusal to accept the fact that Hawaii’s high cost of living is not due to the pandemic, but to policies pursued for decades prior to the crisis — and that this bill would only make worse.

The suggestion that the bill is needed to bring in additional revenues following the pandemic is patently false. In fact, Hawaii is enjoying a budget surplus due to higher-than-expected revenues combined with an infusion of federal funds. Not only does the state not need more revenues, the Legislature is currently considering a proposal to issue a tax refund to Hawaii taxpayers. 

More important, the tax hikes outlined in this bill would have the opposite effect from the goal mentioned in the introduction. Rather than help working families, this bill would help increase the cost of living in Hawaii, drive away businesses and discourage investment, thereby contributing to the unemployment problem.

A significant hike in the top income tax rate also is likely to increase the number of high-earners who leave the state. The minor and speculative increase in revenue that this tax hike would possibly generate would be offset by the damage it would cause to the rest of the state’s economy.

Hawaii businesses are still struggling to recover from the effects of the pandemic lockdowns. Many have closed their doors forever; others are barely hanging on. Raising the capital gains tax and corporate income tax would send a clear message that Hawaii is not open for business and is not friendly to entrepreneurs or new business owners. Moreover, the mere fact that this bill is even being considered is a bad sign by itself.

The experience of the past year demonstrates that there are far better ways to generate more tax revenues than by levying higher taxes on Hawaii’s struggling residents and businesses. In our rebounding economy, even small economic gains have big effects. Thus, policymakers should focus on growing the economy, which would bring in more state revenues than a tax hike — and without any negative effects on business.

We are gravely concerned about the impact of the tax hikes proposed in this bill. Hawaii residents are already among the most taxed in the country; the state has the second-highest overall tax burden in the U.S. That high tax burden contributes to Hawaii’s cost of living and is one of the reasons why so many Hawaii residents have been leaving in search of greater opportunities elsewhere.

Given the state’s already-high tax burden, there is never a good time to raise taxes. But this proposal appears to ignore the reality of our state’s budget surplus and the challenges that our businesses and residents have had to face over the past two years. Hawaii’s economy will take years to recover from the pandemic and lockdowns. The last thing Hawaii residents and businesses need at this point is a tax hike.

There are myriad reasons we should be wary of implementing tax hikes. Here are just a few:

>> Hawaii cannot sustain a hike in taxes since its already-damaged economy was hit harder by the lockdowns than any other state in the nation.

>> State lawmakers increased taxes and fees substantially following the Great Recession of 2007[2008, despite a windfall in revenues from an economic boom over the past decade. Taxes and fees ballooned on motor vehicles, transient accommodations, estates, fuel, food, wealthy incomes, property, parking and businesses.

>> Hawaii’s population reduction of 32,237 people since fiscal 2016 has left Hawaii’s remaining taxpayers with a greater tax burden. 

>> Hawaii already has a regressive general excise tax that disproportionately hits the poor. 

>> Hawaii has a progressive income tax that taxes high-income earners at 11%, second only to California at 13.3%. Hawaii’s top 1% already pays 23% of all income taxes in the state.

If policymakers are serious about helping working families, they should abandon the high-tax approach that has already established Hawaii as the state with the highest cost of living. 

Instead, they should focus on strategies to lower those costs, such as reducing income taxes, creating an exemption to the general excise tax for groceries and medical services, lowering fees and reducing regulations that limit opportunities and stifle economic growth.

Thank you for the opportunity to submit our comments.


Joe Kent
Executive Vice President
Grassroot Institute of Hawaii


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