The following testimony was submitted by the Grassroot Institute of Hawaii for consideration on Feb. 9, 2022, by the House Committee on Economic Development.
To: House Committee on Economic Development
Rep. Sean Quinlan, Chair
Rep. Daniel Holt, Vice Chair
From: Grassroot Institute of Hawaii
Joe Kent, Executive Vice President
RE: HB1507 — RELATING TO TAX FAIRNESS
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on HB1507, which would alter — and generally increase — the Hawaii state capital gains tax rate so that capital gains shall be taxed “at the highest marginal rate applicable to the taxpayer’s filing status and tax bracket.”
While the bill is presented as a tax hike for the wealthy — and “tax fairness” — that does not give the full picture of its effect.
For those in the top income tax bracket, it would be a significant increase to go from the current capital gains rate of 7.25% to a rate based on the top income tax rate of 11%.
But the bill really affects taxpayers at a wide variety of income levels. In reality, tying the capital gains rate to the income tax rate makes this a tax increase at the level of joint taxpayers making more than $48,000 annually. For those filing singly, the bill would enact a higher capital gains tax for those making as little as $24,000 a year.
While the intent of this bill is to help low-income families, this proposed tax hike, if enacted, more likely will frustrate that aim than achieve it. It is not possible to raise the tax on capital gains without having an effect on the state as a whole, including low-earners and working families.
An increase in the capital gains tax is likely to discourage entrepreneurship and investment, two things that could help grow the economy and create jobs. By creating a variable tax rate — and one that is tied to income tax rates, which are often themselves central to proposals to raise taxes — this bill is likely to hasten the exodus from Hawaii of high earners and business owners.
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 steep tax burden, any further tax hike is inadvisable. However, the timing of this proposal is especially bad. Hawaii’s businesses are still struggling to recover from the pandemic and lockdowns. Many have closed their doors for good. The economy will take years to recover, and the last thing Hawaii needs is a tax hike that discourages investment and the growth of new businesses.
Policymakers should be wary of implementing any tax hike while our economy is still in a fragile state. Here are just a few reasons why lawmakers should give the state a much-needed respite from tax increases:
>> Hawaii cannot sustain a hike in taxes since its economy, already damaged prior to the pandemic, was hit harder by the lockdowns than any other state in the nation.
>> State lawmakers increased taxes and fees substantially during the decade following the Great Recession of 2007-2008, despite a windfall in revenues from an economic boom during the same period. 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 has a regressive general excise tax that disproportionately hits the poor.
In addition, this proposal seems especially ill-timed given the fact that the state is currently enjoying a multibillion-dollar budget surplus, thanks to higher-than-expected revenues and an influx of federal funds.
To raise the capital gains tax while enjoying a budget surplus and pondering a tax rebate suggests that this tax hike is being used as a punitive or redistributive measure, not as a needed one. That is certain to send a clear message that Hawaii is not “open for business” and can only lower the state’s ranking as a desirable place to invest.
Hawaii’s residents and businesses need a break from new taxes, fees, surcharges and tax hikes. This is not the time to make Hawaii a more expensive place to live and do business.
Thank you for the opportunity to submit our comments.
Executive Vice President
Grassroot Institute of Hawaii
 Dave Segal, “Hawaii’s unemployment rate hit nation-high 15% in September,” Honolulu Star-Advertiser, Oct. 20, 2020.
 “Annual Estimates of the Resident Population for the United States, Regions, States, the District of Columbia and Puerto Rico: April 1, 2010 to July 1, 2020 (NST-EST2020)” U.S. Census Bureau, Population Division, December 2020 and “U.S. Census data,” “Annual Estimates of the Resident Population for the United States, Regions, States, the District of Columbia and Puerto Rico: April 1, 2020 to July 1, 2021,” U.S. Census Bureau, Population Division, accessed Jan. 3, 2022.
 “Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index: “Sales Tax Burden,” American Legislative Exchange Council, 2021. Note that Hawaii does not have a sales tax, but a state general excise tax that is levied on almost all goods and services, and imposed multiple times throughout the production chain. See also, “Who Pays? A distributional analysis of the tax systems in all 50 states,” Institute on Taxation and Economic Policy, October 2018, pp. 23 and 55.
 Katherine Loughead, “State Individual Income Tax Rates and Brackets for 2020,” Tax Foundation, Feb. 4, 2020.