HB337: Increasing tax on capital gains a bad risk

The following testimony was presented Feb. 3, 2023, by the Grassroot Institute of Hawaii to the House Committee on Economic Development.

Feb. 3, 2023
10 a.m.
Conference Room 423

To: House Committee on Economic Development
      Rep. Daniel Holt, Chair
      Rep. Rachele Lamosao, Vice Chair

 From: Grassroot Institute of Hawaii
            Jonathan Helton, Policy Researcher


Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on HB337, which would increase Hawaii’s capital gains tax rate for individuals from 7.25% to 9% and increase the capital gains tax for corporations from 4% to 5%.

Whatever the motives of this bill’s proponents, the reality is that higher tax rates on capital gains could have the unintended effect of driving down investment and entrepreneurship in Hawaii.

Curtis Dubay, chief economist at the U.S. Chamber of Commerce, wrote in 2021 that “The economic models and past history all reach the same conclusion: When you significantly increase taxes on capital gains you get significantly less capital investment.”[1]

In other words, investors and entrepreneurs would be less likely to conduct business in Hawaii. This additional penalty would contribute to Hawaii’s already poor business environment. In 2022, CNBC ranked Hawaii as the 46th worst state in which to start a business.[2]

A 2021 study by the Baker Institute noted that “two decades of relatively slow economic growth call for increased innovation and faster diffusion of new technology, but higher capital gains tax rates will reduce innovation and technology diffusion.”[3] Hawaii residents, of course, need more innovation, not less, to prosper.

Additionally, higher capital gains taxes can discourage savings. The national Tax Foundation wrote in 2019 that, “When multiple layers of tax apply to the same dollar, as is the case with capital gains, it distorts the choice between immediate consumption and saving, skewing it towards immediate consumption because the multiple layers reduce after-tax return to saving.”[4]

In terms of generating tax revenues, a 2021 economic model from the University of Pennsylvania’s Wharton School found that a proposed hike in the federal capital gains tax rate would actually produce less revenue, since investors would be more likely to hold onto their investments so their heirs would inherit them at death, thus avoiding the increased capital gains tax.[5]

But just in general, tax increases are not a good idea for Hawaii’s economy, especially not now when it already has one of the highest tax burdens in the nation.[6] Hawaii’s population has been suffering a net decline for each of the past six years, with the state’s high cost of living and lack of employment opportunities being among the most cited reasons.[7]

Other issues to consider as you deliberate on this measure include the fact that:

>> Hawaii is predicted to enter an economic slowdown later this year.[8] Tax hikes might only exacerbate this slowdown, since entrepreneurs will be less likely to want to invest their capital — or “wealth assets,” as the case may be.[9]

>> Hawaii has a progressive income tax that taxes high-income earners at 11%, second only to California at 13.3%.[10] Hawaii’s top 1% already pays 24.9% of all income taxes in the state.[11]

>> Hawaii’s continuing population decline leaves remaining residents with a higher tax burden. Many residents leaving Hawaii move to states without income taxes. Washington, Nevada, Texas and Florida — four of the top five destinations for Hawaii residents moving to the mainland — do not have income taxes.[12]

>> State lawmakers increased taxes and fees substantially following the Great Recession of 2007-2008,[13] 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.

If Hawaii lawmakers want to help working families, they should abandon their reliance on taxes as a public policy tool, which has only succeeded in establishing Hawaii as the state with the highest cost of living.

Instead of attempting to solve the state’s economic problems through a tax on capital gains, lawmakers should focus on lowering the cost of living, such as by reducing income taxes, exempting medical services from the general excise tax, lowering fees and reducing regulations that limit opportunities and stifle economic growth.

Thank you for the opportunity to testify.

Jonathan Helton
Policy Researcher
Grassroot Institute of Hawaii

[1] Chris Dubay, “Raising the Capital Gains Tax: Who Does it Really Hurt?” U.S. Chamber of Commerce, May 13, 2021.

[2]America’s Top States for Business 2022: The full rankings,” CNBC, July 13, 2022.

[3] John Diamond, “The Economic Effects of Proposed Changes to the Tax Treatment of Capital Gains,” Baker Institute Center for Public Finance, Oct. 27, 2021.

[4] Erica York, “An Overview of Capital Gains Taxes,” Tax Foundation, April 26, 2019.

[5] John Ricco, “Revenue Effects of President Biden’s Capital Gains Tax Increase,” Penn Wharton Budget Model, April 23, 2021.

[6] Jared Walczak and Erica York, “State and Local Tax Burdens, Calendar Year 2022,” Tax Foundation, April 7, 2022.

[7] Maria Wood, “Where People from Hawaii Are Moving to the Most,” 24/7 Wall Street, Jan. 23, 2022.

[8] Annalisa Burgos, “Experts: Hawaii’s economy poised to slow down ‘significantly,’ but stop short of recession,” Hawaii News Now, Jan. 22, 2023.

[9] Aaron Hedlund, “How Do Taxes Affect Entrepreneurship, Innovation, and Productivity?” Center for Growth and Opportunity at Utah State University, Dec. 23, 2019; Ergete Ferede, “The Effects on Entrepreneurship of Increasing Provincial Top Personal Income Tax Rates in Canada,” Fraser Institute, July 10, 2018; Robert Carroll, Douglas Holtz-Eakin, Mark Rider and Harvey S. Rosen, “Personal Income Taxes and the Growth of Small Firms,” National Bureau of Economic Research, Oct. 2000.

[10] Timothy Vermeer and Katherine Loughead, “State Individual Income Tax Rates and Brackets for 2022,” Tax Foundation, Feb. 15, 2022.

[11]Hawaii Individual Income Tax Statistics,” Hawaii Department of Taxation report for Tax Year 2020, Sept. 29, 2022, Table 13A.

[12] Katherine Loughead, “How Do Taxes Affect Interstate Migration?” Tax Foundation, Oct. 11, 2022.

[13]Tax Acts (by Year),” Tax Foundation of Hawaii, accessed Jan. 30, 2023.

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