The following testimony was presented Feb. 2, 2023, by the Grassroot Institute of Hawaii to the Senate Committee on Judiciary.
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Feb. 2, 2023
10 a.m.
Conference Room 016 and Videoconference
To: Senate Committee on Judiciary
Senator Karl Rhoads, Chair
Senator Mike Gabbard, Vice Chair
From: Grassroot Institute of Hawaii
Joe Kent, Executive Vice President
RE: SB925 — RELATING TO A WEALTH ASSET TAX.
Comments Only
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on SB925, which would establish a wealth asset tax of “1% on the state net worth of each individual taxpayer who holds $20 million or more in assets in the state.”
In this proposal, “assets” refers to the “worldwide net worth” of the taxpayer and includes items such as real estate, stock, business interests, business funds and art and collectibles.
The intention of this bill might be noble, but its practical effects would leave much to be desired. Wealth taxes are difficult to administer and can cause economic damage.
To the first point, the state Department of Taxation would have to figure out how to accurately estimate the entire net worth of wealthy individuals on a year-to-year basis, at a cost yet to be determined. How much money would the department need to hire appraisers and accountants to estimate the tax burden of such individuals?
The bill also seems to assume that those who would be taxed will do nothing in response. In fact, such a tax likely would incentivize those same individuals to adopt creative accounting strategies aimed at lowering their net worths, so they could avoid having to pay the tax.
To the second point — about potential economic damage — a wealth asset tax also could encourage high net worth individuals to move their assets out of Hawaii to states that don’t have such a tax, which in turn would reduce business investment in Hawaii and curb job growth.
A study of European wealth taxes in the 1980s and 1990s discovered that such taxes “dampen economic growth.” And out of 13 European countries that employed wealth taxes before the turn of the century, only three still have them. The other 10 abandoned them because of their high administrative costs, inefficiency and economic harm.[1] [2]
Tax increases in general 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.[3] 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.[4]
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.[5] 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.[6]
>> Hawaii has a progressive income tax that taxes high-income earners at 11%, second only to California at 13.3%.[7] Hawaii’s top 1% already pays 24.9% of all income taxes in the state.[8]
>> 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.[9]
>> State lawmakers increased taxes and fees substantially following the Great Recession of 2007-2008,[10] 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 the wealthy, 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.
Sincerely,
Joe Kent
Executive Vice President
Grassroot Institute of Hawaii
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[1] Jared Walczak, “Wealth Tax Proposals Are Back as States Take Aim at Investment,” Tax Foundation, Jan. 17, 2023; Allison Scharger and Beth Akers, “Issues 2020: What’s Wrong with a Wealth Tax,” Manhattan Institute, Oct. 8, 2020.
[2] Asa Hansson, “Is the wealth tax harmful to economic growth?” World Tax Journal, 2010.
[3] Jared Walczak and Erica York, “State and Local Tax Burdens, Calendar Year 2022,” Tax Foundation, April 7, 2022.
[4] Maria Wood, “Where People from Hawaii Are Moving to the Most,” 24/7 Wall Street, Jan. 23, 2022.
[5] Annalisa Burgos, “Experts: Hawaii’s economy poised to slow down ‘significantly,’ but stop short of recession,” Hawaii News Now, Jan. 22, 2023.
[6] 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, October 2000.
[7] Timothy Vermeer and Katherine Loughead, “State Individual Income Tax Rates and Brackets for 2022,” Tax Foundation, Feb. 15, 2022.
[8] “Hawaii Individual Income Tax Statistics,” Hawaii Department of Taxation report for Tax Year 2020, Sept. 29, 2022, Table 13A.
[9] Katherine Loughead, “How Do Taxes Affect Interstate Migration?” Tax Foundation, Oct. 11, 2022.
[10] “Tax Acts (by Year),” Tax Foundation of Hawaii, accessed Jan. 30, 2023.
