The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Finance on March 1, 2023.
March 1, 2023
Conference Room 423
To: House Committee on Finance
Rep. Kyle Yamashita, Chair
Rep. Lisa Kitagawa, Vice Chair
From: Grassroot Institute of Hawaii
Joe Kent, Executive vice president
RE: HB1362 HD1 — RELATING TO PASS-THROUGH ENTITY TAXATION
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on HB1362 HD1, which would allow the members of partnerships and S corporations to elect to pay the state individual income tax at the pass-through entity level.
Essentially, this bill would allow members of certain Hawaii businesses to deduct their state income tax liabilities from their federal income tax liabilities.
In the past, federal law allowed for these “state and local tax” (SALT) deductions. For example, partnership members who paid $40,000 in state income taxes could deduct that figure from their federal income tax.
In 2017, however, the federal Tax Cuts and Jobs Act changed the law to impose a $10,000 cap on such deductions. This cap will expire in 2025 unless Congress extends it.
In response, several states passed legislation to allow members of pass-through entities, such as partnerships and S corporations, to pay their income taxes at the entity level instead of the personal level. These laws created an avenue through which members of pass-through entities could still deduct their state income taxes from their federal income taxes. To date, 29 states have passed such legislation.
According to an analysis from The Wall Street Journal, these laws are creating big savings for businesses.
“Business owners are likely saving more than $10 billion annually in federal taxes through state laws that circumvent the $10,000 cap on state and local tax deductions,” the newspaper reported in 2022.
If Hawaii adopts this measure, probably not all businesses would make use of it. The bill provides that businesses can voluntarily elect to use or pass on the new policy on an annual basis.
This provision makes sense, as pass-through entity taxation poses businesses and their accountants with several financial questions and not all partnership and S corps may opt to use it. However, this measure would give business owners a valuable new tool in reducing their overall tax burden — all at no cost to the state.
Currently, Hawaii is one of the worst states for entrepreneurs. A 2022 CNBC analysis ranked Hawaii as the 46th worst state in which to start a business. This bill would help offset some of the state’s high tax burden and make it easier to start and expand a business in Hawaii, providing additional employment opportunities and fueling the economy.
Thank you for the opportunity to testify.
Executive vice president
Grassroot Institute of Hawaii
 “IRS permits SALT deduction pass-through workarounds,” GrantThornton, Nov. 13, 2020; “State and Local Tax (SALT) Deduction,” Tax Foundation, accessed Feb. 28, 2023.
 “States with Enacted or Proposed Pass-Through Entity (PTE) Level Tax,” American Institute of CPAs, Jan. 24, 2023.
 Richard Rubin, “States Help Business Owners Save Big on Federal Taxes With SALT-Cap Workarounds,” Wall Street Journal, May 31, 2022.
 Bruce Wood, “SALT Workarounds Carry Consequences for Tax Affected Earnings,” Bloomberg Tax, Sept. 23, 2022.
 “America’s Top States for Business 2022: The full rankings,” CNBC, July 13, 2022.