HB954 HD2: Indexing state income tax to inflation would prevent upward bracket creep

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Senate Committee on Ways and Means on April 3, 2023.

April 3, 2023
9:40 a.m.
Conference Room 211 & Videoconference

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

From: Grassroot Institute of Hawaii
           Ted Kefalas, Director of Strategic Campaigns


Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on HB954 HD2, which would increase the state earned income tax credit; increase the state income tax brackets, personal exemption and standard deduction; and index the state income tax brackets, standard deduction and personal exemption to inflation.

Increasing the personal exemption from $1,144 to $2,288 — a 100% increase — would lower the pre-tax income of all Hawaii residents. Likewise, increasing the standard deduction would provide tax relief, though mainly to lower- and middle-income households.

Indexing the state income tax brackets, personal exemption standard deduction to inflation — as suggested by the 2020-2022 Tax Review Commission — would ensure that this tax relief automatically increases in inflationary times.[1]

No longer would employees be punished simply for receiving a cost-of-living adjustment. Many families that did not receive pay raises in the previous year might also benefit if tax brackets increase and they are moved into a lower bracket.

There is precedent for indexing tax laws to inflation. The federal government already does this for tax brackets, the standard deduction, the EITC and certain exclusions.[2]

For example, the IRS reported that for tax year 2023, the standard deduction for married couples filing jointly increased by $1,800 due to inflation.[3]

Regarding the earned income tax credit, we would like to remind the committee that the federal EITC — and therefore, Hawaii’s EITC — contains a significant amount of so-called “improper payments.”

The U.S. Treasury Department’s Inspector General for Tax Administration estimated that 28% of EITC payments in 2021 — equivalent to $19 billion — were improper.[4]

Previous iterations of the “Green Affordability Plan” included penalties for fraudulent tax credit claims. HB954 HD2 does not include those penalties, and it is unclear whether they would have served as an effective deterrent to individuals who intentionally or unintentionally file improper claims.

In general, we commend the governor for submitting this measure and the committee for considering it, as it could prove essential in making Hawaii more affordable for years to come.

Thank you for the opportunity to submit our comments.


Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii

[1] 2020-2022 Report of the Tax Review Commission,” Dec. 20, 2021, p. 23.
[2] Robert McClelland, “What The IRS Inflation Adjustment Really Means,” Tax Policy Center, Oct. 21, 2022.
[3]IRS provides tax inflation adjustments for tax year 2023,” U.S. Internal Revenue Service, Oct. 18, 2022.
[4]Programs Susceptible to Improper Payments Are Not Adequately Assessed and Reported,” Inspector General for Tax Administration, U.S. Treasury Department, May 6, 2022, p. 3.

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