SB2525: Carbon tax would be toxic for Hawaii economy

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Senate Committees on Energy, Economic Development and Tourism and Agriculture and Environment on Jan. 30, 2024.

Jan. 30, 2024, 1 p.m.
Hawaii State Capitol
Conference Room 229 and Videoconference

To: Senate Committee on Energy, Economic Development and Tourism
      Sen. Lynn DeCoite, Chair
      Sen. Glenn Wakai, Vice-Chair

     Senate Committee on Agriculture and Environment
     Sen. Mike Gabbard, Chair
     Sen. Herbert “Tim” Richards, III, Vice-Chair

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


Comments only

Aloha Chair DeCoite, Vice-Chair Wakai, Chair Gabbard, Vice-Chair Richards and members of the Committees,

Thank you for considering SB2525, which would increase the environmental response, energy and food security tax and create a “carbon cashback” tax credit.

The tax credit provision of this bill would help offset some of the economic harm it would inflict, but research by economists affiliated with the Economic Research Organization at the University of Hawai‘i suggests a carbon tax would cause “a reduction of total economic output of 0.6% in 2045 relative to the baseline and the contraction reduces the demand for imports.”[1]

The economists pointed out that under a carbon tax, “non-tourism exports experience the largest relative impact with a decline of almost 5% in 2025 and 5.7% in 2045. The disproportionate impact occurs because prices of export goods rise relative to the price of goods produced outside of Hawai‘i, causing a loss of competitiveness for Hawai‘i’s non-tourism exports, such as cut flowers and other agricultural products.”

Furthermore, the tax increases proposed in this bill are sharp — going from $1.05 per barrel in 2034 to $40.11 per barrel in 2035 — and infinite, increasing by $1.26 every year after 2035.

The proposal outlined in this bill appears to be based on the idea that it is possible to reimburse Hawaii residents for the economic impact of a massive tax hike — as though taxes were simply a question of money-in, money-out, with the state government operating as a type of bank. However, such an approach deeply underestimates the impact of tax hikes, especially energy tax increases, on the economy as a whole.

Higher fuel taxes definitely would make it harder for businesses to survive, which could discourage business investment and rebound on Hawaii employment. Many Hawaii companies are still struggling from the effects of the COVID-19 lockdowns and the recent inflationary environment.

Looking at the even broader picture, one must consider that 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.[2] Consider these points:

>> Hawaii’s population has been declining for the past six years.[3] Tens of thousands of Hawaii residents have moved to the mainland over the past six years — and mainly to states without income taxes, such as Washington, Nevada, Texas and Florida.[4] Their departure from the islands is not only emotionally distressing, but economically depressing as well.

>> Fewer people remaining means fewer people to work at our private businesses, or even staff our government agencies. It also means fewer people to help pay for Hawaii’s ever-increasing tax burden.

>> Further, higher taxes for those that remain is more fuel for the exodus of talent and capital — our friends, neighbors and family — to places that are more affordable. It’s a downward spiral economically fostered by the relentless upward spiral of more and more taxes.

>> To put our tax system in context, Hawaii taxes high-income earners at 11%, second only to California at 13.3%.[5] Hawaii’s top 1.5% of taxpayers already pay 34.9% of all income taxes in the state.[6]

>> Finally, Hawaii is suffering from a stagnant economy, and both the Economic Research Organization at the University of Hawai‘i[7]  and the state Department of Business, Economic Development and Tourism[8] have predicted continued slow economic growth in 2024. Tax hikes could exacerbate this slowdown, since entrepreneurs will be less likely to want to invest their capital — or “wealth assets,” as the case may be[9] — in Hawaii’s economy.

In short, Hawaii’s residents and businesses need a break from new taxes, tax increase, fees and surcharges. This is not the time to make Hawaii a more expensive place to live and do business. A carbon tax will only contribute to the high cost of living, especially the state’s high energy and gas prices. This effect cannot be mitigated by a rebate and would serve only to drive more residents out of our state.

Thank you for the opportunity to testify.

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii

[1] Makena Coffman, Paul Bernstein, Maja Schjervheim, Sumner La Croix and Sherilyn Hayashida, “Economic and GHG impacts of a US state-level carbon tax: the case of Hawai‘i,” Climate Policy, March 29, 2022, p. 7.

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

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

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

[5] Timothy Vermeer, “State Individual Income Tax Rates and Brackets for 2023,” Tax Foundation, Feb. 21, 2023.

[6]Hawaii Individual Income Tax Statistics,” Hawaii Department of Taxation report for Tax Year 2021, August 2023, Table 12A.

[7] Carl Bonham, Byron Gagnes, Steven Bond-Smith, et al., “State Facing Headwinds as Maui Recovery Begins,” Economic Research Organization at the University of Hawai‘i, Dec. 15, 2023.

[8] Hawaii Department of Business, Economic Development, and Tourism, “Hawaii Economic Growth Remains Low for 2024 as Recovery Continues,” Dec. 11, 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, October 2000.

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