The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Finance on Feb. 24, 2025.
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Feb. 24, 2025, 10 a.m.
Hawaii State Capitol
Conference Room 308 and Videoconference
To: House Committee on Finance
Rep. Kyle T. Yamashita, Chair
Rep. Jenna Takenouchi, Vice-Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: HB476 HD1 — RELATING TO CAPITAL GAINS TAX
Aloha Chair Yamashita, Vice-Chair Takenouchi and other members of the Committee,
The Grassroot Institute of Hawaii opposes HB476 HD1, which would increase the maximum capital gains tax rate for individuals from 7.25% to 9% and the capital gains tax rate for corporations from 4% to 5%.
Hawaii is already ranked among the worst states in which to start a business,[1] and we are concerned a higher capital gains tax could discourage business expansion and innovation.
There are a number of sound fiscal reasons for taxing capital gains at a lower rate than income, if they are to be taxed at all.
For one, it reflects the fact that capital gains are not indexed for inflation, thus the lower rate is intended to offset the fact that some portion of the gain represents inflation rather than real returns.[2]
In addition, high capital gains taxes create a “lock in” effect in which investors delay the sale of investments in order to avoid tax repercussions. This reduces economic growth by discouraging diversification and the movement of capital within the state.[3]
That is why 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: “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.”[4]
In other words, investors and entrepreneurs would be less likely to conduct business in Hawaii as an increase in the capital gains tax would contribute to Hawaii’s already poor business environment.
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.”[5]
Hawaii residents, of course, need more innovation, not less, to prosper.
In addition, higher capital gains taxes can discourage savings. The national Tax Foundation wrote in 2019: “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.”[6]
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.[7]
In fact, Hawaii legislators should be skeptical of optimistic tax revenue projections achieved via a capital gains tax hike. A study from the Congressional Budget Office on how taxes affect the decision to realize gains concluded that such decisions are very responsive to changes in taxation.
The study found a persistent elasticity of -0.79,[8] which means that a 10% cut in capital gains taxes would increase realizations by 7.9%. Thus, a cut in the capital gains tax would have minimal or even a positive effect on tax revenues.
In fact, in 2007 the IRS collected $122 billion at a 15% capital gains tax rate compared to only $26.7 billion in 2007 dollars at the 40% rate in 1977, [9] This was a significant increase even after adjusting for inflation and other relevant factors.
Conversely, an increase in the capital gains tax would net significantly less in tax revenues than what might be calculated from a static model.
In short, Hawaii’s residents and businesses need a break from new taxes, tax increases, fees and surcharges. This is not the time to make Hawaii a more expensive place to live and do business.
Thank you for the opportunity to testify.
Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] Adam McCann, “Best & Worst States to Start a Business (2025),” WalletHub, Jan. 20, 2025.
[2] Stephen Entin, “Getting “Real” by Indexing Capital Gains for Inflation,” Tax Foundation, March 6, 2018.
[3] Jane Gravelle, “Capital Gains Taxes: An Overview of the Issues,” Congressional Research Service, May 24, 2022, p. 17.
[4] Chris Dubay, “Raising the Capital Gains Tax: Who Does it Really Hurt?” U.S. Chamber of Commerce, May 13, 2021.
[5] John Diamond, “The Economic Effects of Proposed Changes to the Tax Treatment of Capital Gains,” Baker Institute Center for Public Finance, Oct. 27, 2021.
[6] Erica York, “An Overview of Capital Gains Taxes,” Tax Foundation, April 26, 2019.
[7] John Ricco, “Revenue Effects of President Biden’s Capital Gains Tax Increase,” Penn Wharton Budget Model, April 23, 2021.
[8] Tim Dowd, et al., “New Evidence of the Tax Elasticity of Capital Gains,” Congressional Budget Office, June 2012, p.17.
[9] Daniel Block and William McBride, “Why Capital Gains are taxed at a Lower Rate,” Tax Foundation, June 27, 2012.
