The Enola Gay Has Left the Hangar

by Tom Yamachika, President, Tax Foundation Hawaii

What we have been seeing at the Legislature in terms of bills proposing new taxes has been relatively tame.

Until now, that is.

Senate Bill 56, with the ominous title “Relating to Revenue Generation,” has been granted its first hearing by the Senate Ways and Means Committee. It has officially started its journey through the legislative gauntlet.

Why do I call this bill the Enola Gay? You might remember from the history books that Enola Gay was the name of the aircraft that dropped the first atomic bomb on the City of Hiroshima in World War II. Here, of course, the bill’s destination isn’t Japan; it’s the pocketbooks of us the taxpayers.

Here’s what the payload contains.

There is an income tax hike. The top income tax rate in the bill is 13% for single filers with more than $250,000 in taxable income, or for couples with more than $500,000 taxable income. The previous top tax rate was 11%.

The top tax rate on capital gains is hoisted to 11% from 7.25%.

The new tax brackets also are designed to get rid of the effects of low tax brackets on higher income taxpayers.

Corporations, which used to be subject to tax rates of 4.4% to 6.4%, are taxed at a flat rate of 9.6%.

Next, we go to general excise and use tax. The bill suspends, for two years beginning July 1, 2021, twenty different exemptions that are now allowed under the GET Law and six different exemptions that are now allowed under the Use Tax Law. This hearkens back to the same exemption suspension that was in effect exactly ten years prior to suspension period now proposed.

And, finally, we have conveyance tax. The tax rate stays the same for properties sold for $1 million and under but is doubled for those selling for more. And if the property is a condominium or single-family residence for which the purchaser is ineligible for a county homeowner’s exemption, the tax is increased further; for such properties with a value of $10 million or more, the tax goes from 1% to 2.5%.

The proposed suspension of exemptions lasts two years. All of the other rate increases proposed are permanent.

The preamble to the bill trying to justify the increases says that we are in a pandemic and state government needs ” to generate revenue to allow the State to meet its strategic goals, avoid furloughs and layoffs for state workers, and prevent disruptions to essential government services.”

Pandemics don’t last forever, however. These tax increases do.

Another passage in the bill’s preamble recites that “the university of Hawaii economic research organization has found that every $1 in state salary reductions results in a $1.50 decrease in overall economic activity.”

And what then happens with all the jobs outside of the public sector that are rapidly disappearing because businesses big and small can’t make ends meet? Are those simply ignored in thinking about economic activity? And I repeat, in the private sector we are not simply talking about salary reductions and furloughs. Those are happening too, but we are seeing layoffs and business closures.

Lawmakers, are you going to let this Enola Gay drop the bomb on an economy already reeling from the pandemic? And taxpayers, if you have opinions on the subject that you want your lawmakers to know about, now may be a very good time to let your voices be heard.