Testimony: Fuel tax damage will far outweigh measly tax credit
by Grassroot Institute of Hawaii, February 24, 2022
The following testimony was submitted by the Grassroot Institute of Hawaii for consideration Feb. 25, 2022, by the House Committee on Finance.
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To: House Committee on Finance
Rep. Sylvia Luke, Chair
Rep. Kyle T. Yamashita, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: HB2278 HD1 — RELATING TO ENERGY
Comments Only
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on HB2278, HD1, which would create a refundable income tax credit in the attempt to offset a massive increase in the tax on petroleum products and fossil fuels.
If enacted, this bill also would create an income tax credit that would be stepped up from $65 for single taxpayers and $30 for those filing jointly in 2023 to $480 plus an additional child credit of $240 for joint taxpayers in 2035 and beyond.
This tax credit is meant to offset a barrel tax that will go from $1.05 currently to between $3.78 and $6.46, depending on the type of fuel by 2023. Gasoline will be taxed at $5.27.
By 2035, that tax will range from $21.84 to $42.24, depending on fuel type. The gasoline tax in 2035 will be $33.16 a barrel.
Energy taxes will also increase from the current 19 cents per 1 million BTUs to $1.29 for coal and 80 cents for natural gas in 2023. By 2035, that tax will be $8.54 for coal and $4.80 for natural gas.
The proposal outlined in this bill appears to be based on the faulty 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, most especially increases in energy taxes, on the economy as a whole.
Despite the tax refund included in the proposal, this bill would raise the cost of living in Hawaii. This bill is, in fact, a continuation of the policy of social-planning-via-taxation that has helped make Hawaii one of the most expensive states in the nation.
It should be noted that local businesses will have an especially difficult time dealing with the soaring energy costs that will come from this bill. Hawaii businesses are still struggling to recover from the effects of the coronavirus lockdowns. Many have closed their doors forever; others are barely hanging on. Raising fuel taxes will make it more difficult to survive and discourage new business and investment.
It is obvious that the real intent of this tax hike is to punish and change behavior rather than to increase revenues. However, the experience of the past year demonstrates that there are far better ways to generate more tax revenues than by levying higher taxes on Hawaii’s struggling residents and businesses.
In our rebounding economy, even small economic gains have big effects. Thus, policymakers should focus on growing the economy, which would bring in more state revenues than a tax hike — and without any negative effects on business.
We are gravely concerned about the impact of the tax hikes proposed in this bill. Hawaii residents are already among the most taxed in the country; the state has the second–highest overall tax burden in the U.S. That high tax burden contributes to Hawaii’s cost of living and is one of the reasons why so many Hawaii residents have been leaving in search of greater opportunities elsewhere.
Given the state’s already-high tax burden, there is never a good time to raise taxes. But this proposal appears to ignore challenges that our businesses and residents have had to face over the past two years. Hawaii’s economy will take years to recover from the pandemic and lockdowns. The last thing Hawaii residents and businesses need at this point is a tax hike.
There are myriad reasons we should be wary of implementing tax hikes. Here are just a few:
>> Hawaii cannot sustain a hike in taxes since its already-damaged economy was hit harder by the lockdowns than any other state in the nation.[1]
>> State lawmakers increased taxes and fees substantially following the Great Recession of 2007-2008. despite a windfall in revenues from an economic boom over the past decade.[2] Taxes and fees ballooned on motor vehicles, transient accommodations, estates, fuel, food, wealthy incomes, property, parking and businesses.
>> Hawaii’s population reduction of 32,237 people since fiscal 2016[3] has left Hawaii’s remaining taxpayers with a greater tax burden.
>> Hawaii already has a regressive general excise tax that disproportionately hits the poor.[4]
>> Hawaii has a progressive income tax that taxes high-income earners at 11%, second only to California at 13.3%.[5] Hawaii’s top 1% already pays 23% of all income taxes in the state.[6]
It cannot be understated how much of an impact this bill, if enacted, will have on Hawaii’s cost of living — a difference that cannot be captured in a simple tax refund.
Every business, from doctor offices to grocery stores, will have to account for the higher energy costs and fuel costs, translating into higher transportation and delivery costs, that will result from this tax. Those costs will become part of their overhead and force them to raise prices accordingly.
Even if Hawaii residents could trust that the refund would not disappear and the tax not go even higher, the refund in this bill cannot come close to undoing the economic damage that this tax hike will do to the state.
In this session, we have heard a lot about helping lower income families, but this bill seems designed to make Hawaii even more unaffordable. If enacted, this bill will cause more businesses to close and more locals to leave Hawaii.
If policymakers are serious about helping working families, they should abandon the high-tax approach that has already established Hawaii as the state with the highest cost of living.
Instead, they should focus on lowering those costs by reducing income taxes, creating an exemption to the general excise tax for groceries and medical services, lowering fees and reducing regulations that limit opportunities and stifle economic growth.
Thank you for the opportunity to submit our comments.
Sincerely,
Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] Dave Segal, “Hawaii’s unemployment rate hit nation-high 15% in September,” Honolulu Star-Advertiser, Oct. 20, 2020.
[2] “Tax Acts (by Year),” Tax Foundation of Hawaii, accessed Feb. 8, 2021.
[3] “Annual Estimates of the Resident Population for the United States, Regions, States, the District of Columbia and Puerto Rico: April 1, 2010 to July 1, 2020 (NST-EST2020)” U.S. Census Bureau, Population Division, December 2020 and “U.S. Census data,” “Annual Estimates of the Resident Population for the United States, Regions, States, the District of Columbia and Puerto Rico: April 1, 2020 to July 1, 2021,” U.S. Census Bureau, Population Division, accessed Jan. 3, 2022.
[4] “Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index: “Sales Tax Burden,” American Legislative Exchange Council, 2021. Note that Hawaii does not have a sales tax, but a state general excise tax that is levied on almost all goods and services, and imposed multiple times throughout the production chain.
[5] Katherine Loughead, “State Individual Income Tax Rates and Brackets for 2020,” Tax Foundation, Feb. 4, 2020.
[6] “Hawaii Individual Income Tax Statistics,” Hawaii Department of Taxation, December 2020, Table 13A.