Some Winners and Losers in the 2023 Session

by Tom Yamachika, President, Tax Foundation Hawaii

Here are some of the bills that survived the grueling Conference Committee process.  Bills with blue titles are probably on their way up to Governor Green’s office to be signed or vetoed.  Those with red titles are dead for this session.

The Tax Relief Shell Game Ends, and Broad-Based Relief Didn’t Make It – The Governor’s centerpiece bill, the “Green Affordability Plan” income tax bill (SB 1347 / HB 1049), proposed enhancements in several different tax credits as well as broad-based relief, specifically long-needed adjustments in the state’s tax brackets, personal exemption amount, and standard deduction amount.  The Governor also proposed indexing these amounts for inflation like IRS and many states do.  The House Finance Committee split the provisions in this bill and put them in three bills that went over to the Senate; the Senate Ways & Means Committee reshuffled them yet again.  The final product was HB 954, which substantially enhances the household and dependent care services credit, the refundable earned income tax credit, and the refundable food/excise tax credit…but ONLY for five years.  All enhancements expire at the beginning of 2028.  Also, there will be no indexing for inflation.  The bracket relief, standard deduction, and personal exemption enhancements were dropped in the round file.  House Speaker Saiki was quoted as saying that this happened because broad-based relief was “too complicated.”

Teacher Tax Credit for Classroom Expenses Fails the Test – The Green Affordability Plan included a tax credit for teachers who spend their own money for classroom expenses.  The “tax relief shell game,” described above, shunted this credit to HB 1327.  After nominally passing the House and Senate, neither chamber appointed conferees to work out the differences between the chambers’ respective versions.  At least the teachers are getting some nice raises, so maybe they won’t feel too bad about this one.

Last-Minute Ploy to Shake Up Production Credit Falls to Cutting Room Floor – HB 1373 started off as a proposal for a workforce incentive rebate program for smaller productions that might have had difficulty navigating the red tape needed to earn the movie / TV production credit.  The Senate Ways and Means Committee then inserted provisions establishing a film studio credit, and substantially changing the way the production credit works – of course, without a public hearing on those provisions.  (There were other problems with the bill, too, that we wrote about in an article being published this week.)  The House failed to appoint conferees, and we don’t have to worry about the problems in this bill anymore.

Hawaii Gets on Board with State Tax Deduction Workaround – For federal tax purposes, the Tax Cuts and Jobs Act (TCJA) capped the state and local tax (SALT) deduction for individuals at $10,000 for the 2018-2025 tax years. The limit generally applies to any SALT liability, including tax on income received from a partnership or S corporation. This limitation causes the most hardship in states with higher income tax rates, a classification to which Hawaii most definitely belongs.

In response, several states enacted laws imposing tax directly at the passthrough entity level.  The entity, not the individual, pays the tax and is not burdened with the $10,000 limit.  The IRS recently issued guidance saying that this strategy works and is legitimate.  SB 1437 would allow partnerships and S corporations to elect to pay tax directly to the State.  Sole proprietors and single member LLC’s, however, get left out of the fix, at least for now.

Maui Given Another Chance to Jump on the GET Surcharge Canoe – HB 1363 would allow a county that hasn’t yet adopted a GET surcharge (namely Maui) to get on board this year.  They want to spend the money on housing infrastructure instead of transportation, so the bill lets them do so.  To be fair to the other counties who already adopted surcharges, those counties are allowed a window to amend their ordinances to allow for spending their surcharge money on housing infrastructure as well.

Green Impact Fee Hits the Wall – The Governor and several legislators proposed a visitor impact fee, which, in SB 304, was phrased in terms of making nonresidents pay a fee of $50 for a year’s license to see our parks, beaches, forests, and other natural goodies.  The devil was in the details, however – DLNR, quite understandably, didn’t have a clue as to how to enforce payment.  Conferees met a few times but couldn’t agree on a solution.