Two Tax Bills This Year

by Tom Yamachika, President, Tax Foundation Hawaii

Our Legislature has reconvened and has adjourned for the year. If you blinked and missed it, you probably are not alone. This year, there was a huge focus on passing only essential items. As a result, only 86 bills passed the Legislature this year while in a typical year 250-300 bills are sent up.

Source: Capitol.hawaii.gov reports compiled by Tax Foundation of Hawaii.

If you wanted to see a new exemption or tax credit, it didn’t happen. If you were shuddering to think that new tax increases were on the table, they didn’t happen either. Only two of the tax bills made it up to the Governor this year.

One bill that went up changed the renewable energy credit by disallowing it for solar farm projects of 5 MW or more that started in 2020, but providing that tax treatment would be grandfathered for certain projects pending approval as of the end of last year.

The second bill was sponsored by the Department of Taxation. Every year, the Department prepares a bill to specify which of the many changes to the federal income tax law get reflected in the Hawaii income tax law. The usual practice is that the federal changes in the previous calendar year, in this case 2019, are considered in the current legislative session. Indeed, a bill to do just that was introduced at the request of the Administration and was passed out of the Senate. Then the pandemic hit and lots of things happened, including the passage of the federal CARES Act. Some testifiers, including the Tax Foundation of Hawaii, urged the Legislature to adopt key provisions of the CARES Act although it became law in 2020. The Department, in testimony, proposed to adopt a few provisions and leave others on the cutting room floor. Without much fanfare or public discussion (the Capitol was still closed), the House adopted those provisions and the Senate agreed to them.

As a result, Paycheck Protection Program (PPP) loan forgiveness will not be recognized as income, federal stimulus payments will not be recognized as income, the limits on people taking out retirement plan loans will be relaxed, and the new treatment of charitable deductions will be expanded to the same extent as in the CARES Act. However, lawmakers did not adopt the provisions of the CARES Act that allowed businesses to monetize their prior net operating losses by allowing them to be applied against other income and by allowing the losses to be carried back to previous taxable years were not adopted. At the national level, it was thought that those provisions would help struggling businesses to weather the COVID-19 economic shock.

We don’t know why some provisions were adopted while others weren’t. The Department of Taxation’s testimony was only that it recommended the changes, but it had no discussion or reasoning behind its recommendations. Public discussion and debate could have brought out the Department’s reasons, which the legislators could then weigh against the concerns of businesses.

The results of this legislative session for tax bills were perhaps understandable, but the process left something to be desired. Is this going to be the new normal? We certainly hope not.