Income tax reform would make Hawaii more affordable

by Keli'i Akina, Ph.D., President/CEO Grassroot Institute, August, 2023

We know that Hawaii has the highest cost of living in the United States. It’s one of the reasons why so many of our friends and family have left for the mainland.

So why does the state government increase the cost of living through sky-high tax rates?

According to an analysis released by the Hawaii Department of Taxation, Hawaii has the second-highest income tax burden in the country. And the news gets worse from there.

You might assume that Hawaii’s high tax burden only affects the top income brackets. After all, much of the rhetoric about taxation in Hawaii is phrased in terms of “fairness” or taxing the rich. However, the analysis shows that Hawaii residents of all income levels pay high tax rates.

For example, a family of four earning Hawaii’s median income of $88,005 a year would have a state income tax bill of $5,086. At that income level, only Oregon families face a higher tax burden.

How does even an average Hawaii family get stuck with such a high-income tax bill? There are a few factors that make Hawaii’s income taxes especially burdensome.First, there’s the fact that the state’s tax rates tied to various income levels increase relatively quickly — and at lower income levels than elsewhere. For example, for a single filer, the Hawaii income tax rate is 8.25% at only $48,000 annual income.

Many states don’t have tax rates that high, even at their top income levels — if they have an income tax code at all.

Among those that do, the income threshold for a tax rate over 8% tends to be much higher. For example, in New York, the tax rate doesn’t exceed 6.85% until single filers make more than $1.07 million — and then it jumps to 9.65%.

To put this into perspective, consider that a New York millionaire pays less in state income taxes than someone making between $175,000 and $200,000 in Hawaii.

In addition, Hawaii’s standard deduction and personal exemptions are also comparatively low. This means that we don’t just pay higher tax rates, but more of our incomes are subject to that taxation as well.

So what can be done? Hawaii desperately needs to reform its income tax code by lowering the tax rates and reducing the burden across the board. That would go a long way toward lowering the cost of living and making Hawaii more affordable for everyone.

As a bonus, income tax reform would also help make Hawaii more business-friendly, as the state’s high-income taxes discourage investment and entrepreneurship.

Thankfully, there have been signs of hope. Earlier this year, Gov. Josh Green unveiled a plan to increase the standard deduction and double the personal exemption for the state income tax. Dubbed the “Green Affordability Plan,” the proposal also would have indexed the deduction, exemption and income tax brackets to inflation.

Unfortunately, the Legislature rejected those proposals, passing only a few increased tax credits instead. Those credits will indeed help some Hawaii taxpayers, for which I am grateful, but their impact won’t be nearly as significant as the larger reform package the governor originally proposed.

Gov. Green has indicated he still wants to enact broad tax relief for Hawaii residents, so maybe next year Hawaii taxpayers will have something more significant to cheer about — if only the Legislature will go along.

Hawaii residents are tired of high tax bills and a crippling cost of living — as demonstrated by their continuing exodus to the mainland. It should be clear by now that it is time to pass meaningful tax reform to decrease our income tax burden.

If lawmakers truly want a Hawaii that’s affordable for all, that’s one way to do it.

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