Blue Hawaii takes the plunge on tax cuts

The Aloha State is poised to enact desperately needed reforms that will ease the tax burden on working families

by Keli'i Akina, Ph.D., President/CEO Grassroot Institute  (Commentary first published June 3, 2024, by National Review.)

In a deep-blue bastion where seldom is heard a peep of pushback against tax hikes, Hawaii legislators surprised everybody last month by unanimously approving a bill that is being heralded as the biggest tax cut in state history.

The proposal is almost certain to be signed into law by Gov. Josh Green, since it was part of his so-called Green Affordability Plan, which he introduced last year during his first year in office. [The tax-cut was signed into law by Gov. Green on June 3.]

Under the proposal, a family making the median income of $91,010 could see its taxes fall almost 70 percent by 2031. And low-income joint filers, who once paid among the highest state income taxes in the nation for their income brackets, now stand to pay the lowest out of the 42 jurisdictions — 41 states and the District of Columbia — that impose income taxes.

In general, Hawaii taxpayers are looking at a savings of almost $5 billion over the next seven years, as Hawaii moves from having the second-highest state income-tax burden for median-income taxpayers to the third-lowest.

Currently, Hawaii’s tax structure is quite complex. It features twelve brackets, with the lowest starting on any income between zero and $4,800, and a top marginal rate of 11 percent that applies to any income over $400,000 for joint filers.

The changes in the new law include almost quintupling the standard deduction, from $4,400 to $24,000, and gradually raising the points at which higher rates apply.

The first reform means that taxpayers who opt for the standard deduction will pay no state income tax on the first $24,000 of their income; the second means that taxpayers will see more of their income taxed at the lower rates — and be less likely to be pushed into higher tax brackets simply because they were given pay raises to keep up with inflation.

The lowest tax bracket is set to increase from $4,800 to $38,400, and the other brackets will grow in similar fashion. The top marginal rate will kick in at all income earned above $950,000.

These reforms are an amazing achievement in a state where residents have long taken it for granted that the notoriously high cost of living is an inescapable fact — “the price of paradise,” as it’s sometimes called.

Not surprisingly, Hawaii has been experiencing tax flight, with its population declining every year since 2016. The Hawaii Department of Taxation estimates that since 2020, these residents have taken with them $185 million in potential tax dollars.

The costs of high taxes are real, but until now, little had been done by Hawaii lawmakers to ease the burden. In fact, given everything that the state has gone through recently — the Lahaina wildfires, a tourist industry still in recovery from the Covid-19 lockdowns, and more — most people expected lawmakers to authorize tax increases, not a major tax reduction.

Indeed, even this year, legislators considered more tax hikes than tax cuts. But in the end, all the major tax-hike bills were killed and Governor Green’s milestone state income-tax cut prevailed.

Again, assuming they are enacted, the Green Affordability Plan tax cuts will reposition Hawaii from having one of the highest state income-tax rates in the country to one of the lowest; save state taxpayers billions of dollars in coming years; lower Hawaii’s cost of living; fuel economic growth; help offset crippling inflation; and reverse or at least slow down the ongoing exodus of Hawaii residents.

Hawaii might be a blue state, but maybe Hawaii residents no longer need to have the blues about taxes. This stunning reversal in tax policy could be the change that finally proves to Hawaii lawmakers that it is possible for paradise to be affordable after all.