Can Hawaii afford its new income tax cuts?

by Keli'i Akina, Ph.D., President / CEO, Grassroot Institute of Hawaii

A lot of people have expressed concern to me that today’s historic tax cut will be next year’s excuse to impose tax increases.

Or that letting Hawaii taxpayers save $5 billion through 2021 will result in some sort of a budget crisis for the state.

My take is that Hawaii absolutely can afford the state income tax cuts proposed by Gov. Josh Green and endorsed unanimously by the Legislature, both now and into the future, without having to raise any new taxes.

Even with pressing problems such as the rebuilding of Lahaina, the state seems well situated to give Hawaii taxpayers a break, so if not now, then when?

Consider, for example, the fact that the Hawaii Council on Revenues projects the state will take in about $9.5 billion in tax revenue this year, and expects that to grow by 4.8% next year, then by between 3.5% and 4.5% each year after that for the rest of the decade. At that rate, Hawaii tax revenue will total about $12 billion in 2030.

Hawaii taxpayers, meanwhile, are expected to save about $1.2 billion that year, according to state tax officials, so the state still would still have almost $11 billion to cover state services and debt payments.

Yes, it’s important to recognize that these are just estimates. But let’s consider also that between 2010 and 2019, state tax collections increased each year by 6.36% on average.

Could state tax revenue slow to less than that? Sure. But we must also factor in that these tax cuts are likely to encourage economic growth and boost state tax revenues.

At the very least, they could help stem the tide of Hawaii residents seeking a lower cost of living on the mainland, which would mean more people in Hawaii to pay taxes.

On the spending side, there always seems to be wiggle room to slim down the budget, and, in fact, state leaders already are looking for ways to cut spending.

For example, at the signing ceremony for the tax cuts, Gov. Green noted that the state has about a 30% job-vacancy rate, so “we’re doing a deep dive into the costs that we have on the books that maybe shouldn’t be on the books.”

Just last year, Gov. Green cut approximately $1 billion from the Legislature’s proposed biennial budget.

And this year, when concerns about Lahaina funding were at their highest, some lawmakers suggested across-the-board budget cuts of up to 15% and reductions to grant-in-aid funding. Yet they wound up passing the sweeping tax cuts instead.

I believe our leaders made the right call, and that the state budget won’t suffer because of these long-overdue tax cuts. In fact, there is every reason to believe these cuts will make Hawaii more affordable and create more economic opportunities — especially if we stick to smart budgeting.

E hana kākou! (Let's work together!)