A Stealthy Tax Hike
by Tom Yamachika, President, Tax Foundation Hawaii
When following bills at our Legislature, it usually isn’t too tough to spot bills that propose tax hikes. There is usually a section in the law that provides for a tax rate. A bill that amends that section to make the rate higher is, obviously, a tax hike.
But there are ways to raise taxes without changing the tax rate (or rates).
House Bill 202 (SAYAMA, LEE, M., TAKENOUCHI, YAMASHITA) shows us one of them. The bill summary sounds innocuous enough. “Amends the definition of ‘adequate reserve fund’ for calendar years 2026 and thereafter,” it says.
Here is what’s really going on.
State unemployment insurance (SUI) is largely funded by employers. Most employers are charged SUI tax that depends on two things: the overall health of the fund into which SUI tax is collected, and the claims history of the employer. So, an employer with a long history of chargeable claims, for example, will pay more than others. Also, if there is lots of money built up in the fund then the tax rate goes down for everyone. In that way, the system is self-correcting.
The health of the fund determines the tax rate schedule. The schedules are named after a letter of the alphabet, with A the least costly schedule and H the most expensive. The fund health is measured at the end of the year, and that measurement is used to set the rate for the following year.
Measuring the fund health is done by comparing two values: the “adequate reserve fund,” which is how much the fund “should” have in it, and the actual amount in the reserve fund after employer taxes are paid in and claims are paid out.
House Bill 202 changes the definition of “adequate reserve fund” by keeping the old formula but multiplying the result by 150%. Of course, the amount of money in the actual fund does not change. As a result, the measure of fund health – the ratio of the actual reserve fund to the adequate reserve fund – drops by one-third. This makes the system think that there is not enough money in the fund, and it raises employer taxes to compensate.
To illustrate what happens if the bill takes effect, suppose the current unemployment reserve fund in Hawaii is $200 million (which is what it was in November 2022). Also suppose that the adequate reserve fund, calculated under existing law, is also $200 million. We would have a ratio of current to adequate reserve fund of 1.00 and employers would have a contribution rate schedule of C. That rate schedule is somewhat normal for us, as we had this schedule in effect for 11 of the past 25 years. That would correspond to a SUI tax for new employers (with a zero reserve ratio) of 2.4% of taxable wages.
Under the bill, the adequate reserve fund is raised to $300 million. That would make the ratio of current to adequate reserve fund drop to 0.67, saddling employers with a contribution rate schedule of E, two notches higher. Our new employer would receive a tax rate of 3.4% of taxable wages, which would be a tax hike of almost 42%.
Proponents of the bill, such as the Department of Labor and Industrial Relations, say that the increase in the adequate reserve fund is necessary. If the fund had been at the 150% level before the pandemic hit, they say, then there would have been no need to borrow a slug of money from the Feds (as most states and Hawaii did) to keep the SUI system afloat.
There were indeed times in our history when the adequate reserve fund was set at the 150% level, from 1969 to mid-1978, and from 1992 to 2007. The 100% level was used from 1978 to 1991, and from 2008 to present.
The question facing us today, then, is whether to pass this stealthy tax hike proposed by House Bill 202. It’s been said that there is never a good time for a tax hike. And we question whether there is a real need to increase the amount of taxpayer money that is sitting around doing nothing most of the time, so it can be there “just in case.” We already have a fund set aside for emergencies, and it has $1.5 billion in it. Do we really need to squirrel away more?