Legislative agenda 2023: tax reforms to boost incomes and fund investments in our future
As we enter the 2023 legislative session, Hawaiʻi Appleseed is hopeful that this year will see a continuation of the dynamic, impactful progress made during the prior session. Hawaiʻi’s people certainly need it to be, because the serious challenges that still lie ahead continue to grow and become more difficult to solve.
Now is not the time to rest on laurels. Rather, we urge lawmakers to forge ahead with bold policy changes with the same sense of urgency we saw last session, and to see the current (and temporary) budget surplus as a tool to make important investments in our collective future now, while we still can.
Top of the list of immediate challenges for Hawaiʻi is to find a way to prevent our people from being overwhelmed by the high and rising cost of living in the islands. Hawaiʻi continues to see high per capita rates of houselessness and outmigration—local folks priced out of Hawaiʻi, sometimes forever.
Tax Credits for Working Families
Last year, lawmakers wisely passed HB2510 to raise the minimum wage and expand the Earned Income Tax Credit (EITC), two tools that work in tandem to boost the incomes of working class families to help overcome high costs that keep people living in poverty. Keeping local families out of poverty and in Hawaiʻi is good for local businesses, for the health of the overall economy, for the state’s tax base and for long term prosperity.
In 2023, Appleseed supports the establishment of additional economic reliefs for working families to extend the positive antipoverty and economic stimulus impacts of a financially stable working class. In particular, the state should consider creating new tax credits targeted at families with children.
The Child Tax Credit (CTC) and the Child and Dependent Care Tax Credit (CDCTC) are two possible credits the state could use as means of helping Hawaiʻi’s working families achieve economic security.
Roughly 162,000 Hawaiʻi families—with some 272,000 children—benefited from the federal CTC in 2021. During that year, the American Rescue Plan (ARP) temporarily increased the maximum federal CTC to provide up to $2,000 for each child under the age of 17. As a result, the federal CTC kept an historic 3.7 million children across the U.S. out of poverty that year.
Unfortunately, much of these benefits were lost when the expansions to the federal CTC expired at the end of 2021. To fill the gaps left by the reduced federal CTC, the State of Hawaiʻi should create a state CTC that is set at a percentage of the federal CTC. Twelve states have already implemented their own CTC programs, and Hawaiʻi policymakers could help lift tens of thousands of local children out of poverty by following suit.
The CDCTC is an existing state tax credit that helps family members pay for expenses related to child care and dependent care. These expenses can put a significant strain on household budgets at a time when caregivers need help caring for loved ones. Reforms to the existing state CDCTC could be made to provide increased benefits to a greater number of families with dependents.
Strategically Targeted Taxes to Pay for Housing for Local Residents
While there are many household costs that are greater in Hawaiʻi than elsewhere, nothing compares to Hawaiʻi’s unusually high cost of housing. Lawmakers therefore passed a handful of policies in 2022 to address the shortage of housing as well, but these measures were just the first steps in creating a comprehensive solution to end homelessness and ensure sufficient supply of affordable housing for future generations.
To truly tackle the housing and homelessness crises, Hawaiʻi needs to shift from a housing commodity paradigm to one in which housing is a human right that every person who calls Hawaiʻi home deserves and should be guaranteed.
The private housing market is an important part of Hawaiʻi’s housing ecosystem, but no matter how efficient we make it by speeding the permitting process and reducing cost barriers, it will never be able to meet the needs of all of our local residents. Indeed, the default question for sellers on the private market is, “How much can I sell this for?” It is not, “How little?”
The only way to ensure that all of Hawaiʻi’s people have access to housing is by deciding as a community that we will make it a collective priority to create housing our people can afford. We can only do it through sufficient investment in government housing subsidies for both the supply-side (development) and demand-side (rental assistance).
This approach has worked in places like Finland, which has found a way to generate significant tax revenue to make smart housing investments over the past 30 years. This strategy has virtually eliminated street homelessness in Finland, and has ensured that the Finnish housing supply remains high and costs remain low.
Figuring out how to finance the necessary investment of public resources into these supply- and demand-side subsidies will be one of our bigger challenges. Finland, for example, funds its subsidies with a high sales tax that may not be feasible in Hawaiʻi. But there are other ways to reform our tax system so that it can collect the revenue we need to solve Hawaiʻi’s housing crisis—and collect it in a fair and equitable way.
In 2023, Appleseed will be working primarily on two initiatives that increase revenues for state affordable housing initiatives by more fairly assessing taxes on wealth and unearned income typically held by wealthier residents and, often, nonresidents. The first is capital gains tax reform and the second is conveyance tax reform.
Capital Gains Tax Reform
Hawaiʻi is one of only nine states that allows capital gains—profits from the sale of wealth, such as stocks, bonds, art, antiques and, crucially, investment real estate—to be taxed at a lower rate than ordinary working people’s income.
Hawaiʻi's capital gains tax rate is just 7.2 percent, while the highest marginal tax rate on regular income is as high as 11 percent. This is, essentially, a loophole that provides a tax break for some of the richest and most privileged among us. This includes non-residents who profit from investing in real estate in Hawaiʻi, which drives up the cost of housing by reducing supply and inflating market prices.
Of the taxpayers who had capital gains income in 2019, the 7.7 percent who earned $400,000 or more that year also received 79.4 percent of the capital gains income in the state. For those who paid taxes in Hawaiʻi and made more than $400,000 a year in 2019, long term capital gains were 41.4 percent of the total taxable income of residents, and 49.4 percent of nonresidents.
Long-term capital gains constitute 11.5 percent of total taxable income in the state, or nearly $4.3 billion in 2019. If Hawaiʻi were to tax capital gains at the same rates as regular income—as most states do—Hawaiʻi would bring in about $135 million in annual revenue according to estimates from the state Department of Taxation (DOTAX).
A massive 97 percent of this revenue would be paid by the top 5 percent of earners in Hawaiʻi—or those making at least $261,000 a year—according to an analysis conducted by the Institute for Taxation and Economic Policy (ITEP) in January of 2022. Meanwhile, the vast majority of Hawaiʻi taxpayers—those in the bottom 80 percent—would pay nothing at all.
Conveyance Tax Reform
There’s no doubt it will take a comprehensive approach to address our affordable housing crisis, but one place that makes a lot of sense to start is in addressing Hawaiʻi’s relatively low conveyance tax—a one-time tax on the sale of real estate, usually borne by the property seller.
The revenue from this real estate sales tax partly goes to fund the development of affordable housing, as well as to protect conservation land and natural resources—two places in our social structure where the impact of an out-of-control real estate market has serious, adverse impacts.
The real estate industry is one of the few sectors of our economy that has been doing well in spite of the pandemic and other economic challenges. People who own property have seen the equity value of their property increase by huge amounts over the past decade. However, our real estate sales tax policy has rates that are so low that:
They do not deter investors from using the real estate market to make a quick buck buying up the housing supply and, in some cases, flipping homes, driving up the cost of housing for locals; and
The revenue collected by the state from this tax is insufficient to make real progress on either affordable housing development or effective resource conservation efforts.
By adjusting the real estate sales tax rates and lifting arbitrary caps on the amount of revenue going to affordable housing and conservation efforts, we can lower the cost of housing for residents without significantly impacting the average middle class local homeowner should they choose to sell.
Our proposed changes would simultaneously funnel more money toward critical affordable housing and conservation efforts while deterring the kind of real estate speculation and investment purchases that are driving up the cost of housing for locals. Both components of the proposal will contribute to increases in the supply of available housing—both rental and for-sale—for local residents that live and work in Hawaiʻi.
There is a third facet of this issue that is, at the moment, left out of the current conveyance tax policy—homelessness services. Clearly, homelessness is directly impacted by the shortage of affordable housing caused by the over-commodification of our real-estate market.
We propose adding a third earmark from the revenue collected by this updated tax policy to be funneled directly toward homeless service providers to assist in triaging the most devastating result of our affordable housing shortage.
Eviction Protection + Rent Relief
One final reform Appleseed hopes to see passed this year involves creating additional safeguards against eviction that benefit both tenants who are struggling to pay their rent, and the landlords that rely on those payments. Coming off the heels of a successful, innovative, but temporary pandemic mediation program that prevented thousands of evictions during the height of the COVID-19-fueled recession, Appleseed will advocate for changes to the standard eviction mediation program to bring it into alignment with the more successful pandemic pilot program.
In addition to the pilot program itself, the availability of rent relief funds from the federal COVID-19 relief legislation, such as the American Rescue Plan, was instrumental in ensuring the success of the mediation program. Therefore, Appleseed will also advocate for a permanent, state-funded rent relief program to provide temporary assistance to families who miss a rent payment.
The rent relief program is intended to create greater housing stability and provide temporary relief. In combination with this permanent funding, proposed modifications to the mediation program will make a big difference in keeping more families housed as ongoing tenants, reducing eviction actions filed with the court, and improving the health of our housing ecosystem.
We hope you will join us in advocating for these policy changes that will benefit the working people of Hawaiʻi and lay the groundwork for a bright future for us all.
