Hawaiʻi’s 2025 legislature focused on raising tax revenue to prepare for federal cuts

To build a prosperous Hawaiʻi in which all families can thrive, the state must equitably fund critical investments in our keiki and our communities. Assessing an adequate tax rate on corporations and the wealthy will be necessary to produce a budget that can fund these investments. Hawaiʻi’s current tax rates still exacerbate inequality by taking too much from working families, and not enough from the rich and wealthy corporations. 

The 2025 legislative session was defined by the threat of deep federal spending cuts; since crucial funding for the state’s current levels of service will likely be on the chopping block, the legislature was forced to consider its revenue options via tax increases. While more could have been done to collect critical revenue for community-wide investments from those who can afford to pay more, the legislature did at least ensure that working families would not have to shoulder a larger tax burden, opting instead to raise taxes on tourism and certain businesses.

Early on during the session, leadership in the legislature wisely announced plans to hold at least one (but up to three) special session(s) later in the year to address these cuts through emergency legislation that cannot wait until 2026.

Special Sessions

Due to the uncertainty surrounding the federal government’s spending cuts, legislators have reserved dates in August, September and November of this year for possible special sessions of the Hawaiʻi legislature. These sessions would allow lawmakers to quickly respond with state policy once the full extent of federal cuts is known. 

In particular, lawmakers have signaled they will be looking to address cuts to vital programs such as Medicaid, SNAP and Section 8, as well as cuts to our public education system.

During these special sessions, the legislature will likely have to make changes to the state’s $21 billion operating budget. Some planned spending items may need to be reduced so that core services and social safety nets can be maintained. 

The legislature has $200 million on hand and accessible in the general fund to safeguard Hawaiʻi against federal budget cuts. This funding will supplement vulnerable state programs that are at risk of losing federal support. On top of that, $50 million will go towards nonprofits that depend heavily on federal funding.

Mixed Results for Raising State Revenue

Recognizing the urgency of raising revenue, legislators approved during the 2025 regular session Senate Bill (SB) 1396, which will increase the Transient Accommodations Tax (TAT)—essentially a tax on hotel rooms. The bill also extends the tax to cover cruise ship passengers. A portion of the new revenue will be directed to conservation, environmental protection, and mitigating climate change. 

This is important in and of itself, as our natural environment has a major impact on our quality of life. But it’s also important in maintaining our tourism sector, which is still a primary engine of Hawaiʻi’s overall economy. Tourists come to Hawaiʻi because of its natural beauty. Preserving our ecological infrastructure is critical to the longevity of the industry and the jobs it supports.

To reclaim revenue for more general purposes, House Bill (HB) 1369 eliminates several exemptions to the General Excise Tax (GET) for some businesses. The GET is the largest source of revenue for the state’s general fund, accounting for roughly half of all revenues collected. Hawaiʻi exempts some businesses from paying GET in certain situations to help stimulate economic activity, but decided recapturing the lost revenue from these exemptions was more important, at least at the moment.

The legislature also considered exempting food and medicine purchases from the GET, which would have helped families afford basic necessities, but would have put an even larger hole in the general fund as a result. The proposal was shelved due to the overall budget outlook.

There has also been a growing discussion among legislators about rolling back last year’s income tax cuts, which will reduce the state’s tax revenue by billions of dollars over the next seven years. Although these tax cuts will provide a small amount of help to low- and middle-income families, the majority of the benefits will go to the state’s wealthiest taxpayers. 

Lawmakers also missed a huge opportunity to collect tens of millions of dollars in additional revenue from the wealthiest households by failing to pass HB476. The bill would have raised the capital gains tax rate by a modest 1.75 percent up to 9 percent (still lower than the top income tax rate). 

This reform would have captured more of the profits wealthy households make from selling stocks, bonds, art, antiques, real estate and other luxury goods that gain investment value. A large majority of capital gains are earned by people who make over $400,000 a year. Almost no one in Hawaiʻi making below the top income quintile would have been impacted, making this a highly equitable proposal.

HB1410, meanwhile, would have reformed the structure of the state’s conveyance tax (a real-estate transfer tax paid on the sale of property), which would also have slightly raised the tax revenue collected from it. In particular, this tax helps to fund construction of homes for low-income families. The bill also failed to make it through the session.

Lawmakers will have the option to revive any of these bills in one of the upcoming special sessions.

Tax Credits for Working Families

While broad, sweeping tax cuts like the one now under reconsideration can tank revenue collections while delivering only very modest relief to working families, tax credits are much more effective at targeting relief only to those who need it. As a result, they are much more affordable for the state budget while simultaneously being at least as effective if not more at delivering tax relief to struggling households.

Unfortunately, none of the bills proposed this past session to create a state Child Tax Credit (HB694/SB1053) or to expand the state’s existing Earned Income Tax Credit (HB183/SB1013) were heard by any of the legislative committees to which they were assigned. 

These bills would have given millions of dollars to working families at a moment in which federal economic policies, like extreme tariffs, threaten to bring the cost of living to an all-time high while, at the same instant, critical safety net programs are facing brutal cuts. If lawmakers decide to roll back the income tax cut from 2024, they should consider reinvesting some of the saved state funding into these two tax credits to stabilize working families without breaking the bank.