Hawaiʻi’s elected leaders buy-in to costly “trickle-down” myth
Passing an “historic” tax cut that mostly benefits the wealthiest Hawaiʻi residents is not the path to a healthy economy that works for working people.
When it comes to tax policy, Hawaiʻi’s 2024 legislative session was largely defined by a single bill—House Bill 2404. Signed into law as Act 046 by Governor Green on June 3, the bill enacts sweeping tax cuts for people of all income levels, but most of the benefit goes to those at the top of the income scale.
First, HB2404 doubles the amount that can be claimed by the standard deduction, a welcome change that will help working families that are burdened with the high cost of living in Hawaiʻi. However, at the same time HB2404’s tax bracket adjustments will give away millions to households that are by no means struggling to pay for basic necessities.
Notably, the bill the governor signed emerged from the conference committee stage of the legislative process a significantly different measure than what Gov. Green’s office proposed at the beginning of the 2024 session. Conference committee does not allow for any public input, and the negotiations are largely carried out behind closed doors. This means the public had no say in the final bill or its provisions. While the governor’s original proposal would have cost $150 million per year, the bill that emerged from conference committee will cost an estimated $1.4 billion per year.
In addition to its mixed efficacy in helping working families make ends meet, HB2404 also had the effect of sidelining other, more effective tax policies, such as the proposed state Child Tax Credit, which were not seriously considered due to a supposed lack of funds.
HB1662 would have created a state Child Tax Credit (CTC) for Hawaiʻi, focused on helping working families afford their everyday costs. The expanded federal CTC lifted 2.9 million children out of poverty during the pandemic, reducing child poverty by 40 percent in 2021. Unfortunately, Congress allowed the expansion to lapse, and much of the gains made against poverty have since been lost. A total of 15 states have already implemented their own state-level CTCs to fill in the gap left by the federal expansion lapse, and these states have been able to hold on to the anti-poverty benefits of the policy as a result.
While HB1662 received an outpouring of supportive testimony from a diverse cohort of advocates, union members and concerned community members, it was deferred in the Senate Committee on Health and Human Services after crossing over from the House.
In an effort to raise revenue for state services, HB1660 would have reformed the capital gains tax on investment income. Currently, capital gains are taxed at a flat rate of 7.25 percent. Even someone wealthy enough to pay income tax at the highest rate of 11 percent is still only subject to the 7.25 percent rate on their capital gains. And for people in the highest income tax brackets, often a significant portion of their gross income comes from capital gains. This gives these wealthy taxpayers in Hawaiʻi an unfair, preferential tax advantage over lower-income taxpayers who very often do not own capital gains, and who might have to pay a higher rate on their capital gains than their ordinary income if they did.
HB1660 would have closed this loophole by taxing capital gains at the same, progressively increasing rates as ordinary income from work, making our tax system more fair and generating up to $167 million in new revenue each year. The House Committee on Finance passed this bill, but the Senate Committee on Ways & Means declined to schedule it for a hearing.
Impacts of HB2404
From 2025 through 2031, HB 2404 will steadily shift Hawaiʻi’s income tax brackets (and rates) upward. This will reduce income taxes for nearly all taxpayers, but most of the total tax cut will go to high-earners. For example, in the first year alone, the top 1 percent of taxpayers will receive a tax break of over $6,000 on average, compared to just $335 for the bottom 20 percent, according to data analysis provided by the Institute on Taxation & Economic Policy.
By 2031, once these changes are fully phased-in, they will cost the state an estimated $1.2–1.4 billion per year in foregone revenue. Hawaiʻi Appleseed is concerned about whether the state will be able to afford this monumental cost. The fully phased-in tax cut will swallow up about 10 percent of Hawaiʻi’s general fund tax revenues. Consequently, it will sharply limit the money that can be put towards the state’s chronically underfunded programs and services. Low-income residents will be affected the most by this steep decline in revenue, as many of them may rely on government programs to help make ends meet.
In the event of lower-than-expected tax collections, economic recessions, or disasters like the Maui Wildfires, the state will also now have a much smaller cushion of funds to fall back on. Any major shortfalls would likely require Hawaiʻi to decrease its funding for key priorities, just as it did during the Great Recession. During that period (2008–2010), state departments underwent budget cuts that seriously compromised their existing programs and services.
To clamp down on the cost of teacher salaries, the Department of Education canceled school sessions on its “Furlough Fridays.” In addition, the Department of Human Services was dealt a $111 million budget cut that affected healthcare and cash payments to families, services for low-income and disabled adults, and contracts with non-profit organizations. Our state is still—to this day—recovering from the adverse impacts these cuts had on our educational attainment and public health.
HB2404 is representative of the debates that arise time after time with tax policy. The wealthy can easily afford everything they need, while the backbone of Hawaiʻi’s economy—working families—are living paycheck-to-paycheck. Without raising thorny questions around who is more “deserving” of tax relief, it should be abundantly clear which group needs assistance simply to survive.
In alignment with the values we share in our island community, the goal of our state policy should be improving economic security for all. To accomplish this, it is important to prioritize invaluable government spending on evidence-based solutions. For decades, research has shown that tax cuts for the wealthy do not “trickle down” to the rest of the population, reduce poverty, or improve wages for the average worker.
Instead of adopting trickle-down policy that delivers huge tax cuts to the rich at the cost of a robust state budget, our elected leaders should focus their attention on the low- to middle-income population that would benefit immensely from long-term tax relief. Doing so would strengthen our economy from the bottom-up, while helping to create an affordable Hawaiʻi where all families can thrive.
