Hawaiʻi inequality is on the rise—wealth taxes can help fix the problem

Extreme wealth inequality in the United States has been on a consistent rise since the 1980s, thanks in large part to the Reagan-era tax cut “revolution” that introduced the phrase “trickle-down economics” into the public lexicon. Since 1983, the share of aggregate wealth going to high income families increased from 60 percent to 79 percent. By contrast, the share of wealth going to middle income families has fallen from 32 percent to 17 percent, while the lowest income families hold only 4 percent. 

This trend poses a significant threat to our democracy, as it limits economic opportunity and mobility for those at the bottom, while delivering outsized economic and political influence to those at the top.

A new report from the Institute for Tax and Economic Policy (ITEP) sheds light on this unequal growth, while also analyzing how that wealth is distributed across the states. According to the report’s findings, Hawaiʻi ranks as one of the top states with above average shares of wealth over $30 million, alongside other states like New York, California, Connecticut and Florida. 

For the purposes of the report, wealth was defined as the value of wages, as well as unrealized capital gains from investments. When looking at extreme wealth relative to our state’s share of the national population, Hawaiʻi ranks 7th in the nation. While Hawaiʻi’s share of wealth over $30 million is 0.7 percent nationally, we only represent 0.4 percent of the nation’s population. 

In terms of dollar value, ITEP’s analysis shows that total wealth held by high net worth individuals in Hawaiʻi is roughly $214 billion. Much of this wealth is not subject to state or federal taxes because it is held in the form of unrealized capital gains—the increase in the value assets such as stocks, bonds, real estate, art and antiquities. Capital gains taxes are only paid when these assets are sold.

This means that our tax policy allows a handful of individuals to continually accumulate wealth tax-free (until the point of sale), further perpetuating the trend of income inequality. Low tax rates on the sale of these assets, meanwhile, deprives our state of millions of dollars in potential annual tax revenue that could otherwise go toward infrastructure, education and services to help low-income families afford the cost of living and avoid homelessness. 

A tax on this extreme wealth would help to address this problem, but doing so at the national level is likely to be challenging, given that no such tax on unrealized gains has ever been implemented. Additionally, tax avoidance strategies used by the ultra wealthy can diminish the amount of taxable revenue that the government can collect. 

However, at the state level, Hawaiʻi’s government has an opportunity to implement policies that work to more equitably tax capital gains made by the ultra wealthy. Hawaiʻi is one of only 9 states that taxes realized capital gains at a lower rate than regular income. Our state’s capital gains tax rate is just 7.2 percent, whereas the highest marginal income tax rate is 11 percent. 

Long-term capital gains constitute 10 percent of total taxable income in the state, or nearly $3.5 billion in 2017. If those capital gains were taxed at regular individual income tax rates, the state would bring in about $135 million in new revenue each year, according to an analysis by the Hawaiʻi State Department of Taxation. And given that 85 percent of all capital gains in Hawaiʻi go to the wealthiest 5 percent of taxpayers, this would be a tax increase levied almost entirely on high-income taxpayers, including non-residents who profit from investing in real estate in Hawaiʻi.

Hawaiʻi relies heavily on its highly regressive General Excise Tax (GET) for revenue, but the GET takes a much higher share of income from struggling, working families than it does from the rich. It is likely impossible for Hawaiʻi to eliminate the GET, since it accounts for almost half of the state’s revenue—critical dollars needed to keep government running efficiently.

Nevertheless, we can find ways to offset this tax burden on low-income Hawaiʻi residents, such as increasing the power of tax credits for working families. Hawaiʻi can also identify ways to pivot away from its reliance on the GET—but the revenue will need to be made up somewhere. By focusing on capturing a larger share of the wealth held by the richest 5 percent of taxpayers instead through higher taxes on capital gains, Hawaiʻi would be taking a step in the right direction.