The big budget trouble with HB2404’s over-broad and sweeping tax cuts

For years, Hawaiʻi Appleseed has been advocating for our state government to design a tax system that puts more money in the pockets of struggling working families, both to help them make ends meet and to stimulate consumer spending within our economy to generate shared prosperity the best way that research and data shows us we can—from the bottom-up.

The most efficient, targeted and useful way to do this is through carefully-designed tax credits like Hawaiʻi’s successful Earned Income Tax Credit, or the federal Child Tax Credit, which managed to cut child poverty in the United States by 40 percent during the pandemic recession.

Paying for these programs—and for Hawaiʻi’s many other needs, including affordable housing, public school upgrades, climate change preparedness, and rebuilding Lahaina—requires a robust public budget funded by fair taxes on the wealthy and corporations. These successful individuals and their companies benefited tremendously from the public investments in infrastructure, education, housing and more created through the state budget. A well-designed tax system recognizes the critical role of public investment in the success of the wealthy, and requires re-investment from them into the next generation.

Initially proposed by Governor Green’s administration, House Bill 2404 started off as a bill to reform several components of the state tax code that would have given us progress toward a better tax system. However, in the final days of the 2024 legislative session, lawmakers used the opaque conference committee process to radically overhaul the measure, turning it into a sweeping and deep tax cut that risks doing more harm than good while the benefits largely go to the wealthiest among us.

Under the final version of HB2404, the families that need relief to pay for basics—those earning below $90,000 for example—will receive relatively modest tax cuts, averaging less than $640. Meanwhile, Hawaiʻi’s highest earners—the top one percent—will receive nearly 10 times that. 

Certainly, $640 is meaningful for a family struggling to pay the bills. But with a total price tag estimated at between $1.24 billion and $1.4 billion by 2031, HB2404’s lopsided distribution of tax breaks is not targeted enough to create the healthy, balanced economy struggling working families need.

Escalating Revenue Losses Will Jeopardize Key Priorities

HB2404 is projected to cost the state $656 million in 2025, with the annual loss expected to grow from year to year. By 2031, the cost would reach nearly $1.4 billion according to estimates from the Institute for Taxation and Economic Policy. That is more than 10 percent of expected general fund tax revenues. 

This cost would put an immense strain on the state’s budget going forward, likely compromising the integrity of existing programs and services. As people concerned about the well-being of Hawaiʻi’s working families, we must consider the impacts HB2404, not just on taxes paid, but on our government and economy as a whole, including:

• Affordable Housing: Hawaiʻi must build between 4,000 and 5,000 affordable rental units each year to meet our demand. The Hawaiʻi Housing Finance Development Corporation projects that, with existing resources, they can only fund the development of 9,650 affordable units by 2028, falling well short of the projected need. If constrained revenues threaten further investment, the state will continue to fall behind on our housing goals.

• Public School Facilities: According to the Department of Education, fully modernizing our state’s outdated school facilities will cost approximately $11 billion to fully implement. DOE estimates that it will take upwards of 23 years to fully implement those efforts at current funding levels. This goal becomes increasingly unreachable if we forgo hundreds of millions each year in tax revenue.

• Climate Change Initiatives: According to the Hawaiʻi Executive Collaborative, estimated costs for preparing the state for climate change reach upwards of $15 billion for road re-alignments and flooding mitigation due to rising sea levels. This figure is likely a significant undercount of needed investments, as the state is only beginning to reckon with the total costs associated with the Maui Wildfire recovery effort, and the high cost of future wildfire prevention efforts.

These are only a few of the ongoing priorities for the state, in addition to the billions of dollars required to cover fixed costs for public employee retirement and health benefits, Medicaid, and other federal programs. In Fiscal Year (FY) 2024 the state’s total fixed costs topped $4.5 billion and consumed nearly one quarter of our annual budget spending. These costs have consistently grown over time and are expected to continue growing in the future, yet HB2404 will dramatically reduce revenue available to meet these obligations. 

HB2404 Minimally Benefits Struggling Families Relative to High-Income Households 

HB2404 would result in large tax breaks for high-income earners who have already received massive federal tax cuts in recent years. The tax breaks for low-income earners are relatively low. In the first year of HB2404’s implementation, the top 1 percent wealthiest households would receive a tax break of over $6,000 on average, while those in the bottom 20 percent of households would only get $335. 

These numbers increase in each consecutive year, with outsized benefits going to the highest earners. When fully implemented in 2031, the top 1 percent will receive an average tax cut of $12,800, while the average tax cut for the bottom 20 percent will only rise to $439 on average.    

Nearly two-thirds (65 percent) of the tax breaks would go to those making more than $90,000 (the top 40 percent), and those earning less than $53,000 (the bottom 40 percent) would receive only 18 percent of the tax breaks by 2025. This disparity grows even more by 2031. 

Replacing Revenue Lost by HB2404 Will Be Extraordinarily Challenging

In FY2023, about a third of Hawaiʻi’s tax revenue was derived from the individual income tax. Losing over a billion dollars of this revenue by 2031 would inevitably force Hawaiʻi to reconsider all its funding priorities. This likely means cuts to services or attempts to make up for the lost revenue through other taxes. 

Hawaiʻi Appleseed has explored progressive tax revenue policies for over a decade. Year after year the legislature has failed to pass policies such as taxing capital gains at the same rate as ordinary income, raising the conveyance tax on high-value properties, and adopting worldwide combined reporting. Collectively, these reforms would generate just over $500 million per year under the most optimistic conditions. Even if they did finally pass, they would not fill the gap left by HB2404 once it is fully phased in, and we are unaware of any strong progressive alternatives of raising revenue being proposed. 

There are More Effective Alternatives to Support Hawaiʻi’s Workers and Economy

There are more targeted ways to provide tax relief to those who need it most. For example, the changes to the standard deduction proposed by HB2404 by themselves are reasonably well targeted. More modest changes to the tax brackets are also possible, geared toward the low- and middle-income earners who need help simply to make ends meet. 

Additionally, targeted tax credits such as the Earned Income Tax Credit and the Child Tax Credit are extraordinarily effective at getting tax reductions to where they will have the greatest benefit. For instance, the federal Child Tax Credit reduced child poverty by a historic 40 percent in 2021, lifting 2.9 million children across the U.S. out of poverty. Hawaiʻi could enact a state-level Child Tax Credit of its own, helping working families put food on the table and remain housed in the long term.

A Government and Economy that Works for All Requires Truly Democratic Processes

The legislature’s claim that HB2404 is historic is true. But it will likely come to be known more for its harms than its benefits. The realities of this bill would have surfaced during the legislative session were it the product of a genuine democratic process. But the “historic” magnitude of the bill in its final form was both proposed and adopted at essentially the same time: during conference committee. This is the very last stage of the legislative session, and it allows for no public debate or discussion whatsoever. 

When the bill was first introduced by Governor Green at the beginning of the legislative session, the cuts proposed were projected to cost roughly $150 million by 2030. In the bill’s first hearing, the House Finance Committee removed most of the relevant numbers, leaving blanks so the total cost of the bill—and how the tax cuts would be distributed across the income spectrum—could no longer be determined. 

The Senate Ways and Means Committee put concrete numbers back in, similar in magnitude to what was proposed in the Governor’s original bill. At that point, all of the public testimony and discussion was over. Nothing in the bill, its committee reports, or the public written testimony suggested anything other than something close to the Governor’s original proposal would be considered in conference committee.

The purpose of the conference committee process is “limited to resolving differences between the Senate and House drafts of a measure.” It’s supposed to be a discussion between a select group of Representatives and Senators intended to achieve a compromise between the House’s preferred version of the bill and the Senateʻs. Yet what emerged from the conference committee for HB2404 was a radically different bill. 

While the measure started as a significant, but careful tax cut, reasonably well-targeted to help struggling working families, it emerged as what the House Finance Chair boasts to be the largest income tax cut in Hawaiʻi history. The changes to the bill made without public scrutiny will increase the cost of the measure by nearly eight-fold. Households on the higher end of the income scale will be receiving more than the folks struggling to make ends meet. 

This is not the collaborative approach that ought to be taken in tackling Hawaiʻi’s most pressing problems. We’ve seen examples of how such an approach can work—including when this bill was originally drafted, a process that included broad perspectives from stakeholders to provide input. If we want a healthy economy that works for everyone, we must honor our democratic processes. They are in place for good reason. The best policy is created by bringing together a broad group of perspectives for robust, informed analysis, discussion and debate.