Introduction

Tax credits are among the tools the state uses to invest in people, businesses and the environment. Instead of appropriating state funds for these investments through the budget process, tax credits meet the state’s objectives by reducing the tax liability of qualified individuals and businesses in order to:

• Promote social welfare;

• Encourage certain industries or economic activities; or

• Avoid double taxation or pyramiding of Hawai‘i taxes.

Tax credits enable taxpayers to reduce their tax liability on a dollar-for-dollar basis (unlike tax deductions, which reduce the amount of income that is taxable). A tax credit may be “refundable,” meaning the government sends a payment to the taxpayer if the tax credit is more than the tax liability. Alternatively, a tax credit may be “nonrefundable,” in which case it can be used only to offset the tax liability. However, nonrefundable credits can usually be carried forward for use against tax liabilities in future years. 

State tax credits are passed by the legislature and signed into law by the governor. They cover a variety of situations and may be used to reduce tax liability for individual and corporate income taxes, as well as the taxes on insurance premiums, financial corporations, fiduciaries and exempt organizations. 

When examining tax credits that promote social welfare, in general they are widely claimed, indicating their value to residents, but for low average claims (LIHTC—a credit that assists in the development of affordable housing—being the exception). On the other hand, tax credits that promote certain industries and economic activity are claimed by few but provide much larger claims to those able to obtain them.