Taxes & Budget
Hawaiʻi continues to make progress in making its tax system more fair toward low-income workers by letting them keep more of what they earn. Tax credits help offset the high cost of living in Hawaiʻi, alleviating poverty and stimulating the consumer economy all at the same time. Tax credits are less burdensome to apply for than government benefit programs. With Hawaiʻi’s refundable Earned Income Tax Credit (EITC) expanding to 40 percent of the federal credit, Hawaiʻi will have one the strongest EITCs in the nation, behind only California, Maryland, and Washington D.C.
Although the EITC expansion is great progress, its benefits still aren’t enough for many families in the state. And because the EITC depends on work, not all residents qualify. As another means of delivering a targeted form of economic relief to offset the high cost of raising children. Hawaiʻi should establish a state child tax credit, or “Keiki Credit,” as well. The Keiki Credit would deliver an additional economic benefit to families with children, helping them to cover the cost of things like child care.
On the other side of the tax equation is assessing equitable taxes on corporations and the wealthy to pay for the many things Hawaiʻi needs as a collective community to meet the serious challenges of the 21st century. At the top of the list is affordable housing, its associated infrastructure costs, and houseless services; anti-hunger programs like universal school meals; and economic support programs like the Keiki Credit, paid family leave and paid sick leave.
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Tax credits such as the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) are crucial lifelines for low-income families, helping to reduce racial and economic disparities by providing direct economic assistance to working families struggling to make ends meet. In 2021, the federal government temporarily expanded the CTC, which resulted in a historic decrease in child poverty by 40 percent between 2020 and 2021. While the federal government failed to reenact this expansion (and poverty shot back up as a direct result), many states are stepping in to fill the gap by creating their own state-level child tax credits.
Hawaiʻi now has an opportunity to prioritize the health and well-being of our keiki by investing in its own state-level CTC. This “Keiki Credit” would assist more Hawaiʻi families in covering essential expenses like food, housing, school supplies and childcare, while setting our most precious resource—our keiki—up for economic and personal success throughout their lifetimes.
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To create a more fair tax system in Hawaiʻi, capital gains—the profits from selling assets like stocks and real estate—should be taxed at the same rates as regular income from work. Currently, long-term capital gains are taxed at a flat rate of 7.25 percent, regardless of the taxpayer’s income. This means wealthier individuals—who own the vast majority of these capital gains—pay a lower tax rate on their capital gains compared to their regular earnings, which are taxed at a maximum marginal rate of 11 percent for those earning over $400,000. This contributes, in part, to a lower overall effective tax rate on Hawaiʻi’s wealthy than on its struggling families.
In 2020, more than $3.9 billion in capital gains income was claimed by residents and non-residents in Hawaiʻi. Over 77 percent of these gains went to the wealthiest individuals earning over $400,000. Reforming Hawaiʻi’s capital gains tax so that it mirrors the same progressively-increasing marginal rates applied to regular income from work would generate an additional $87 million in revenue for 2024.
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It's a tight budget year and lawmakers are being criticized for advancing a major reduction in the state inheritance tax that would only benefit Hawaiʻi's wealthiest families.