Hawaii’s Income Tax Cut U-Turn Muddles Relief for Working Class

Hawaii Gov. Josh Green (D) last week unveiled a proposal for the Hawaii Legislature to “pause” his much-ballyhooed 2024 tax cuts. But the new plan eliminates future scheduled tax cuts entirely, which could undermine past efforts to provide tax relief for lower-income households.

In 2024, the legislature passed and Green signed Act 46 (House Bill 2404), which the governor’s office called the “largest income tax cut for working families in the state’s history.” In odd-numbered years up to 2031, the law substantially increased the standard deduction; in even-numbered years, the bill greatly and incrementally enlarged the existing rate brackets so that lower rates would apply to more taxpayers. The governor’s office claimed at the time that “the state income taxes paid by working class families will fall by 71 percent by 2031.”

Government officials quickly set up a new website, taxcuthawaii.org, which even contained a calculator projecting residents’ tax savings between 2024 and 2031. A family of four making $75,000, for example, was projected to have an increase in take-home income of $18,041 over the period, an annual increase of 80.52%.

In the ensuing years, however, the new federal administration bent on cost-slashing made it increasingly clear that states should expect the cash flow of federally funded programs and direct state aid to dry up a bit.

In speeches leading up to Hawaii’s 2026 legislative session, Green floated the idea of limiting the tax benefits that higher income Hawaii residents would otherwise receive. He noted that the tax relief the legislature passed was far more generous than that proposed in the plans his office introduced in 2024. He also mentioned that families with incomes of more than $250,000 got a “big (tax) benefit at the federal level,” and suggested the state might be able to save as much as $1.8 billion by walking back the tax cuts for them.

But House Bill 2306 and Senate Bill 3125, the companion bills sponsored by the governor’s office, propose something a bit different from what his speeches indicated.

The bills don’t pause the previously scheduled tax cuts in 2027 and subsequent years. They eliminate them, plainly and simply. Nothing in the bills would allow the tax rates and standard deduction amounts scheduled for 2027 to take effect in 2030, 2035, or any future year. The bills also don’t appear to treat taxpayers making over any threshold amount, such as $250,000, differently from any other taxpayers.

The legislation would change the refundable credit for household and dependent care services necessary for gainful employment by replacing the credit percentage table with a mathematical formula, which may look more elegant on paper but may prove tougher to deal with by lower-income taxpayers who may have a harder time filling in tax forms in general.

The bills also would enact debarment provisions. If a taxpayer’s claim for credit is disallowed, the taxpayer isn’t allowed to claim the credit for two additional years. If the disallowance is due to fraud, the debarment period is increased to 10 years.

Both changes to the household and dependent care credit are temporary. At the end of 2032, the changes made in both 2023 and 2024 are undone.

Finally, the bills would extend the temporary increases enacted in 2023 to the refundable earned income tax credit and the refundable food/excise tax credit. Those increases were scheduled to sunset at the end of 2027 but are given five more years of life, to sunset at the end of 2032.

Hawaii has several disparate programs and tax credits aimed at poverty relief. They include the EITC, the food/excise tax credit, the household and dependent care credit, and the credit for low-income household renters. The credits have non-duplication provisions and strict time limits on when they may be claimed upon pain of credit forfeiture.

Past lawmakers apparently had many different ideas on how to reduce poverty in Hawaii but couldn’t figure out which program to go with—so they adopted them all. The principal disadvantage of this is that people can and do get confused over which credits they can claim, possibly exposing themselves to credit disallowance, penalties, and other undesirable consequences.

A better approach may be to lop off the income tax brackets applicable to lower-income taxpayers—a task that the scheduled tax cuts were designed to accomplish. Another may be to provide just one credit to encourage behaviors necessary or desirable for taxpayers to pull themselves out of poverty. The EITC, for example, has been extolled as “the single most effective program targeted at reducing poverty for working-age households.”

Green’s plan is set to go through a series of hearings in both the House and Senate. Representatives and senators can, and probably will, amend the bills as they meander through the legislature.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Thomas Yamachika is president of the Tax Foundation of Hawaii.

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