EDITORIAL: Make responsible tax cuts, increases

In this election year, the tension between budgeting and policy- making is high inside Hawaii's Legislature — but aligning those paths is the job we elected lawmakers to do. The tug-of-war between tax collections, government spending, public needs and voters' choices is a feature of democracy, as legislators are trusted to protect voters' interests.

Over the next few weeks, lawmakers will decide some weighty taxation issues: whether and how to revise the structure of Hawaii's income tax, increase the conveyance tax to fund the Department of Hawaiian Home Lands (DHHL), end tax exemptions for real estate investment trusts (REITs), and about giving cruise ships a break on the transient accommodations tax (TAT). These decisions aren't actually tough, though: All simply require clear-eyed analysis of public needs and benefit, against optimization of tax collections.

In these cases, the strategy that increases government revenue is the right one, and doing so is the responsible choice.

Taxpayers, individual and corporate, naturally prefer to keep their money. But a thoughtful retooling of Act 40 — the historic but ill-thought-out income tax law of 2024 — must now happen, given significant pullbacks of federal funding. The act is deservedly touted as tax relief for low-income and middle-class taxpayers, but rewards to Hawaii's wealthiest taxpayers are disproportionate.

Under Act 40: Multiyear changes in Hawaii's standard deduction, scheduled in alternating years, benefit lower and higher earners relatively equally — but the relief is a higher proportion of low- income earners' salaries, a necessary correction to Hawaii's former system. In alternating years, tax brackets move up, so that only earners reaching into higher brackets get a "break."

The pattern quickly emerges: Hawaii's 2024 tax rules doubled the standard deduction, costing the state about $41 million in foregone tax, while incorporating the 2025 tax bracket adjustment raises foregone tax collections to an estimated $656 million. The Institute on Taxation and Economic Policy estimates that when fully phased in, Act 40's tax cuts will cost the state $1.8 billion annually. That expense was criticized as patently unrealistic in 2024, and becomes even more so now, as the fall-off in federal supports makes uncomfortably clear.

The honest, responsible move is to adjust these scheduled cuts to preserve breaks for those in lower and middle brackets, while adjusting brackets to place proportionate responsibility on Hawaii's highest earners. That's the tack espoused by House Bill 2306, which would preserve standard deduction increases, repeal future tax bracket adjustments and create new brackets for the highest earners, who would see a 1% increase in each bracket. The Senate's bill, SB 3125, doesn't go far enough to cure tax break deficits.

Legislators must be on guard against granting one interest group deference over the public interest — a constant danger when wealthy, powerful entities enter thundering objections to the imagined "harm" resulting from their transactions being taxed. That's the case with arguments against increases to the conveyance tax and cruise ship TAT levies.

The real estate conveyance tax increase in SB 2362 and HB 2049 would boost rates on title transfers for the highest-priced properties, directing additional revenue to support development of affordable housing and creating predictable, necessary funding for DHHL. Raising taxes collected on transactions involving modern mansions is a trending topic nationwide, and Hawaii legislators need to jump on this bandwagon.

It's also time for a long-overdue adjustment on the giveaway tax breaks enjoyed by REITs, which often siphon money out of the state. Sadly, SB 2362's elimination of the dividends-paid deduction for REITs has already been weakened in the Senate. The revised bill would inaugurate a study. That's unsatisfying, but it should nevertheless be passed to start the ball rolling.

Legislators also are trying to step back from the imperative to fund needs and shape taxes accordingly with SB 634, which would abandon collection of the TAT on cruise ships pulling into Hawaii's ports — a tax the cruise industry is litigating to sidestep paying into Hawaii's historic "green fee" pot. Instead, SB 634 would charge a flat $10 per passenger fee, reserving it for "port infrastructure projects that benefit cruise ships." This bill should be shelved — changing course before litigation is resolved walks away from the prospect of raising nearly $26 million annually for environmental remediation via the cruises' TAT.

Passing SB 634 would be a misstep signaling the Legislature's lack of commitment to environmental remediation, a choice voters must disparage and discourage.

Public sentiment affirms that Hawaii's residents aspire to live in a state that prioritizes economic security, housing and environmental protection. To do so, spending must be aligned with needs, incorporating guardrails against waste and inefficiency, and tax collections must match spending targets. Our Legislature must make its decisions accordingly.