HONOLULU — The state Senate on Tuesday passed legislation that would increase the income tax paid by Hawaii’s top wage earners to 16%, which would give the islands the highest state income tax rate in the nation.
The Senate voted 24-1 in favor of the bill, which cited a need to maintain essential government services at a time when the pandemic and subsequent drop in tourism led state tax revenues to shrink. There was no discussion or debate on the Senate floor regarding the measure.
The legislation also hikes the capital gains tax, corporate tax and taxes on luxury real estate sales.
The bill will now go to the House for consideration. House lawmakers have passed their own legislation raising the capital gains tax.
California is currently the state with the highest income tax rate in the nation, at 13.3% for individuals earning more than $1 million a year.
Hawaii’s 16% rate would apply to those earning more than $200,000 a year. The rate would revert to the existing rate of 11% after 2027.
Lawmakers say they want to avoid budget cuts recommended by Gov. David Ige to cope with the shortfall, including those that would subtract funds from public schools, sex abuse treatment, plant and pest disease control and family planning services.
Sen. Donovan Dela Cruz, chairperson of the Senate Ways and Means Committee, said the state would need a variety of solutions to address the budget shortfall. He identified transferring money from special funds and federal aid as among them in addition to spending cuts and tax increases.
The key will be how the state can do that without affecting the most needy and working families, Dela Cruz, a Democrat, said after the bill passed.
Critics say the high individual income tax rate risks harming businesses because some businesses owners file their company’s taxes through their individual returns. Higher taxes could eat into their bottom lines, taking away money they would use to invest or hire workers, the critics say.
Hawaii’s proposed new top income tax rate would also outstrip the largest combined local and state tax rate in the nation, paid by the highest income earners in New York City, which is currently 12.7%.