Despite an unprecedented $ 1.6 billion bailout from the U.S. government earlier this month, the Senate is again seeking a substantial tax hike to put pressure on Hawaii’s richest residents to bend the state’s bills to pay.
The Senate’s Ways and Means Committee unanimously approved proposed changes to House Bill 58 on Tuesday to get more revenue from both state inheritance tax and state transportation tax. The bill would also suspend a number of government excise tax exemptions.
Seconds later, the chairman of the committee, Donovan Dela Cruz, asked the committee to reconsider this measure in order to have more time to finalize some technical details in the bill. The committee then rolled back its vote, which is now scheduled for Thursday morning.
On Monday, the same committee approved House Bill 133, which aims to increase state capital gains tax on profits from the sale of capital assets such as houses, stocks, bonds or jewelry. This move would earn the state an additional $ 57 million a year initially.
The members of the House of Representatives gather on the ground ahead of the opening day of the 2021 legislature. Despite an enormous rescue of the state finances by the federal government, the legislature is considering increasing taxes for wealthier residents and investors. Cory Lum / Civil Beat
The push for these tax hikes is the result of an extraordinary cash injection into the state government with the passage of the Federal American Rescue Plan Act. That bill allocated $ 1.6 billion to shore up state finances and hundreds of millions more to help Hawaii cope with the pandemic.
The latest Senate tax proposals were prepared by the Hawaii Chamber of Commerce, which warned that “introducing sweeping tax increases during a period of economic recovery will undermine efforts to reverse the Hawaiian economy”.
“Hawaii’s business world is at a critical juncture – where additional corporate taxes could mean the difference between closing their doors, going bankrupt or laying off employees,” read a written testimony from the Chamber.
However, the tax proposals were backed by some left-wing activists, who argue that the wealthy received huge tax cuts under the Tax Cut and Employment Act of 2017. Proponents of the law see this as an opportunity for the state to claim some of these tax savings now enjoyed by the wealthy.
Nicole Woo, director of research and economic policy at Hawaii Children’s Action Network Speaks, said cutting government spending during a recession would “further damage our already damaged economy.”
Instead, “it makes sense to ask those fortunate enough to do well in this economy to pay more to prevent cuts in critical government services that so many working families rely on,” Woo wrote.
The proposed transportation tax increase on the bill would apply to non-owner sales of $ 4 million or more. For properties valued at more than $ 4 million, transportation tax would double, while for more than $ 6 million, sales tax would triple and sales of properties valued at more than $ 10 million would quadruple.
The changes to the portion of state inheritance tax on the bill would reduce the amount of inheritance that is exempt from state inheritance tax from now $ 5.49 million to $ 3.5 million when the bill is passed.
When asked why the state would raise taxes in the wake of a major federal bailout, Dela Cruz responded in a written statement that the state was facing some large debts.
This includes $ 750 million that Governor David Ige borrowed last year to cover government operating expenses, as well as hundreds of million dollars in payments due for future health care benefits for government employees and retirees.
The state has also borrowed $ 723 million to pay unemployment benefits to the unemployed. Technically, Hawaii’s employers are required to repay that money. However, House and Senate leaders say the state should cover this debt as the state suspended tourism during the pandemic, triggering business closings and layoffs.
The State House’s budget proposal would repay the $ 750 million Ige borrowed and also pay the unemployment debt on behalf of Hawaii’s employers, but it doesn’t rely on significant tax increases, according to Sylvia Luke, chair of the House Finance Committee.
Instead, the House’s budget proposal relies largely on “raiding” special funds or pulling money out of funds set up with their own stream of income to fund certain government activities.
The House budget proposal would also raise approximately $ 160 million by cutting funding for vacant government positions.
These tactics have alerted some State Department leaders who say they need these positions in order to operate. Luke acknowledged that many of these positions are actually necessary for the government to work, and said funding will be restored for many of them later.
The budget proposed by Ige, which was drawn up prior to the federal bailout, was also not based on significant tax increases. However, there have been profound cuts in foreign ministries and government contracts with social welfare offices.
The governor’s budget included money to repay the $ 750 million government loan, but did not include money to repay the unemployment debt owed by Hawaii’s employers.
The House has already given preliminary approval for an increase in state capital gains tax and has refined House Bill 445 to change the way in which state inheritance tax is applied.
The latest draft of the house measure does not specify how large an inheritance would have to be before the state tax comes into effect. It is therefore unclear what impact this bill would have.
The House turned down a Senate proposal earlier this month to increase state income tax for higher-income residents.
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