Legislature Debates Controversial Senate Bill 56 SD1 to Raise Taxes

by Dennis Galolo

It’s no secret that Hawaii leads the nation in several reputable categories. We are the healthiest state for senior citizens and a leader in efforts to achieve environmental sustainability and a future free of fossil fuels. Hawaii is also at the forefront when it comes to fighting for women’s rights and other civil liberties.

But on the downside, the Aloha State has the nation’s highest unemployment rate thanks largely to the COVID-19 pandemic. We have paralyzing traffic gridlock and endless red tape and government regulations for small business start-ups. Hawaii is also the least teacher-friendly state in the nation and the state with the lowest annual teacher salary.

And if legislators have their way, Hawaii could soon hold the dubious distinction as the state with the highest income tax rate courtesy of Senate Bill 56 SD1 which calls for tax increases to help the economy.

Introduced by Sen. Stanley Chang, SB56 SD1 was approved by the State Senate by a vote of 24-1 and transmitted to the House of Representatives where it passed First Reading and referred to the committees on Economic Development, Housing, Consumer Protection & Commerce, and Finance. As of press time, none of the four committees have scheduled hearings.

SB56 SD1 in its current form would do the following:

• Impose a 16 percent tax on residents earning more than $200,000 a year.
• Increase the capital gains tax rate from 7.25 percent to 11 percent.
• Impose a single rate for the corporate income tax at 9.6 percent.
• Repeal certain GET exemptions from July 1, 2021 until June 30, 2023, and
• Increase conveyance taxes for the sale of properties valued from $1 million to $2 million to 0.6 percent and from $2 million to $4 million to 1.0 percent.

The bill would revert the state income tax rate for higher earners from 16 percent back to its current rate of 11 percent after the year 2027. Of note, California currently has the highest state income tax rate in the U.S. at 13.3 percent for residents who earn more than $1 million per year.

In a media statement, Sen. Chang said SB56 SD1 is a mechanism to generate revenue for the state.

“In order to avoid future furloughs and layoffs for state workers, we need to consider every option to prevent disruptions to essential government services,” he said.

Interestingly enough, Sen. Chang’s constituents are largely those from Kahala, Diamond Head, Waialae Iki and other ritzy neighborhoods in East Oahu.  

In testimony before the Senate’s Ways & Means Committee (WAM), State Tax Director Isaac Choy estimated that SB56 SD1 could raise upwards of $100 million per year for the state during the proposed seven-year period.

Supporters say the bill is needed to generate additional state revenue needed to offset the financial toll caused by the COVID pandemic on Hawaii’s economy. As of December 2020, the state’s budget shortfall was estimated in excess of $2 billion.

Gov. David Ige late last year said every proposal to address the shortfall would be considered, including state worker layoffs, budget cuts and tax increases, but with a better-than-expected economic forecast for the coming year such measures may not be necessary.

Help is also on its way in the form of the federal government’s $1.9 trillion COVID relief package, $6.1 billion of which is earmarked for Hawaii’s families, small businesses, and government to cover budget shortfalls and prevent worker furloughs.

“This new infusion of federal funding gives the State much needed breathing room, and layoffs and furloughs are no longer necessary in the foreseeable future,” Ige said.

Development and distribution of COVID vaccines for both the public and visitors have also helped but Ige is keeping an eye on various strains that are reportedly deadlier and more easily transmittable.

In his recent State of the State address, Ige cautioned that Hawaii has yet to turn the corner.  

“Government will have to tighten its belt, our citizens will be asked to do more with less, and we will all need to help each other,” Ige said.

Fairness For All?
The COVID pandemic devastated many workers in low-wage tourism and hospitality jobs who were already struggling to make ends meet before the pandemic hit. At the same time, many of those at the top benefitted from a record-breaking stock market and skyrocketing high-end real estate prices.

Supporters say SB56 SD1, which targets Hawaii’s wealthiest residents and profitable corporations, will bring in much-needed revenue but not hurt lower income residents. Advocates want to make taxes more equitable, noting that Hawaii’s lowest income residents pay 15 percent in taxes, compared to the wealthiest residents who pay 9 percent.

According to Nicole Woo, director of research and economic policy for Hawaii Children’s Action Network Speaks!, SB56 SD1 has a number of “worthwhile revenue-generating ideas” that could help close budget shortfalls and protect important community services.

“It makes sense to ask those who are fortunate enough to be doing well in this economy to pay more, in order to close the deficit without slashing the critical government services that so many struggling working families have come to rely on,” she said in written testimony.

Rev. Sam Domingo from the Hawaii Workers Center opposes cutting government spending that would affect low-income housing assistance, unemployment insurance, food stamps and other social service programs.

“That’s not the answer that our communities deserve,” he said. “When the wealthy and corporations pay their fair share in taxes, we can prevent these cuts to essential services and protect our communities,” he said.

However, others like Hawaii Food Industry Association executive director Lauren Zirbel say SB56 SD1 will do more to harm rather than help our State in the long run. Zirbel opposes the bill, saying that increasing income and corporate taxes makes Hawaii a less attractive and less affordable place to live.

“Hawaii already has some of the highest individual and business tax burdens in the nation,” she said in testimony. “As our residents and local businesses are struggling, now is the worst possible time to increase that burden. Our residents and businesses need the support of our leaders and our state as they work to rebuild and regrow our economy.”

The Chamber of Commerce of Hawaii agreed with the bad timing of the measure, saying that implementing broad tax increase measures called for in SB56 SD1 will undermine efforts to turn Hawaii’s economy around. The Chamber expects higher corporate tax rates to significantly harm already ailing small businesses and may force them to close altogether.

The Tax Foundation of Hawaii also opposes the bill, even drawing comparisons to the infamous Enola Gay, the B-29 bomber that dropped the first atomic bomb on Hiroshima and helped end World War II. The target this time would be the pocketbooks of Hawaii’s taxpayers.

If SB56 SD1 is passed, the Foundation expects Hawaii’s residents to leave in droves for tax-friendlier states. In written testimony, the Foundation stated, “When people are squeezed economically by the cost of living, taxes, and inefficient bureaucracy, they can and do vote with their feet – by getting on planes, for example. To what lengths will we go to chase people out of our state?”

Last October, economists from the University of Hawaii predicted a net population loss of 19,000 over the next two years, a figure that very well could be exacerbated by the effects of SB56 SD1. In fact, Hawaii’s population has been on the decline since 2017. Not since statehood has Hawaii’s population declined for two consecutive years.

The result of declining population is bad for the economy since fewer residents mean a smaller labor force, less tax revenues and shrinking consumer spending by households.

“Hawaii already has some of the highest individual and business tax burdens in the nation.  As our residents and local businesses are struggling, now is the worst possible time to increase that burden. Our residents and businesses need the support of our leaders and our state as they work to rebuild and regrow our economy.”

– Lauren Zirbel, Executive Director, Hawaii Food Industry Association

Escape From New York
Like Hawaii, New York City has seen a population dip over the past three years but none more so than in 2020 as the result of COVID-19. According to the New York Post, the Big Apple’s rich are leaving in droves for tax friendlier states like Texas and Florida.

For 2020, there were nearly 300,000 change of address requests from New Yorkers. Numerous moving trucks were seen throughout the city with residents headed for the suburbs and beyond. Additionally, cell phone data showed more than 50 percent of residents ghosting Manhattan’s wealthiest neighborhoods.

According to a modeling scenario conducted by Rockefeller College in Albany, a 5 percent one-time net increase in out-migration by New Yorkers earning $100,000 or more would result in a loss of $933 million in income, sales and unincorporated business tax revenue.

For his January 2022 budget proposal, New York Gov. Andrew Cuomo proposed a 14.7 percent tax rate on the wealthy, which he estimates would raise $1.5 billion to address the state’s $15 billion budget shortfall.

In California, state lawmakers last year deferred a proposal that would have raised the top personal income tax rate to 16.8 percent which would have impacted cities like San Francisco where an exodus from the Bay Area has accelerated due to homelessness and a host of long-standing problems.

One venture capitalist from the Bay Area described such tax proposals as “rocket fuel for the exodus from California.” In 2020, major tech companies such as Oracle and Hewlett-Packard announced plans to relocate out of the Golden State, along with Elon Musk, Larry Ellison and other billionaires.

Hawaii’s Doctor Shortage
SB56 SD1 creates a 16 percent income tax rate for single taxpayers who make $200,000 or more and married couples making $400,000 or more. Healthcare experts say the bill could negatively impact Hawaii’s healthcare industry which suffers from a severe shortage in the number of physicians. As of last year, the state had a shortage of 1,014 physicians.

According to Dr. John Wade, a diagnostic radiologist based in rural Hilo and a member of the Hawaii Physician Shortage Crisis Task Force, the physician shortage varies from island to island, with the Big Island at 53 percent, Maui at 43 percent and Oahu at 20 percent.

“These shortages are something that we on the Big Island deal with every day,” Wade says. “Certain specialties are either missing or we simply don’t have adequate numbers. This impacts patients’ access to healthcare. Even if you have a healthcare plan but no healthcare provider that you can see, then your health plan is meaningless.”

In a recent webinar hosted by ThinkTech Hawaii and entitled “Tax Hikes Could Worsen Doctor Shortage,” Wade cited two reasons for Hawaii’s physician shortage—the difficulty in recruiting doctors to Hawaii due to our high cost of living and doing business, and an accelerating rate of retirement among current physicians.

But if steep tax increases called for in SB56 SD1 are implemented, the results from a healthcare standpoint, Wade says, would be “nothing short of apocalyptic.”

“We’re already having incredible challenges recruiting and retaining physicians and now you have the Legislature looking to add a tremendously high tax rate,” said Wade. “The bill is just one more negative factor that physicians have to weigh when considering coming to Hawaii. It makes an already bad situation even worse.”

Those physicians who come to Hawaii end up working long hours and struggle with high overhead costs, decreasing reimbursements and general excise tax that cut into their slim profit margins. Not surprisingly, the vast majority end up staying only a year or two before leaving for greener pastures in other states.

Nationwide surveys of doctors show that over half have experienced burnout, are emotionally exhausted and have lost their sense of purpose. The high burnout rate among physicians has led to more divorces, financial catastrophes and in extreme cases, suicides.

The bottom line, according to physician advocacy groups, is that more taxes will only frustrate the many doctors who are already unhappy with the current state of affairs of the profession and discourage physicians from choosing to practice in Hawaii.

“We’re already having incredible challenges recruiting and retaining physicians and now you have the Legislature looking to add a tremendously high tax rate [as SB56 SD1 is proposing]. The bill is just one more negative factor that physicians have to weigh when considering coming to Hawaii. It makes an already bad situation even worse.”

– Dr. John Wade, member of the Hawaii Physician Shortage Crisis Task Force

Dead On Arrival
While SB56 SD1 sailed through the Senate, the going may be a lot bumpier in the House. The bill was assigned a rare quadruple committee referral, giving it a little to no chance of survival. Most observers feel that House leadership has its qualms about supporting any new tax increases to balance the State budget, preferring instead measures to restructure and consolidate.

However, there is still time in the legislative process for legislators wanting a compromise to revive parts of the bill in one form or another. If so, Rep. Bob McDermott says that any new tax increases will be proposed at a much lower rate.

Overall, Rep. McDermott says the tax increase proposals in SB56 SD1 are “short sighted and debilitating.”

“With the announcement by Gov. Ige that furloughs and layoffs for state workers are no longer necessary, I don’t see any reason to continue considering this,” he said. “The bill is a bad idea that hurts doctors and small businesses who are still struggling.”