SB56 Tax Scare Could Have Long-Lasting Effect

by Joe Kent

Hawaii residents were spooked last week by Senate passage of a bill that would increase the state’s highest personal income tax from 11% to 16% on annual incomes of more than $200,000, making it the highest in the nation.

Promoted as a way to help balance the state’s budget, the now-notorious SB56 also would increase the state’s capital gains tax, corporate income tax and conveyance tax, and “temporarily” repeal a large number of general excise tax exemptions.

Thankfully, the word from House leaders is that the bill is probably dead — at least for this year. The bill has been referred to four separate committees, all of which must hold hearings and approve it for the bill to survive.

But even if the bill is functionally dead at the moment, it still is shocking that such a bill made it out of the Senate — by a vote of 24-1, no less — and could return next year. At a time when many Hawaii residents still are nursing their wounds from the economic devastation caused by the COVID-19 lockdowns, our senators do not seem to know that:

>> Hawaii already has the second-highest tax burden in the nation.

>> Hawaii has been harder hit by the lockdowns than any other state in the nation, forcing thousands of businesses to close and pushing unemployment to the highest rate in the nation.

>> State lawmakers increased taxes and fees substantially in the decade before the lockdowns.

>> Hawaii businesses will be seeing their state unemployment taxes go up by average 38% in 2021, leaving them little, if any, room to handle more taxes.

>> Hawaii has been experiencing net population loss in recent years because of its high cost of living, further eroding the state’s tax base as well.

As The Wall Street Journal’s editorial board wrote last week, “If the Hawaii Legislature’s goal is to shrink the state population, its new tax grab might do it.” Already some entrepreneurs and doctors have notified the Grassroot Institute of Hawaii that they are considering leaving the state.

Dr. Scott Grosskreutz, of the Hawaii Physician Shortage Crisis Task Force, said SB56 has pushed many physicians into thinking seriously about relocating to the mainland. He added that for four years, doctors have been lobbying the Legislature for a medical services exemption from the state general excise tax. But what did they get? Possibly the worst Hawaii tax bill in decades.

The state’s propensity to “tax to da max” also likely will discourage doctors moving here in the first place. Grosskreutz said most new physicians won’t want to move to a state with such high taxation while still dealing with their student loans and the overhead costs of setting up a practice.

The fact is, SB56 is a Pandora’s box of tax hikes that already has waved a red flag to entrepreneurs across the nation that Hawaii is not a good place for business. If you were a potential investor on the mainland and saw headline, “Hawaii lawmakers considering nation’s highest income tax,” what would you think?

Overall, it is doubtful any of Hawaii’s proposed tax increases this year will, if enacted, achieve the goal of increasing state revenues. More likely, they will further damage the economy and prompt even more of our family, friends and neighbors to move away.

If our lawmakers really want to generate more tax revenues, they should stop playing with fire and instead focus on growing the economy. They need to cut government spending, lower tax rates, and remove barriers to commerce and employment. The result would be more investment, more business activity and more jobs, and thus more tax revenues to help balance the state budget, which, after all, is the goal of SB56.
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JOE KENT is executive vice president of the Grassroot Institute of Hawaii.