Rebalance Hawaiʻi’s Upside-Down Tax Code To Achieve Prosperity For All
We are the third-worst state when it comes to taxing struggling working families.
The Hawaiʻi Legislature has the power to rebalance the tax code.
Honolulu Civil Beat // Community Voice
January 23, 2024
Larisa and her husband live in Kapahulu on Oʻahu. Both work full time and earn just over the limit to qualify for SNAP, the program formerly known as food stamps.
With two children, they’re living paycheck to paycheck and struggling to keep their keiki fed. Their daughter, Kaimele, suffers from epilepsy, adding additional costs from medical bills.
When Covid hit in 2020, the price of basic necessities like food and gas jumped, pushing strained household budgets to extremes.
Larisa’s family squeaked by, in part, thanks to a temporary expansion of the federal Child Tax Credit that provided a monthly budget boost. While that cushion disappeared at the end of 2021, the cost of living burden hasn’t lessened.
The combination of Hawaiʻi’s highest-in-the-nation cost of living (in particular the cost of housing) and its comparatively low wages is pricing working families like Larisa’s out of their homes. Hawaiʻi’s homelessness and outmigration crises each stem from this unsustainable economic paradigm.
Our state tax code makes the situation worse. A comprehensive analysis of state and local taxes across the country shows that Hawaiʻi is the third-worst state when it comes to taxing struggling working families. Households in the lowest income category pay an effective tax rate of 14.1 percent, while the richest 1 percent pay an effective tax rate of 10.1 percent.
While families like Larisa’s were struggling during the pandemic, the top 20 percent of households got richer. The conditions that created this inequity—and the cycle of poverty it perpetuates—are the result of policy choices. Better policy choices can reverse the cycle.
The Hawaiʻi Legislature has the power to rebalance the tax code, easing the high burden on working families while increasing the share owed by the wealthy and corporations.
This strategy puts more money into the pockets of working families, stimulating our consumer economy.
At the same time, increasing taxes on wealth generates tax revenue for critical investments in our communities from those who can best afford to contribute.
Tax Code Toolbox
There are multiple policy tools in the tax code toolbox for lawmakers to choose from. One combination that highlights the concept of rebalancing the tax code is that of the Keiki Credit and the capital gains tax.
Capital gains are profits from the sale of assets such as stocks, bonds, art, antiques or real estate.
Hawaiʻi is one of only nine states that taxes capital gains at a rate that is lower than the top-end tax rates on regular income. Since 97 percent of capital gains income in Hawaiʻi goes to the top 5 pecent richest households (earning $270,000 and above), this is effectively a tax break for the rich.
Taxing capital gains at the same rates as regular income would generate an estimated $87 million in new revenue, and 97 percent of the new tax burden would fall on those same affluent households. Reinvesting this revenue into working families in the form of a state Child Tax Credit—or Keiki Credit—would ease their cost of living, and stimulate the economy.
Some 162,000 families in Hawaiʻi benefited from the expanded federal Child Tax Credit, and the expansion contributed to an unprecedented 40 percent decline in the national child poverty rate during the midst of a pandemic-recession.
Children who grow up in financially secure households do better in school, have better health outcomes, and are more likely to be employed, and earn higher wages relative to their poorer peers. Investing in the financial security of children now, pays all kinds of social (and financial) dividends throughout their lifetimes.
In the wake of the lapse of the expanded federal Child Tax Credit, the child poverty rate more than doubled from 5.2 percent to 12.4 percent. In response, 14 states have stepped up to meet the need with state CTCs. Hawaiʻi should be the 15th.
Since affordable housing is the biggest cost for working families, it’s worth mentioning one more tax code tool: raising taxes on the sale of multimillion dollar mansions. Revenue from the state’s conveyance tax goes directly to financing affordable housing development.
It’s the only designated revenue source for affordable housing construction in our tax code. Targeting this mansion tax at properties that sell for over $4 million means that we are funding affordable housing through fair taxes on the same wealthy investors driving up our home prices.
Because of the expensive challenges facing our state, lawmakers must seize the opportunity to leverage the tax code to lower costs for working families while funding our collective future through more equitable taxes on wealth.
Doing so moves us all toward a sustainable future in which Hawaiʻi’s people are well-cared for, our communities have the resources needed to overcome big challenges, our working families can support our economy, and our keiki are set up to succeed.
