The Legislature this year has been worrying about the cost of the Maui wildfire disaster recovery and pandemic hazard pay for state workers, but it appears unlikely lawmakers will resort to any tax increases this year to help cover those expenses.

Instead, the House and Senate are seriously considering a sizable state income tax cut to benefit working families, and also a separate measure to exempt more people from the state inheritance tax.

That focus on tax cuts instead of tax increases suggests state finances are in better shape this year than some leading lawmakers suggested earlier in the session, including Ways and Means Committee Chairman Donovan Dela Cruz.

Lawmakers have spent much of the session mulling the potential cost of the Maui recovery, and proposing budget adjustments to try to cover those costs. The Ways and Means Committee last month approved appropriations totaling more than $800 million in state and federal funds to cover expenses associated with the Aug. 8 fire.

But Gov. Josh Green, who has been advocating for income tax relief since he took office in December 2022, said in a written statement Monday the state still has enough money to deliver the income tax changes he proposed in House Bill 2404.

“We can afford the income tax cuts for ALICE families and that should be our focus as I have said from the start,” said Green in his statement. ALICE is an acronym for Asset Limited, Income Constrained, Employed, shorthand for Hawaii’s struggling working families.

House Speaker Scott Saiki described HB 2404 as “probably the most significant tax bill” of the session, and said he also wants tax relief for low income workers.

Senate President Ron Kouchi referred questions about the tax proposals to Dela Cruz, who did not respond to a request for comment.

Green’s original income tax proposal has been modified as it’s moved through committees at the Legislature, and now has two major features. First, it would index state income tax brackets to inflation, a step that would prevent or delay people from moving into higher tax brackets as their earnings increase.

Dela Cruz’s Ways and Means Committee then amended the bill last week to more than double the current standard deductions that tax filers can claim. Those larger deductions would effectively reduce each state filer’s taxable income, delivering income tax savings to many residents.

An analysis by the state Tax Department predicts the latest version of HB 2404 would increase take-home pay by $634 for a hypothetical head-of-household filer with two children who earns $60,000 per year in wages.

The measure was tentatively approved by the full Senate on Friday, and is scheduled for another Senate floor vote on Tuesday. It will almost certainly then advance to conference committee, where lawmakers will try to work out differences between the House and Senate versions of the bill.

But tax changes in the bill would come at a substantial cost to the state general fund. The Tax Department analysis shows the new Senate version of HB 2404 would reduce state income tax collections by more than $83 million next fiscal year.

The annual amount of lost tax collections would then grow by about $15 million each year after that, and by fiscal year 2030 the single-year revenue loss would reach about $163 million, according to the Tax Department.

Still, Green said in his statement he has diverted $300 million that was earmarked for the public employees’ retirement system back into the general treasury, which means money is available to make the income tax changes.

“The legislature can afford to approve this tax policy and also GIAs (grants in aid) to help those in need,” Green wrote.

That last reference to grants in aid involves money the Legislature normally distributes to nonprofit organizations each year to fund social services and community projects. Last year lawmakers provided nonprofits with about $20 million to fund operations and $30 million for various construction projects.

Some lawmakers have questioned whether the state can afford to provide that support this year, but Saiki said he is now more optimistic some grants-in-aid funding will be available. A final decision on how much money will be distributed will have to wait until the end of the session, he said.

Saiki also said that “tax relief is definitely on the table at the Legislature. It’s something that we want to seriously consider, and it is time for us to take a look at the standard deduction and the brackets.”

“The lowest paid workers should not be paying state income tax, and by adjusting the brackets you could provide relief paycheck by paycheck because you would have minimal (tax) deductions in every paycheck,” he said.

But Saiki was more guarded in his comments about Senate Bill 3289, the second major tax proposal still in play this year. That bill would exempt more people from Hawaii’s estate tax, an idea that has proved to be controversial.

Currently the “marital deduction” for the estate tax shields spouses from paying the inheritance tax. SB 3289 would expand that exemption to include any immediate family member, including a “spouse, child, sibling, parent, grandparent, grandchild, stepparent, stepchild, stepsibling, or equivalent adoptive relationships.”

The bill is backed by an array of longtime kamaaina companies ranging from City Mill and Servco Pacific to Zippy’s Restaurants and Foodland Supermarket.

Mark Fukunaga, executive chairman of Servco, told the House Finance Committee last week that the estate tax is “a one-time sledgehammer of a tax that breaks up thriving family businesses.” He said the businesses often do not have enough cash on hand to pay the estate tax, and are forced to sell instead.

Fukunaga said he represents 67 family-owned businesses that support the measure, and said the state will actually generate more tax revenue if it foregoes the estate tax.

He argued lifting the burden of the estate tax would allow family businesses to invest more money in expanding their operations, which would create more jobs and generate more tax revenues in the long run.

But critics say that relaxing the estate tax would benefit only Hawaii’s wealthiest residents while costing the state some $43.3 million per year in lost revenue.

Gavin Thornton, executive director of the Hawaii Appleseed Center for Law and Economic Justice, told lawmakers the measure would only benefit the wealthiest 0.2% of Hawaii residents.

“We cannot afford to provide a $43 million tax break at a time of such great need for our broader
community: Maui wildfire relief; hazard pay for state workers; and numerous other services and
supports for Hawaii’s people,” Thornton said in written testimony.

Senate Bill 3289 sparked a heated debate on the House floor on Friday, with a dozen Democrats voting against the bill and other lawmakers expressing reservations about the measure. Rep. Burt Kobayashi, a member of the Finance Committee, urged his colleagues to reject the bill.

“I’ve decided that this bill puts you on the side of either for the people, or for the very wealthy, and by very wealthy I mean couples that have an estate exceeding $11 million, which are very, very few,” Kobayashi said.

He said the state and the community have no guarantee that granting the tax break to some of Hawaii’s wealthiest families will result in any benefit to anyone else.

The measure is scheduled for another floor vote on Tuesday, but it is not certain that the House will again vote to approve it.

Saiki said lawmakers do need to think about ways to support Hawaii’s longtime family businesses, but observed that the estate tax bill would be a major change in the state tax code.

“Sometimes it takes two or three years for a change like that to be approved,” he said. “So, this was the first year that it’s been introduced to this extent, with this level of interest.”