This article has been saved to your Favorites!

Hawaii Senate Approves Income, Capital Gains Tax Hike Bill

By Asha Glover · Mar 10, 2021, 7:45 PM EST

The Hawaii Senate passed a bill that would make a number of tax changes, including increasing personal income tax rates, to recoup revenue lost in the novel coronavirus pandemic and to avoid furloughing and laying off state employees.

The Hawaii Senate passed S.B. 56 by a 24-1 vote Tuesday. The bill, introduced by Sen. Stanley Chang, D-Honolulu, would temporarily increase the personal income tax rate for heads of households to 16% for income over $300,000 between Dec. 31, 2020, and Jan. 1, 2028. For individuals, the tax would be 16% for income over $200,000. Currently, heads of households are taxed at 11% for income over $300,000, and individuals are taxed at 11% for income over $200,000.

The bill would also temporarily increase the tax imposed on surviving spouses to 16% for taxable income over $400,000. Under current law, surviving spouse income is also taxed at 11% on income over $400,000.

The bill is intended to help the state recoup revenue lost by the state as a result of the pandemic.

"The Legislature additionally finds that it is necessary to generate revenue to allow the state to meet its strategic goals, avoid furloughs and layoffs for state workers, and prevent disruptions to essential government services," according to the bill's summary.

The bill would increase the tax on capital gains to 11% from 7.25%, and increase the corporate income tax rate to 9.6%. Under current law, a 4.4% tax rate is imposed on taxable income less than $25,000, corporate income between $25,000 and $100,000 is taxed at 5.4% and income over $100,000 is taxed at 6.4%.

The bill would also establish a single corporate income tax rate for all corporations, including regulated investment companies and real estate investment trusts.

The measure would temporarily repeal a wide range of general excise tax exemptions, including exemptions for the amounts deducted from gross income received by contractors and reimbursements received by federal cost-plus contractors for the costs of purchased materials, plants and equipment. The measure also provides for a conveyance tax increase for the sale of properties valued at $4 million or higher. 

The bill, if passed, would take effect July 1. The personal income tax rate hike would apply to tax years beginning after Dec. 31, 2020, and the temporary repeal of certain exemptions and the conveyance tax increase would be repealed on June 30, 2023.

The bill will next be considered by the state's House.

A companion bill, H.B. 3, was introduced by Rep. Jeanne Kapela, D-Naalehu, in January.

Representatives for Democratic Gov. David Ige did not respond to a request for comment Wednesday.

Democratic and Republican leaders in the Hawaii House and Senate did not immediately respond to requests for comment Wednesday.

--Editing by Neil Cohen.

For a reprint of this article, please contact reprints@law360.com.