Lawmakers are considering increasing the capital gains tax from about 7% to 9%. Capital gains are the profits earned on investments or through the sale of a property.
Devin Thomas, a senior analyst at the Hawaiʻi Appleseed Center for Law & Economic Justice, explained that because capital gains are taxed at a flat 7.25% rate, it's not fair to those with lower incomes.
"So even if somebody is a high earner and they belong to the $200,000-plus income tax bracket, they would still pay that lower rate of 7.25%," he said.
“This fundamentally is not a fair way to structure the tax because it means that people who make a lot of money from investment income are able to get a bit of a tax break and they pay a lower tax rate compared to working families at the lower end of the income scale, who usually don't have any investments to earn capital gains from at all.”
Those whose general income tax bracket is lower than the 7.25% capital gains tax would pay the lower income tax rate. For a single filer, that’s someone who makes less than $36,000 a year.
Thomas added that those who pay capital gains taxes are likely higher income earners. In 2021, for those earning $400,000 a year, a third of that income came from capital gains.
For those earning about $85,000 a year, only about 2% came from capital gains.
However, the Hawaiʻi Realtors Association opposed the measure because it could impact seniors trying to sell their homes.
“The capital gains tax has a disproportionate impact on our kūpuna who may want to sell and downsize to a smaller home where they can age in place or rely on their investments to convert their assets to spendable income during their retirement, such as for medical expenses or to move into a care home,” the organization wrote in its public testimony.
It added that Hawaiʻi has the 10th highest capital gains tax rate in the nation.
The proposed increase would bring in an additional $84 million to the state each year.
The bill will next be heard by the Senate Ways and Means Committee.
