Two years ago, the Legislature passed a historic income tax cut that would cost the state over a billion dollars in revenue if fully implemented by 2031.
“Our budget is in a different place than it was a few years ago,” said Nicole Woo, Hawaiʻi Children's Action Network’s director of research and economic policy.
“We have a federal administration that is threatening a lot of cuts, or sometimes they call it cost sharing, that's going to put burdens of tens or hundreds of millions of dollars a year on our state and threatens essential programs like SNAP and Medicaid and even public education and Head Start.”
With those federal changes on the horizon, state lawmakers are advancing measures proposed by Gov. Josh Green that would pause some of those tax cuts.
“In 2026 and in the coming years, we will keep finding ways to make living in Hawaiʻi more affordable,” Green said during his State of the State speech at the start of this year.
“In 2025, the federal government's severe cuts and other actions took $3 billion out of our state's economy, leaving us with an unforeseen budget shortfall.”
Rep. Amy Perruso was one of three state lawmakers in 2024 who raised reservations about passing the large income tax reduction. The concern was that because it applied to all income earners, those who make the most money were actually seeing the highest reductions in their taxes.
“It is a political challenge to walk that back or pause it, but I think it's the only responsible thing to do," Perruso said.
She sits on the House Finance Committee, which voted Wednesday to pause the tax cuts, an action expected to bring back about $1.4 billion to the state.
“We have had a really robust conversation, at least in the House this session, about what it looks like to adequately fund our future – tax revenue and tax fairness have to be part of that conversation,” Perruso said.
“I think this is the most interesting fiscal conversation, or set of conversations, I've seen since I've been in office, and it's really refreshing.”
What’s in the House bill?
While the House bill will likely be amended as it moves through the legislative process, as it stands, most of the income tax reductions from 2025 through 2026 will stay the same. The pause would be on further reductions in the following years.
However, there would be a 1% increase in the rate for the top three income brackets – that means it impacts couples who make over $450,000 a year or individuals who make over $337,000 a year. However, because of other adjustments to the income brackets themselves, even if the measure goes into effect, those impacted would likely pay less in state income taxes than before 2025.
The current House bill would also allow the increases in the standard deduction to continue uninterrupted.
“This would provide meaningful tax relief for all income levels, but is particularly impactful for working-class families, who are less likely to itemize,” House Finance Chair Chris Todd explained during Wednesday’s hearing.
The bill also includes adjustments to the child care and dependent tax credit to increase the percentage of the care expenses that could be claimed for those who are middle to lower income.
“What we're trying to do here is target the relief of this credit more towards the middle class,” Todd said.
“One of the problems with the credit … as it's currently on the books is that about two-thirds of the benefit go to high-income earners currently. So this would restructure it a little bit while still providing some degree of a credit for high-income earners.”
However, groups like the Grassroot Institute of Hawaiʻi – a Libertarian think tank – would rather the state take a closer look at ways it can reduce costs instead of raising revenue to cover the federal funding losses, like cutting vacant positions or looking at unspent special funds.
“We are really trying to just start the conversation because right now, the conversation is all or nothing. It's we either pause the tax cuts completely, or we keep going, and we don't have enough revenues to make ends meet as a state,” said Grassroot Institute Hawaiʻi Director of Strategic Campaigns Ted Kefalas.
“We're just trying to bridge that gap and say, ‘Look, there's other ways to do this.’ It doesn't just have to be through stopping the tax cuts.”
Rep. Kyle Yamashita, who chaired the House Finance Committee when the tax cuts were passed in 2024, also pushed the Green administration on what efforts it had made to shrink the size of state government.
“This is a good time for us to re-examine and rightsize government to provide the services that we need to provide and that's our responsibility,” Yamashita said during Tuesday’s hearing.
“We should have a well-compensated, well-trained smaller workforce, but we have to start working on that.”
This was one of the first times that the Legislature had an open discussion on how the income tax cuts are structured because when it was passed in 2024, most of the bill language was inserted in the final days of the legislative session during the conference process, where public testimony is not accepted.
The Senate Ways and Means Committee also advanced its version of the income tax pause bill. The Senate's bill preserves the income tax cuts for most income earners, but pauses them for the top five highest tax brackets. It also broadens the scope to sunset other tax credits in 2029, like those for renewable energy.
Momentum for other progressive tax measures
The House Finance Committee also advanced several other bills that aim to increase taxes on wealthier residents. For example, it passed a measure that would increase the tax on capital gains – the money people make from investments – from 7% to 9%.
Another measure advanced would add a 2% surcharge on large estates that are inherited.
Hawaiʻi Appleseed Center for Law & Economic Justice’s Devin Thomas explained that lawmakers are being forced to look critically at the state’s tax code to find new ways of generating revenue. It’s something that doesn’t usually happen during an election year.
“The state is having to reconsider many different taxes, not just an income tax, but also capital gains, right? Other wealth taxes were put forward during the session too, which, you didn't see them get very far in previous years,” Thomas said.
“That's a big change in 2026, and it does feel like people are more receptive to having these conversations around how do we make our tax system fairer? How do we make sure that money is going to the right places? And you can see that reflected in the bills that are getting passed and amended.”
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