The Senate and House money committees have come to a compromise on a measure that would impact the historic income tax cut that went into effect last year and several popular tax credits — including one for rooftop solar.
Under the current income tax plan, the state is expected to be in a $400 million financial hole by 2032 due to cuts in federal funding.
The historic tax cut that started last year for all Hawaii residents, including its highest income earners, is expected to cost the state over $1 billion when it’s in full effect.
1. Future tax reductions retained for most, a new tax bracket for millionaires
The new proposal continues income tax cuts for most tax brackets. But it pauses the future cuts for the top four income levels — individuals who make more than $175,000 a year and married couples making more than $350,000 dollars a year.
It also creates a new bracket for millionaire households. It would tax any income over $1 million for joint-filers and $500,000 for single-filers at 13%.
The measure also continues to increase the standard deduction. By the time it is fully implemented in 2031, it will be nearly six times higher from what it was before the law went into effect in 2024.
2. Some tax credits will be phased out
The measure also phases out tax credits over the next several years. Notably the proposal will sunset the Capital Goods Tax Credit that businesses can claim when they buy things like machinery or equipment in 2028.
It also includes the phase out of the Renewable Energy Tax Credit, which is largely used for rooftop solar. The proposal caps the amount that the state can spend on the credit at $40 million for four years and ends the tax credit completely in 2031.
3. The Legislature can move forward with the budget
Because the budget relies on revenue, this measure needed to be approved before other pending bills can be finalized. It also now allows the House Finance Committee and Senate Ways and Means Committee to open negotiations on the budget.
The Senate and House have had opposing ideas on how to stabilize the state's finances. The Senate has looked to cut vacant positions and recoup unspent money in special funds. These proposals have resulted in cuts to many departments, which the House said includes at least 20 positions that are currently filled.
House Finance Chair Chris Todd explained that while he's open to negotiation, cuts to the Department of Human Services and the Department of Health are off limits.
“ There's proposed cuts to Department of Human Services of close to $40 million. We will not cut a single dollar from the Department of Human Services. It is a complete off limits line for us,” he said.
“Same thing to the Department of Health, a proposed cut of $25.3 million. That is also a cut we will not sustain," Todd said. "We've been very flexible on trying to come to an agreement on this tax plan, even on areas where we're personally, or I'm personally uncomfortable, you gotta get something done, but as far as the budget goes, there's just some things we're not gonna be able to make work.”
