There’s no magic involved here, only taxes.  Taxes you can see, and taxes you can’t.

The taxes you can see are things like income tax, which gets taken out of your paycheck, and general excise tax, which you can see on your receipt whenever you go to the store.

There are also lots of taxes you don’t see.

One tax that lawmakers love playing around with is called the barrel tax.  It gets paid whenever fossil fuels are imported into the State.  We previously wrote about its history here.  The tax is paid at the wholesale level, so retail customers almost never see a line item on their bills for this tax.  Yet it does get baked into the retail prices — not only at the gas station, but also for electricity (because a lot of our electricity is generated by burning bunker fuel), charges for transportation (think trucking and delivery services, because the service providers use vehicles), and charges for all kinds of tangible goods (they need to get to the stores somehow).

For the past several years, there have been proposals in the legislature to convert the barrel tax into a carbon tax.  Here’s some further information on that proposal.  The carbon tax proposals we have been seeing would be much more expensive than the barrel tax it would replace.

Our GET, furthermore, is not completely visible.  There are some very large hidden components.  For example, when a retail store buys its inventory, it pays a supplier.  If the supplier is local, another GET is imposed, this time at 0.5%.  If the supplier is out of state, then the same 0.5% tax gets imposed as Use Tax, which the retailer has to pay.  These taxes get paid by or are passed on to the retailer, and the retailer adds that in to the price of the goods.

Another hidden component is the tax on business-to-business charges.  If the retailer doesn’t own the land on which its store sits, the retailer needs to pay rent.  GET is charged on the rent, and it’s not at the wholesale rate but at the full 4.5% rate.  (And if the retailer does own the land, it needs to pay county real property tax, probably at a commercial rate that is a lot more expensive than the residential rate real property tax that most of us are used to.)  Does the retailer need help from a CPA firm to keep its books?  GET at 4.5% applies to those charges as well.  Does the retailer need power to keep the lights on, run the registers, keep the frozen food frozen?  GET isn’t imposed on that — instead, a more expensive tax called the Public Service Company Tax kicks in.  The PSC tax has a state component of 4%, similar to the GET, but also there is a county component of between 1.885% and 4.2% depending on how profitable the public utility is.

The state, furthermore, has no monopoly on business-to-business taxation.  Our federal government contributes to higher prices by imposing taxes of its own, such as fuel taxes, transportation excise taxes, communications taxes, environmental taxes, and manufacturer’s taxes on a number of different articles.

So, what’s the bottom line here?  Open up your wallet.

Do you see money inside?

Now you see it, now you don’t.

The rules work a little differently when the government is part of the agreement.  The government has the ability to contract as well, but the ability is defined and limited by law.  It should be.  We, the people, have an interest in the deals that our government is making.  Especially if tax money, or government resources paid for by tax money, is part of the deal.

When it comes to taxes, furthermore, we want our government to be consistent and fair.  We can’t always see the terms of tax deals, because they are generally private tax return information, but we as the public want some assurance that there are no sweetheart deals being given to connected insiders, and that the terms of the agreements are not wildly different from those made with other taxpayers.

Given all of that, it looks like the “settlement” that created the Anti-Weaponization Fund has some issues.  This may not be a moot problem, because although Acting Attorney General Todd Blanche is telling Congress that the fund is dead, his boss, President Trump, still thinks it’s a good idea.

The Fund is loosely connected with a lawsuit Mr. Trump, two of his sons, and his company filed in the Southern District of Florida against the government because an IRS contractor leaked tax return information to the press.  The settlement consists of the settlement agreement and two attorney general orders (here and here) signed by Blanche.

Part of the settlement consists of the Trump parties dropping the lawsuit, which they did.  A group of 35 former federal judges is trying to get the judge to reopen the suit (that challenge has its own problems primarily because courts are equipped to decide disputes between parties, and one of the issues here is whether there is any real dispute here, with Trump basically on both sides of the case).

Another part of the so-called settlement is more problematic.  The settlement agreement requires the termination of any tax audits and forbids, among other things, tax examinations on “any matters currently pending or that could be pending (including tax returns filed before the Effective Date).”

Tax settlements are governed by section 7121 of the Internal Revenue Code.  The Treasury Regulations under that section say that closing agreements shall be on forms specified by the IRS.  The IRS has two forms, Form 866 to agree upon a tax liability, and Form 906 to agree upon the tax treatment of specific matters.  The settlement here isn’t as to any specific matters, so Form 906 can’t be used.  Form 866, under IRS procedures, needs to include a liability determination for each year and tax type involved, as opposed to a blanket statement like “There shall be no tax assessed.”  The settlement agreement here is not on Form 866, obviously, and is not consistent with these regulations and procedures.

That is just one problem with the settlement.  Multiple lawsuits in other parts of the country are bringing up others.  The Department of Justice had been arguing, in the settlement agreement, the Attorney General orders, and elsewhere, that the settlement is consistent with other settlements the Department has done in the past.  That it may have been done before, however, doesn’t make it legal or right today.

Guest Speaker

William Kaneko
Partner, Denton’s Honolulu
Founder, Hawaii Institute for Public Affairs

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Of course, we in Hawaii need to be competitive nationally, so we need to pay some of our student athletes for their NIL.  Or so our University of Hawaii has been arguing.  And, as reported in the Star-Advertiser, our university has already committed to some $5 million in NIL payouts.

University officials began their journey navigating the twists and turns of the NILe environment by coming to our Legislature this past session with hat in hand, seeking $5 million.

A request for a budget line item to this effect made it into the House version of the budget, but it was swatted down in the Senate.  A separate House bill, HB 2384, made it all the way through the House but had a chilly reception, and no hearing, in the Senate.  And a compromise bill, SB 3263, tried to set up an endowment fund the income from which could be used for NIL payments.  It made it through a House-Senate conference committee, but university officials asked the House and Senate money chairs to scuttle the bill, contending that it would create more problems than it would solve.  A Senate floor vote then narrowly killed the bill, 11-12.

So, what is to become of NIL funding here in Hawaii?

According to UH’s athletic director Matt Elliott, “We’re in the budget process right now,” he said. “Our mindset is we’ve got to find those resources to cover those expenses. … We’ll find a way.”

Which means that although the Legislature tried to sink NIL funding, UH’s ship stubbornly refuses to go down.  “We can do this the easy way … or the hard way,” UH is saying.

During a hearing on another measure we were following, SB 2602, Senate Education Committee Chair Donna Kim pointed out multiple instances of UH pulling millions of dollars out from a block of money given for repairs and maintenance, and then repurposing them for other projects that UH was interested in — but were not repairs or maintenance.  One example is renovation of the Sinclair Library.

Is UH going to pull the same kind of stunt here?

We had previously written about UH’s Tuition and Fees Special Fund, which had an unencumbered balance of some $430 million.  SB 2602 was a bill to raid the fund and put excess moneys back into the General Fund (and thereby ease the pressure to raise additional money from taxpayers).  That bill died in this past legislative session when the House decided not to appoint conferees to work out the bill with the Senate.

At a hearing on that bill, UH President Wendy Hensel said, “I don’t want anybody to ask me for a dime when they have a dollar in their hand.  And I feel the same as we come to you and ask for funding.”

Fine.  UH, do what you promised.  Use that money.  No pulling from the repair and maintenance fund.  Use that fund to clear UH’s infamous backlog of repair and maintenance projects.  And, most of all, don’t use this as an excuse to ask lawmakers for taxing power (like the DOE did when they asked for and received the authority to impose school impact fees, which have been a disaster).

This year, the Governor isn’t wasting time.  Senate Bill 3125, Our Big Tax Bill (which is still a lot smaller than the federal One Big Beautiful Bill Act) was signed into law on May 21 and became Act 24, what I am calling the One Big Tax Bill Act or OBTBAA.  The bill changes individual tax rates, adds a new millionaires’ tax bracket, adds limits to the solar credit, and gets rid of several different business tax credits over time.

We had written earlier about the House and Senate contenders for the OBTBA.  The final version of the bill looks a bit more like the Senate version, although it incorporates elements from both the House and Senate positions.

Basically, the OBTBA preserves the scheduled tax cuts that were enacted in 2024 for folks with taxable income of less than $350,000 joint (for single filers, it’s half that amount, and for heads of households it’s 75% of it).  For higher income earners, the tax brackets that are in effect today remain in place, although those earners will see some tax reduction because the first $350,000 (joint) of their income will see the same benefit as is given to everyone else.  The new 13% tax bracket kicks in at $1 million joint and applies to all income over that threshold.

There are no changes to the scheduled increases in the standard deduction that were enacted in 2024.  The Administration’s version of the bill got rid of those, but neither the House nor the Senate went along with that part of the bill.

One significant part of the House position that made it to the OBTBA is a section providing for new limits on the renewable energy technologies credit.  We wrote about that credit last week.  For taxable years beginning on or after 2027, folks making adjusted gross income of at least $350,000 joint (which is not the same as the $350,000 taxable income threshold mentioned in the previous paragraph) will be ineligible for the credit.  As we read it, that means such people who have solar or wind installations scheduled or in progress need to be done by the end of this year or their credit will go poof.  It is not clear how, or if, corporations will be affected by this limitation because adjusted gross income only applies to individuals.  A statewide limit of $40 million in credits also kicks in beginning in 2027.

As for the business credits, the OBTBA scraps the capital goods excise tax credit for taxable years beginning after December 31, 2027.  The same will apply to the technology infrastructure renovation tax credit.

Tax years beginning after December 31, 2028, will see the demise of the high technology business investment tax credit, the renewable fuels production tax credit, and the tax credit for research activities.

Some of these business credits have been around for decades.  The capital goods credit has been around since 1987.  The three high technology related credits came into being at the turn of the millennium.  The renewable fuels production credit was originally enacted in 2016 with a five-year life.  It expired in 2021 and was revived in 2022.  Some of these credits have been a fixture of business for a while now, which is probably a good reason to write their obituaries.  Credits are supposed to be temporary enhancements to incentivize certain behavior.  After a while, they stop having that effect and take on the flavor of entitlements.  Credits are usually complex, which makes us wonder:  Were businesses for which the credits were enacted properly rewarded?  Or did they miss the credits due to lack of awareness or the inability to employ a suitable professional?

In any event, the signing of OBTBA removes the uncertainty.  The bill is law and we now need to plan for it.

In this week’s column, we will try to explain what changes are being made to the credit and when.  The column is based on the bill as it now exists.  We understand that the solar industry is extremely unhappy with the bill and is trying to have the Governor veto it (which we think is a tall order because the bill contains tons of material other than changes to the solar credit, and a veto would apply to the whole bill).

The first thing to understand is when the credit is earned.  The solar credit isn’t earned when the contract is signed, when the money is paid, or when construction starts.  It’s when the equipment is “installed and placed in service.”  The Department of Taxation’s Administrative Rules section 18-235-12.5-01 defines that event as when all costs have been incurred, the installation is completed, and requests for inspection have been sent to the appropriate government agencies.  If the system fails an inspection and corrective work is required, however, the system is not considered installed and placed in service until the system passes the inspection.  In other words, the credit is earned when the system owner can turn it on and operate it legally.

Now, let’s go to the three significant changes to the solar credit in SB 3125.

First, there is a new income cap.  If the taxpayer’s adjusted gross income is at least $175,000 for a single taxpayer or $350,000 for a married couple, then the credit is disallowed in full.  It’s unclear what happens if a corporation owns the system because Internal Revenue Code section 62 defines adjusted gross income only for individuals, meaning that corporations don’t have adjusted gross income.  That change goes into effect for taxable years beginning after December 31, 2026.

Second, there is an aggregate cap of $40 million statewide for each year from 2027 to 2030, and the credit is dead for taxable years beginning after December 31, 2029.  This relates to the third change, which is that there is a new certification procedure required, effective for taxable years beginning after December 31, 2025.  Taxpayers who have completed an alternative energy installation need to file some forms with the Hawaii State Energy Office before March 1st of the following year.  The HSEO will then notify each qualifying taxpayer of the amount of credit awarded, which may be somewhat less than what the taxpayer applied for if total statewide claims exceed the $40 million statewide cap.

This means that calendar year taxpayers who have 2026 installations will need to apply for HSEO certification.  Presumably, if the installation was finished and all inspections were passed in 2026, there would not be much for HSEO to review because neither the income limit nor the statewide cap kicks in until 2027.  For 2026 systems that get done toward the end of the year, there may be particular scrutiny of the inspections to see if the systems indeed passed in 2026 as opposed to 2027, when the statewide cap and the income limits become effective.

Taxpayers making plans to install alternative energy in the 2029-30 time frame also need to watch out.  Although there is a $40 million aggregate limit in 2030, calendar year taxpayers finishing installations in 2030 won’t be able to get any credits at all because of the sunset date.  The $40 million limit in 2030 can only be used by fiscal year taxpayers whose year starts in 2029 and ends in 2030.

Yes, this is complicated.  Look for more guidance to come out of the State if the bill is enacted.

House Bill 2329, which conforms our state tax law to provisions of the One Big Beautiful Bill Act, is our first topic this week.  Our legislature normally adopts many of the changes made to the federal tax code in the Hawaii income tax law every year to make it easier for taxpayers to comply with the law.  This year’s federal tax law changes are extensive, however.

To start with, the federal code includes new provisions based on some of President Trump’s campaign promises.  Our bill does pick up “No Tax on Tips,” which we previously reported on.  It does not pick up “No Tax on Overtime,” which we discussed here, nor does it allow the federal deduction for car loan interest.  Enhanced standard deduction for senior citizens?  We don’t pick that up either, probably because we already allow an enhanced personal exemption for our kupuna.

The federal code previously had a provision called the “Pease Limitation” that started eating away at itemized deductions once a taxpayer reached a certain income level, disallowing more and more itemized deductions if the taxpayer’s income was higher, until the taxpayer could use only 20% of the itemized deductions otherwise available.  The federal Tax Cuts and Jobs Act scrapped the Pease Limitation, but we kept it.  And now, the One Big Beautiful Bill Act enacted a more taxpayer-friendly version of the limitation that disallows at most 2/37 of itemized deductions allowable, but for Hawaii tax purposes we are keeping the older, nastier version of the law, with the federal income thresholds that existed in — get this — 2009.

For charitable giving, our state tax bill conforms to the federal provisions allowing up to a $1,000 ($2,000 for joint filers) charitable deduction to be taken by folks who don’t itemize their deductions, and it also incorporates the federal deduction floors.  Thus, individuals can only take itemized charitable contribution deductions only to the extent that their contributions exceed 0.5% of adjusted gross income, and corporations are allowed charitable contribution deductions only to the extent that their contributions exceed 1% of taxable income.

For those interested in the state GET, income tax, and unemployment tax benefits for enterprise zones, Senate Bill 2360 adds new qualifying activities, including biotechnology products, whether or not genetically engineered; medical and health care services, including home health care, specialized care practices, and health coaching; research and development activities in aerospace technology; and information technology design and production.  In addition, the qualification period is extended from the current 7 years to 9 years.  Those who are working in newly qualified fields should check to see if they are in an enterprise zone or wouldn’t mind moving to one.

And, for those interested in the motion picture and TV production credit, Senate Bill 2580 makes several important changes.  An additional 5% is allowed to productions that have at least 80% local hires.  The per-production cap is raised from $17 million to $20 million, where unused production cap is allowed to carry over to the following year.  Productions with $60 million or more in production spending are exempt from the cap altogether.  Productions for a streaming platform qualify.  And the bill legislatively nullifies a troublesome interpretation of the General Excise Tax, stated in Tax Information Release 2024-04, that had dramatically increased production payroll costs.

Next week:  More tax news that’s fit to print (and maybe some that isn’t).