The last committee to consider the bill with public input was the Senate Ways and Means Committee.  In accord with that committee’s normal practice, the committee did not hold a hearing on the bill because a previous Senate committee had already heard it.  Instead, WAM held a decision-making meeting where written testimony could be submitted but oral testimony was not taken.

We submitted testimony on this bill.  We made the same arguments we made in this space before, and even attached a copy of our previous Weekly Commentary that ended with:  “Someone needs to rewrite this bill or put it out of its misery.”

We also did something unusual.  We rewrote the bill.  We wrote a draft that got rid of the parts of the bill requiring second tax returns and public disclosure.  We replaced them with provisions that would allow DBEDT to conduct a study of tax expenditures with the information that is already on tax returns, like how the federal government allows the Department of Commerce to access IRS tax return data.  We put the redraft in our testimony.

WAM adopted our redraft.

The committee report doesn’t say much about our contribution.  The committee report states simply, “Accordingly, your Committee has amended this measure by:  (1)  Deleting language requiring:  (A)  Taxpayers to file tax expenditure disclosure forms as a condition for claiming certain income tax credits and general excise tax and use tax exemptions; and (B)  The Department of Business, Economic Development, and Tourism to use information from the tax expenditure disclosure forms in their evaluation of the effectiveness of tax expenditures; and (2)  Instead, authorizing Department of Business, Economic Development, and Tourism staff who are conducting an evaluation of tax expenditures to examine income tax, general excise tax, and use tax returns.”

In the decision-making meeting, however, Chair Dela Cruz said:  “Recommendation is to pass with amendments, to take the Tax Foundation’s amendments in testimony.”

No discussion.  Vote taken.  Done.  It all happened in about 10 seconds.

We gave them an off-ramp.  They took it. We, for one, are very grateful that a potential train wreck for Hawaii taxpayers has been avoided.

We are also thankful for those of you who made their opinions known to our lawmakers and supported our efforts at the Foundation.

The job is not over, however.  Conference Committee meetings now begin.  We are hopeful that any conference draft will be similar to WAM’s.

The tax dates back to 1967, in the first decade after statehood.  (Act 10, Hawaii Session Laws 1966.)  At the time the State, not the counties, was administering the real property tax.  Because property deeds tended not to disclose the actual sales prices (they said things like “For $1 and other good and valuable consideration” when they mentioned what the real property was being sold for), real property assessors needed data on which to make market value assessments.  So, it was decided to impose a rather small tax — it was half a mill, or 0.05 cents, per dollar of consideration.  If the property was sold for $1 million, for example, the tax would have been $500.

Over time, the conveyance tax was hiked several times, leading to the structure we have today.  Today we have tax brackets, but not with marginal tax rates like we have in income tax.  For example, a property sold for less than $1 million is taxed at 20 cents per $100 and a property sold for $1 to $2 million is taxed at 30 cents per $100.  When the sales price is $1 million, the tax is $3,000; if it’s a shade less, then the tax is a little less than $2,000.  The jumps in tax due get larger and larger with the higher tax brackets.

In this legislative session, there are two bills moving that would change the conveyance tax structure to a marginal rate, where hitting a new tax bracket would only expose the price in excess of the bracket amount to the higher tax rate.  These bills are House Bill 2049 and Senate Bill 3028.  The description of both bills contains similar language:  “Restructures the conveyance tax to a marginal rate system for the sale of properties with residential use, adjusts the tax for multifamily properties to reflect value on a per-unit basis, and applies a cost-of-living adjustment to conveyance tax rates.”

The last part of the description is already scary:  “Applies a cost-of-living adjustment to conveyance tax rates.”  Yes, we have inflation going on, and yes, that means a dollar we have today isn’t worth as much as a dollar we had last year.  I can understand increasing amounts, like fee amounts or bracket amounts, for inflation.  But rates?  There is no similar reason why rates need to be increased with inflation.  Taxing an amount higher because of inflation yields a higher tax even if the rate is the same.  So, what they are saying is that there will be tax rate hikes.  Yikes!

A second reason for dread is that both bills don’t tell us what the politicos have in mind.  The rates and the brackets in both bills are blank.  Yes, these are “Blankety Blank” bills that we have often mentioned and just as often reviled.  With the bills in their current state, it’s impossible to tell if they want to raise rates 10%, 100%, or even 1000%.  Previous versions of the bills that did have numbers in them, however, called for substantial tax hikes.  The House bill as originally introduced contains a maximum tax rate of 6%, more than four times the current maximum tax rate of 1.25%.  The Senate bill as originally introduced contains a maximum tax rate of 4.1%.  The only other version of the bill that contains numbers is House Draft 3 of the House bill, which contains a maximum tax rate of 9.5%.  Even more scary!

If either of these bills are to pass, it doesn’t seem like numbers are going to be put in them until Conference Committee, which as we know neither requires nor accepts public input.  So, we wait nervously for the door of the crypt to open and then we can finally see the monster that comes out.

One of them, House Bill 2604, would have slapped a new $1 per ticket tax on concert tickets on top of the general excise tax that ticket sellers already pay.  The incremental revenue from the bill, in theory, would have given a shot in the arm to the State Foundation on Culture and the Arts.  Although that bill crossed over from the House, it did not survive a joint hearing in the Senate.

The other bill, House Bill 2030, revolved around a Robin Hood concept, namely robbing from one class of taxpayers to reward another class.  The bill’s reward was a rebate for taxpayers purchasing or leasing an electric or alternative fuel vehicle.  A new zero-emission vehicle would get a rebate of $5,000, a new plug-in hybrid would get $3,000, and used clean energy vehicles would earn $2,000.  Except that if a taxpayer made more than 300% of area median income, the taxpayer would not be eligible for the rebate, and if a taxpayer made more than 200% of area median income the taxpayer would not be eligible unless the Department of Transportation extended the rebate upward if funds were available.  (For comparison, the area median income for a family of four for urban Honolulu is $152,000.)  The bill also directs HDOT to offer an additional rebate of $2,000, over and above the $5,000, $3,000, or $2000, to low- and moderate-income households.

The scary part of the bill is how these rebates are funded.  The bill would impose a new tax on the sale of new or used gas-powered vehicles, including hybrids with batteries.  The bill creates three tiers of tax based on miles per gallon.  However, the beginning and ending MPG limits are blanked out in the bill, as are the tax rates.  So, we don’t know if the bill seeks to impose an additional tax of 1%, 10%, or 100%.

This, by the way, is what we call a Blankety Blank bill, as we have written about before on many an occasion.  In an article from 2019, our own Hawaii State Tax Watch Doggie coined the term.  How is it even possible to pass something like this, with blanks obscuring the truly important information in the bill?  Are legislators voting on a small tax hike, a medium one, or one of Brobdingnagian proportions?  Even the legislators themselves can’t know.  They can just trust that acceptable numbers will be inserted at the appropriate time – during conference committee negotiations, most probably, where public input is neither requested nor allowed.

This session, the Senate Transportation Committee saved all of us the trouble of worrying about this bill’s fate.  It deferred the bill.  The committee chair noted that the Ways and Means Committee, which is next in line to consider the bill, refused to hear the Senate companion bill that her committee passed out earlier this session.  That committee “is not in the mood, at least for now, to do this,” she said in announcing the deferral.

That, of course, is no guarantee that the bill is dead.  It might get resurrected this session if it, in Frankenstein fashion, is grafted onto another live bill.   Or it could be reintroduced next session.  Is it what we as the people of Hawaii want?  Is it what you want?  Then let your legislator know!

One bill still moving in the Legislature, House Bill 2429 House Draft 2, would change all of that.

That bill has what seems to be a noble purpose of collecting good and accurate data to evaluate the dozens of income tax credits and general excise tax exemptions that we now have.  “Regular evaluation strengthens accountability, supports sound budget decisions, ensures equitable competition, and ultimately maximizes benefits for taxpayers,” the bill preamble reads.  So far, so good.

To gather this data, the bill says that people who are claiming credits and exemptions hereafter need to file an information statement with DBEDT.  That statement would contain the taxpayer’s name, GE license number if it is a GET exemption, the name of the credit or exemption being claimed, the amount of credit or exemption being claimed, and the total cost to the State for the taxable year.  This statement would be filed on or before the date on which the taxpayer’s annual return is filed, and filing the statement would be a condition of claiming the credit or exemption, meaning that if you don’t file this statement in addition to your tax return, the credit or or exemption that you are trying to claim will be disallowed.

And, by the way, the statement filed with DBEDT is not confidential.  It is open to public inspection.

Whoa.

So, according to this bill, it isn’t enough to file just one tax return any more.  You need to file two of them.  And one of them will be open to the public.

This bill is going to affect lots more people than, perhaps, its proponents intended.  Suppose you are an employee making $50,000.  You might not know this, but you are taking advantage of a GET exemption (HRS section 237-24(6)) for salaries and wages.  That’s why you don’t have to file a GET return.  So, under this bill you need to file a public statement declaring your salary, and if you don’t your $50,000 becomes subject to GET.  $2,250 please.  Plus penalties and interest, of course.

Never mind that the State Auditor is already tasked with evaluating these same credits and exemptions on a rolling basis.

And what’s the theory behind requiring a taxpayer to disclose not only the credit or exemption amount but also the cost to the State?  Isn’t that easy enough to calculate just from the credit or exemption amount (credit amount = cost to the State, exemption amount x tax rate = cost to the State)?

It seems that the information the State needs to analyze the revenue impact of credits and exemptions is already filed with the tax returns.  Why, then, don’t we simply open the information pipeline from DOTAX to DBEDT to allow them to pull statistics to do their data analyses?  This is what the Feds do.  Internal Revenue Code 6103(j) says that certain agencies such as the Department of Commerce may access statistical tax return information to do their analyses and studies.

Somebody needs to rewrite this bill or put it out of its misery.

The House and the Senate passed modified versions (HB 2306 HD1, SB 3125 SD1) of the governor‘s “stop, not pause“ bill on the scheduled income tax cuts. We wrote about that last week.

Both the House and the Senate advanced bills to create credits or tax incentives for many different things, including sustainable aviation fuel (HB 1694 HD2, HB 1695 HD2), diapers (HB 2214 HD2), family caregiving (HB 1972 HD2), and automated external defibrillators (HB 1535 HD2).  There is also a bill to limit the credit for solar or wind energy by making higher income taxpayers ineligible for it (HB 2241 HD1, SB 3183 SD2).

One House bill would also end the lower tax rates on capital gains except for folks selling an owner-occupied home(HB 1850 HD2).

Although bills that would have legalized and taxed gambling and non-medical marijuana are dead, bills to create new taxes are still alive. One adds a $1 surcharge on theater and concert tickets (HB 2604 HD2) and another adds a surtax on selling gas-powered cars (HB 2030 HD2). The latter is a bit scarier because the tax rates in the bill have been blanked out.

Also, do you remember back in 2018 when the Legislature proposed a constitutional amendment to slap a state tax on certain types of real property (although they took great pains to avoid using the word “tax”)? The Hawaii Supreme Court struck that one down in 2018, but a new and presumably improved version of the bill is still alive (HB 2147 HD2), so this question may be on your 2026 general election ballot.

Both the House and the Senate have passed proposals (HB 2049 HD3, SB 3028 SD2) to overhaul the conveyance tax, which is charged when real estate is bought, sold, or leased.  The proposals would make it a marginal rate system just like the income tax. However, the House version would raise rates considerably and the Senate version has blank rates.

One House bill (HB 1590 HD3) would require services booking vacation rentals to collect and pay over the GET and TAT on behalf of individual property owners and operators.  The Department of Taxation proposed the same thing in one of its bills, but that bill did not survive.

Another bill (HB 1713 HD1) would repeal school impact fees, which, as we have said before, are gathering dust within the Department of Education because of restrictions on their use.  Last year, a bill to do this was watered down at the last minute.

And, last, but at least, there are bills that will “raid,“ or transfer into the general fund, balances from oodles of special funds. One Senate bill (SB 2921 SD1) would raid more than 160 different funds, although the amount to be taken from each is not yet specified, and another bill (SB 2602 SD1) focuses specifically on the University of Hawaii Tuition and Fees Special Fund, which at the end of last fiscal year had an unencumbered balance of about $430 million. We would certainly like to see any excess monies being put to good use before the legislature raids taxpayers’ pockets yet again.

Stay tuned for more reports from us as the Legislature continues its work.

The House and Senate money committees heard that bill independently.  Both committees opted to make substantial modifications to it before moving it forward.  What will likely follow will be a bit of negotiating, most of which will occur behind closed doors, which will result in adoption of the House version, the Senate version, the Administration version, or some hybrid of the three.  Whichever version is adopted will, of course, define our State income taxes for the next several years.

So let’s take a closer look at the contenders.

House Bill 2306 House Draft 1 scuttles the scheduled bracket changes for 2027 and 2029, as was done in the Administration version.  In addition, effective 2027, the bill proposes to keep the 2025 brackets but raise the tax rate on the top three brackets from 9%, 10%, and 11% to 10%, 11%, and 12% respectively.  The changes kick in for single taxpayers making $225,000 in taxable income or joint filers making $450,000.  However, the bill proposes to keep the scheduled changes to the standard deduction amount and not cancel them as was done in the Administration bill.

The House Finance Committee explained:  “Your Committee finds that the tax relief scheduled to take effect pursuant to Act 46, Session Laws of Hawaii 2024, particularly the income tax bracket amendments, would provide significant benefits to a broad base of taxpayers but create substantial, recurring reductions in general revenues during a time of mounting fiscal pressures.  By repealing portions of the scheduled income tax relief at this time, this measure protects the State’s long-term fiscal stability.  Your Committee further finds that this measure proposes instead tailored tax relief to low- and moderate-income families by enhancing and extending previous enhancements to the Household and Dependent Care Services Tax Credit and extending enhancements to the Earned Income Tax Credit and Food/Excise Tax Credit.”

On the other side of the ring is Senate Bill 2518 Senate Draft 1.  That version keeps some of the planned cuts for 2027 and 2029, but for single filers making $175,000 and joint filers making $350,000, it imposes the brackets as we have them now:  an 8.25% bracket starting at $350,000 (joint), a 9% bracket starting at $450,000, a 10% bracket starting at $550,000, and an 11% bracket starting at $650,000.  This bill also proposes to keep the scheduled changes to the standard deduction amount and not cancel them.

In addition, this draft would get rid of many of the business-related tax credits that now exist in the income tax law:  the Renewable Energy Technologies Income Tax Credit, Capital Goods Excise Tax Credit, High Technology Business Investment Tax Credit, Renewable Fuels Production Tax Credit, Technology Infrastructure Renovation Tax Credit, Ship Repair Industry Tax Credit, and Tax Credit for Research Activities.

The common thread here is that both money committees appear to be preserving the benefit of the scheduled tax cuts for the working families but don’t have much sympathy for the wealthy.  Where “working families” stop and “the wealthy” starts is, of course, a matter of debate.  The House seems to start it for a couple making $450,000, while the Senate would start it at $350,000.  This great taxing debate is now playing out at the Legislature.  If you have an opinion on the matter, better talk to your legislators now.  Once the measure becomes law, it’s too late.

When a wholesaler sells tangible personal property to a retailer and that retailer resells it, the wholesaler is taxed at 0.5% and the retailer is taxed at 4.5%.  Under a law that has been on the books since 1971, the same thing happens when the wholesaler sells to someone who rents out the property as a service to others.  The theory expressed at that time was that the State will get its 4.5% tax on the rental income, whether the property is a car, boat, or backhoe.

The bills in the Legislature propose to require car rental companies to pay 4.5% when they buy or import cars.  HB 1937 / SB 2394 would use the additional money for teacher temporary hazard pay.  HB 2575 / SB 2594 would fund an additional position in the Department of Taxation.  HB 2586 / SB 2784 would funnel the money to the Department of Hawaiian Home Lands.

Some op-ed pieces that ran in the Star-Advertiser argued that allowing car rental companies the 0.5% rate is a loophole that needs to be closed.  On February 27, the Star-Advertiser published an editorial agreeing with that proposition.  They even had a few things to say about us…but I’ll get to that later.

We aren’t convinced that there is a loophole in the current law.

The bill proponents and the editorial complain that car rental businesses use the cars here just for a few years and then ship them off to the mainland where car sales aren’t subject to GET, so there is only a short period when 4.5% GET is imposed.  But if a retailer imports an article and then sells it immediately to an out-of-state buyer, the 0.5% rate still applies to the retailer’s purchase, even though no 4.5% GET is captured anywhere in the economic stream.  In response to our observation that car rental companies are no different from renters of industrial equipment or farm machinery, the editorial argues that “industry equipment rentals are typically closer to the production stage of a business operation, where taxation can be traced directly to a cost of doing business; for car-rental companies, however, vehicles are the business.”  But what does that even mean?  If I am going to an equipment rental company to rent a backhoe for a construction project, isn’t that backhoe the business?

The editorial also says, “the reliably anti-tax Tax Foundation of Hawaii warns of potential litigation.  The Tax Foundation’s argument that this tax would be ‘selective application’ of the law doesn’t hold, however, if the Legislature modifies tax law.”  But that’s not what we said, and we certainly didn’t threaten litigation.  We certainly recognize that the Legislature has the right to muck up the General Excise Tax law if it wants to, so we suggested that if it wants to raise taxes on this industry only, it could do so by hiking the Motor Vehicle and Tour Vehicle Surcharge Tax.

The editorial does say something with which we strongly agree:  “To preserve maximum flexibility, the [Legislature] must first rule out any advance earmarking of revenues.  In today’s shaky political and economic reality, potential crises loom on a daily basis, and it would be foolish to channel all new revenues to one cause.”  Nevertheless, we always seem to be knee-deep in bills suggesting or demanding tax earmarks, with their proponents clamoring for a “dedicated funding source.”  Those are the real loopholes in our public finance system, and it is our hope that the Legislature recognizes them as such and begins to get rid of them instead of made-up ones touted by partisan proponents.

OBBB TAX-01 analysis – FOR PUBL

Download here

In last year’s legislative session, as you may recall, the TAT was increased and broadened to include cruise ships.  The cruise ship industry filed suit, leading to an end-of-year flurry of court activity.

The cruise ship industry has pointed to the Tonnage Clause in the U.S. Constitution and the Rivers and Harbors Act in its attempt to strike down the Green Fee as applied to cruise ships.  These federal laws are trying to prevent states that happen to have ports in them from taxing maritime traffic.  This, in theory, burdens the other states that don’t happen to have ports in them if they need the goods that came in by ship.  Which is not a good thing if all of the states in the USA are supposed to be parts of one big, happy family.

One of the State’s principal arguments is that the Green Fee isn’t a tax on maritime traffic, it’s a tax on transient accommodations.  It just so happens that for the cruise ship industry, their transient accommodations happen to be aboard a ship.  It is lawful to tax hotel rooms, the argument goes, so it should be lawful to tax cabin berths as well.

Not so, says the cruise ship industry.  The TAT is only imposed on the rental component of what is paid for a hotel room.  If a hotel room is offered as a package that includes meals, for example, then the TAT is not imposed on that portion of the package price that is for the meals.  But how about the Green Fee?  There is nothing in the Green Fee law that allows cruise ships to do the same thing.  The TAT is imposed on the passenger fares, with no comparable exclusion for the price of meals which the fares include.  Therefore, says the industry, the Green Fee law is not simply a nondiscriminatory tax on transient lodging, it does indeed tax maritime traffic, and should be struck down as a result.

Interestingly, we have not seen any bills in the current legislative session that would address this issue.

Instead, there are bills that would undo the TAT extension to cruise lines and, instead, impose a per-passenger charge on cruise ship docking.  These bills are moving in the Legislature with the administration’s and the cruise industry’s support.

Per-passenger charges have been around for decades.  The Hawaii Department of Transportation imposes them now and they have never been challenged.  This is because these charges are kept within the DOT, go into the Harbors Fund, and are, in theory, wholly used for repairs, maintenance, and improvements to the boat harbors.  That would make the charges user fees, not taxes; as such, they would not be a tax on maritime traffic.

But theory and practice aren’t always the same.  There is a 5% “central services assessment” that the Department of Budget and Finance levies against the fund for expenses in administering the fund.  According to Departmental Communication 35 submitted to this year’s Legislature, the Harbor Fund paid $7.3 million — which seems to be a lot more than expenses of administration.  That same report details reimbursements paid to other departments to administer their special funds, and the biggest one is $650,000 to the Department of Land and Natural Resources for administering the Ocean-Based Recreation Special Fund.  (The Harbor Fund is exempt from departmental assessments.)

And, in the future, there may be pressure on the Legislature or the Department of Transportation to use the Harbor Fund for environmentally friendly causes having nothing to do with harbors or cruise ships.  If that happens, the State and the industry might once again fight over the legality of these charges.

NOTE:  Today’s featured image © 2026 John Pritchett.  Used by permission.

And, unlike some of the special funds we have been writing about, lawmakers are very aware of the big balance in this one.  Senate Bill 2602, which recently passed the Senate Education Committee, would lapse any carryover balance in the fund at the end of each year to the State’s general fund.

Not surprisingly, the University of Hawaii and the U.H. Professional Assembly howled in opposition.

“Shifts in federal policy and the termination of grant funding have created significant uncertainty for the UH,” the University argued.  “At the same time, major technological changes relating to AI and other needs will require ongoing substantial investment in infrastructure.  The UH has outlined major initiatives to ensure it can more effectively and efficiently meet its mission despite these major challenges and to maintain accountability for executing on strategic goals.”

Those words might be more believable if the tuition and fees special fund was the only fund the University had.  Actually, HRS chapter 304A has three different subparts, one describing 22 special funds, the next describing 14 revolving funds, and the next enumerating 4 different trust funds.  Surely, between 40 different non-general funds, the University has the flexibility to take on its major challenges and meet its strategic goals.

And, let’s be real here, $400 million is a major amount of dough.  Maybe the University can justify squirreling away a few million here, a few million there.  But $400 million?

And when the University undertakes a major construction project, it doesn’t hesitate to visit lawmakers with hat in hand, as was done in 2019 when it asked for authorization to rebuild its venerable Sinclair Library into a brand-spankin’-new Student Success Center.  Yes, it got $41 million in authorization then, and costs ballooned to $57 million by the time construction started in 2023.  Did that extra $16 million come out of the tuition and fees special fund?  According to the testimony before the Senate Education Committee, the excess funds were pulled from a pot of general fund money earmarked for repairs and maintenance.  Meaning that the nine-figure sum in the special fund still sat there and there were fewer dollars to tackle the deferred maintenance backlog that the University is famous for.

At the Senate hearing, the University indicated that the fund buildup was due to an influx of pandemic relief funds.  But, as we pointed out with the example of Department of Hawaiian Home Lands funding some weeks ago, if a recipient of federal money doesn’t use it, it greatly increases the chance that the federal government will take it away.

We realize that the University’s president and chief financial officer are both relatively new in their respective positions.  They both pleaded with the committee that they have no intent whatsoever to leave large gobs of cash unused.  Fine, then.  Come up with an immediate and measurable plan to deploy what is needed.  And by immediate I mean now.  The State has a financial crisis now.  If this cash cannot be deployed now, lawmakers will try to beat it out of us, the taxpayers, now.

Use that hoarded tuition and fees.  Now.