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Background to Act SLH 2024 Act 46

Structural fiscal surplus
Lawmakers wanted to help ALICE families
Income tax code was due for an update

Last update was early 2000’s
Hawaii is one of the only states with a progressive income tax schedule that is NOT indexed to inflation
Bracket creep pushes people into higher tax brackets, which represents an implied tax hike
Under current law, the 8.25% goes into effect at $48,000

The result is a very high effective tax rate for most taxpayers

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Background: In 2023, the Leg passed Act 163�(providing $104 million of income support for working families) �

Increase Refundable Earned Income Tax Credit from 20% of Federal to 40%

The bill doubles the size of the earned income tax credit, providing $50 million of additional support
The credit supplements what is often considered the most effective poverty alleviation tool provided by the Federal government

Doubles the Food Excise Tax Credit and increases income limitation by $10,000

The bill doubles the amount of the credit and benefits an additional 90,000 people in our State
The expansion of the credit represents $43 million in direct income support for the people who need it the most

Child and Dependent Care Tax Credit:

Increases the amount of allowable expenses to $5,000/$10,000 from $2,800/$4,800
Provides a refundable credit of up to $3,000 for working parents struggling to pay the high cost of childcare

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ALICE Households

2023 law change provided income relief for low-income taxpayers

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Even with tax credits, Hawaii still had one of the highest income tax burdens for working families

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In 2024, the Leg passed Act 46 (HB 2404 CD1), the largest tax cut in the State’s history

The law has two major components that take effect over eight years
Standard Deduction:

A larger standard deduction exempts more income taxation
Increasing the standard deduction benefits low to moderate-income taxpayers more since they are less likely to itemize deductions
Avoid having minimum wage increase pushing people into higher brackets

Tax Bracket Adjustments:

Eliminates the lowest income tax brackets
The highest tax brackets go into effect at higher income thresholds

	Existing Law	2024	2025	2026	2027	2028	2029	2030	2031
Standard Deduction	Joint: $4,400 Single: $2,200	Joint: $8,800 Single: $4,400		Joint: $16,000 Single: $8,000		Joint: $18,000 Single: $9,000		Joint: $20,000 Single: $10,000	Joint: $24,000 Single: $12,000
Tax Brackets			Decrease rates. Eliminate bottom brackets		Decrease rates. Eliminate bottom bracket		Decrease rates. Eliminate bottom bracket

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GAP II increases the Standard Deduction

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Shifts tax brackets to higher income thresholds

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How to Calculate Personal Income Tax

Tax Owed = (Income – exempted amount) * Tax Rate – Tax Credits
Exempted Amount = Standard Deduction + personal exemptions
Or
Exempted Amount = Itemized Deductions + personal exemptions
Example: Income = 75,000, # of exemption = 4, status = married joint filing

Current Law: Tax Owed = (75,000 – (4,400+4*1144)*Tax Rate – Tax Credits

Tax Owed = (75,000-8,976 = 66,024)*Tax Rate – Tax Credits

Law in 2031: Tax Owed = (75,000 – (24,000+4*1144)*Tax Rate – Tax Credits

Tax Owed = (75,000-28,576 = 46,424) *Tax Rate – Tax Credits

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Act 46 Substantially Decreases Tax Burden for Median Income Household ($97,000) in 2031

Annual after-tax income increase: $3,829

Increase in take-home income: 3.6%

Total tax savings 2024-31: $20,572

Total Tax Liability Reduction: 66%

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GAP II significantly decreases Hawaii’s income tax burden relative to other states

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Hawaii’s tax ranking improves across for a range of income

Hawaii will have the lowest income tax burden for low-income filers

The State will be in the low to mid-range for most income levels

It reduces the tax burden for Hawaii business owners

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Is the Tax Law Progressive?�Measuring Progressivity

Regressive – lower income people pay a higher percentage of their income in taxes

Neutral – everybody pays the same percentage of income in taxes

Progressive – higher income pay a larger percentage of their income in taxes

Tax

Income

% Tax Burden =

% Tax Burden

Low Income

High Income

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GAP II reduces tax liability more for low incomes taxpayers than high income taxpayers

GAP II makes the tax code more Progressive:

High income earners will pay more of the taxes

Presently, taxpayers making more than $150,000 contribute 53% of income tax

In 2031, taxpayers making more than $150,000 contribute 69% of income tax

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Lower income earners see a larger decrease in effective rates relative to high income earners

Average Effective Tax Rates on Taxable Income of Residents by Hawaii Adjusted Gross Income (AGI) Class in 2019 vs. 2031.

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The revenue impact of the bill is large

Proposal	FY 2025	FY 2026	FY 2027	FY 2028	FY 2029	FY 2030	FY 2031	FY 2032
Std Ded and Tax Bracket Change	-240.3	-596.6	-740.1	-922.7	-1,052.6	-1,262.3	-1,347.5	-1,453.2

General Fund Impact ($ millions)

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When will people start feeling the effects?

The Governor directed DOTAX to adjust the withholding tables:

People’s paychecks will get bigger beginning in January 2025

Tax refunds will also get larger beginning in 2026 (for TY 2025)

Scheduled Withholding Adjustments

Jan 1, 2025

Jan 1, 2026

Jan 1, 2027

Jan 1, 2028

Jan 1, 2029

Jan 1, 2030

Jan 1, 2031

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Key Take-Aways from Act 46

Act 46 is the largest tax reduction in the history of the state

The tax law tax effect over 8 years. 2025 is the first year people will experience salient relief.

It will make a meaningful increase take-home impact for all taxpayers, especially working-class families

Act 46 is progressive and higher income people will contribute a greater share of the tax base

It is the most efficient way to reduce tax burdens for residents while still taxing non-residents

It improves business competitiveness

It represents a new approach to Hawaii fiscal governance

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