Hawaii Has Nation’s Highest Income Tax

Published August 1, 2009

Faced with a $1.8 billion budget shortfall, Hawaii’s state legislators have passed a host of tax increases, including new brackets, one of which imposes the highest state income tax burden in the nation.

Gov. Linda Lingle (R) vetoed several of the bills, but legislators voted the next day to override those vetoes.

Among other increases, legislators approved three additional income tax brackets on top of the current nine, taking the top income tax rate from 8.25 percent to a whopping 11 percent. Hawaii now has the highest state income tax rate in the country and more tax brackets than any other state.

Another tax increase targets the state’s most important, and already struggling, industry: tourism. With hotel occupancy at a record low, the legislature raised the “transient accommodations” tax on hotel rooms from 7.25 to 9.25 percent—a 28 percent increase.

Workers Rally for Veto

At an early May veto ceremony hosted by the governor’s office, at least 1,000 citizens showed up to express their support for Lingle’s vetoes. Waikiki hotel employees attended en masse along with hundreds of other Hawaii citizens, in a demonstration reminiscent of the April 15 Honolulu Tax Day Tea Party.

“My administration presented the legislature with responsible, prudent, and fair alternatives to balance the budget in order to avoid tax increases which would further burden Hawaii’s residents and businesses, discourage visitors from traveling to Hawaii, jeopardize our economic recovery, and result in more job loss,” said Lingle. “The Democrat majority has ignored these alternative solutions and instead turned to tax increases that will take more money out of the pockets of our residents and visitors and diminish business investments.”

‘Jobs Will Be Lost’

Andre Tatibouet, former chairman of the Hawaii Hotel Association, was disappointed with the legislature’s decision to raise the tourism tax.

“Thousands of jobs will be lost as the result of this action,” said Tatibouet. “And it’s important to note that we’re not talking only about those people who work in the hotels. We’re talking also about a sales clerk in a souvenir shop, or a fry cook in Waikiki.”

Lingle also vetoed a 257 percent increase in the real estate conveyance tax and a 75 percent increase in the tax on smokeless tobacco. Lawmakers overturned those vetoes the following day, May 8.

The legislature also passed a bill to increase cigarette taxes for the sixth time in seven years, from $2 to $3 a pack by 2011. The governor did not veto this bill, which will bring total state and federal cigarette taxes to about $4 per pack in Hawaii.

Oil Tax Awaits Action

Another major tax increase on oil awaits the governor’s signature or veto. This bill aims to increase the tax from 5 cents to $1 per barrel, which is estimated to raise gasoline prices by approximately 3 cents a gallon and pull more than $30 million out of the state’s economy.

Supporters of the tax increases argued they were necessary to balance the budget.

State Sen. Donna Kim (D-Honolulu), chair of the Ways and Means Committee, told the Honolulu Star-Bulletin, “We looked under every single rock that we could to find ways in which we could cut, and at the end of the day, we still had holes in the budget.”

Speaker of the House Calvin Say (D-Honolulu) went even further, telling the Star-Bulletin, “By the end of the day, the legislature will look good because they were responsible in balancing their budget.”

‘Taxes Protect Government Workers’

State Sen. Sam Slom (R-Hawaii Kai), who opposed all tax increases, stated, “We already have double the unemployment we had a year ago, a record number of business failures, and plummeting visitor arrivals. Tax collections have nosedived. How can any rational person believe that the answer is to both protect the legion of government workers and their benefits while at the same time raising taxes on all levels?”

He added, “Hawaii is already at a major cost and distance disadvantage; more taxes and a more hostile business climate will only make that worse.”

Jamie Story (http://www.jamie2grassrootinstitute.org) is president of the Grassroot Institute of Hawaii.