Hawaii taxpayers should have a happy new year as the first of a series of historic tax cuts takes effect in January.
Gov. Josh Green in June signed Act 46 into law, which he billed as “the largest income tax cut in state history.” Each year until 2031, the new tax plan will eliminate the lowest tax brackets, reduce the tax rates for all brackets and increase the standard income tax deduction.
Residents across the state will see less being withheld from their paychecks beginning in January. For a person making $50,000 annually, they will get about $33 more each bimonthly paycheck, or over $790 annually.
According to a statement by the state Department of Taxation, the withholding adjustment depends on the circumstances of the individual taxpayer and does not necessarily reflect the tax cut they will receive under the new tax rates.
However, the withholding adjustment allows taxpayers to see the benefits of the new plan immediately, rather than forcing them to wait until they file their taxes.
The new tax scheme will continue to make adjustments to its withholding tables annually through 2031. The other changes will come in alternating tax years: Increases to the standard deduction will take effect in even-numbered tax years between 2024 and 2030 and also the 2031 tax year, while the tax bracket changes will be implemented in odd-numbered tax years between 2025 and 2029.
Tom Yamachika, president of the Tax Foundation of Hawaii — a nonprofit organization dedicated to informing taxpayers about the finances of the state government — said the changes should be a welcome relief for taxpayers on the lower to middle rungs of the income ladder and that the foundation was supportive of the changes when they were introduced in this year’s legislative session.
“People needed this,” Yamachika said. “We needed this. We’ve been losing too many people. People have been buying one-way tickets out of here.”
According to Tax Foundation of Hawaii data, the tax percentage reductions will have the greatest impact for people making $10,000 to $40,000 a year.
In 2025 their state tax will be reduced by about 70%, while in 2027 and 2029 — when the next bracket changes take effect — they could see their tax burden more than 90% reduced from what it is today.
Data from the Department of Taxation estimates the average tax owed by a family of four making the state’s median household income was just over $5,000 in 2023. In 2025 that burden will be about $3,500, and by 2031 it will be only $1,473.
At the lowest end of the income spectrum, the new tax brackets reduce payers’ income tax burden by 100%.
With the new tax cuts, Hawaii will go from having the second-highest income tax burden in the country — behind Oregon, which doesn’t have a sales tax — to having the fourth-lowest income tax burden by 2031.
In June, Green said the tax reforms would reduce total state tax revenue by about $5.6 billion.
“People are going to ask, ‘How can we afford this?’” Green said at the time. “The fundamentals are this: Individuals who are working paycheck to paycheck will spend every single dollar on local businesses, on rent, on their cars, on health care needs. They will spend it here. … Individuals who make many millions of dollars, God bless them, we’re excited for them, but they already have enough resources to maintain their needs.”
Because employers will adjust employee withholdings beginning Jan. 1, the first actual reductions to withholdings should be felt by late January or early February.
Workers who do not see an increase in their net take-home pay should contact their employer.
