TAX MAN: House Bill 202: A stealthy tax hike

When following bills in our Legislature, it usually isn’t too tough to spot bills that propose tax hikes. A section in the law usually provides for a tax rate. A bill that amends that section to make the rate higher is, obviously, a tax hike.

But there are ways to raise taxes without changing the tax rate (or rates).

House Bill 202 (SAYAMA, LEE, M., TAKENOUCHI, YAMASHITA) shows us one. The bill summary sounds innocuous enough. “Amends the definition of ‘adequate reserve fund’ for calendar years 2026 and thereafter,” it says.

Here is what’s going on.

Employers primarily fund state unemployment insurance (SUI). Most employers are charged an SUI tax that depends on the overall health of the fund into which SUI tax is collected and the employer’s claims history. So, an employer with a long history of chargeable claims, for example, will pay more than others. Also, if there is lots of money built up in the fund, then the tax rate goes down for everyone. In that way, the system is self-correcting.

The fund’s health determines the tax rate schedule. The schedules are named after a letter of the alphabet, with A being the least costly and H the most expensive. The fund’s health is measured at the end of the year, which is used to set the rate for the following year.

Measuring fund health involves comparing two values: the “adequate reserve fund,” which is how much the fund “should” have in it, and the actual amount in the reserve fund after employer taxes are paid in and claims are paid out.

House Bill 202 changes the definition of “adequate reserve fund” by keeping the old formula but multiplying the result by 150%. Of course, the amount of money in the fund does not change. As a result, the measure of fund health—the ratio of the actual reserve fund to the adequate reserve fund—drops by one-third. This makes the system think there is not enough money in the fund, raising employer taxes to compensate.

To illustrate what happens if the bill takes effect, suppose Hawaii’s current unemployment reserve fund is $200 million (which is what it was in November 2022). Also, suppose that the adequate reserve fund, calculated under existing law, is also $200 million. We would have a current to adequate reserve fund ratio of 1.00, and employers would have a contribution rate schedule of C. That rate schedule is normal for us, as we have had this schedule in effect for 11 of the past 25 years. That would correspond to an SUI tax for new employers (with a zero reserve ratio) of 2.4% of taxable wages.

Under the bill, the adequate reserve fund is raised to $300 million. That would drop the current adequate reserve fund ratio to 0.67, saddling employers with a two-notch higher contribution rate schedule of E. Our new employer would receive a tax rate of 3.4% of taxable wages, which would be an almost 42% tax hike.

Proponents of the bill, such as the Department of Labor and Industrial Relations, say that the increase in the adequate reserve fund is necessary. If the fund had been at the 150% level before the pandemic hit, they say, there would have been no need to borrow a slug of money from the Feds (as most states and Hawaii did) to keep the SUI system afloat.

There were indeed times in our history when the adequate reserve fund was set at the 150% level, from 1969 to mid-1978 and from 1992 to 2007. The 100% level was used from 1978 to 1991 and from 2008 to the present.

The question facing us today is whether to pass this stealthy tax hike proposed by House Bill 202. It’s been said there is never a good time for a tax hike. We question whether there is a real need to increase the amount of taxpayer money sitting around doing nothing most of the time so it can be there “just in case.” We already have a fund set aside for emergencies with $1.5 billion in it. Do we need to squirrel away more?

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Tom Yamachika is president of the Tax Foundation of Hawai‘i.