ITEP’s Miles Trinidad Testifies Against Weakening Hawai’i’s Estate Tax

ITEP State Policy Analyst Miles Trinidad submitted this written testimony to the Senate Ways and Means Committee on April 5, 2024.

Chair Dela Cruz, Vice Chair Moriwaki, and members of the Senate Ways and Means Committee, thank you for the opportunity to provide testimony on HB 2653. My name is Miles Trinidad, and I’m a policy analyst with the Institute on Taxation and Economic Policy, a nonprofit, nonpartisan research organization that focuses on state, local, and federal tax policy issues.

On behalf of ITEP, I am testifying in opposition to HB 2653.

Estate taxes play an important role as a revenue raiser in helping states fund public services, while adding progressivity to a state’s overall tax system. This is especially important as most taxes levied by state and local governments, particularly consumption taxes, fall most heavily on low-income families. Sales and excise taxes comprise more than 48 percent of total tax revenue in Hawai’i, a share that is nearly 30 percent higher than the national average. In addition, the estate tax is one of the few ways wealth is taxed and is essential to reducing economic inequality. Because wealth is so disproportionately held by white households, improving racial equity requires a strong estate tax.

Wide gaps in income and wealth continue to persist across the country, and Hawai’i currently has an overall regressive tax system with lower-income households paying a higher share of their incomes in taxes compared to their higher-income peers.

The changes being proposed by HB 2653 would only exacerbate these issues.

To elaborate, I’ll touch on the following points:

1. Hawai’i’s overall tax system is regressive, with higher-income households paying a lower effective tax rate than their lower- and middle-income peers.
2. Hawai’i would be better served by pursuing progressive reforms to its tax code to reduce its overall regressive tax code and leverage its above-average concentration of extreme wealth for the benefit of all Hawai’i residents rather than pursuing an estate tax reform that further benefits the wealthy.
3. Conforming the state’s estate tax to the federal tax would be deeply regressive as the federal tax is the weakest it has ever been in its century-plus history.
4. The new deduction for closely held business interests goes further than what is permitted under the federal estate tax, which would primarily benefit the wealthy.
5. Hawai’i’s overall tax system is regressive

According to our recent Who Pays? report, which is the only distributional analysis of its kind for tax systems in all 50 states and Washington, D.C., Hawai’i’s tax structure is regressive, meaning that the total state and local taxes take up a greater share of income from low- and middle-income families than from wealthy families. For those in the bottom 20 percent of earners in Hawai’i, state and local taxes comprised 14.1 percent of their household income, while the share for those in the top 1 percent, who are also the primary beneficiaries of the proposed estate tax changes, is 10.1 percent.

In addition, our report on the geographic distribution of extreme wealth across the country found that Hawai’i has a high concentration of extreme wealth when compared to its share of the nationwide population. Often, federal and state tax codes provide few ways to directly tax the wealth of extremely wealthy households. In most cases, the few taxes that do exist provide preferential treatment of income derived from wealth rather than labor. This concentration of extreme wealth runs counter to our national aspiration for genuine equality of opportunity, and it saps the vitality of our democracy through the consolidation of power and influence.

HB 2653 would only exacerbate the regressive nature of Hawai’i’s state and local tax system and compound the preferential treatment of income derived from wealth.

2. Conforming Hawai’i to the federal estate tax would be deeply regressive.

Estate taxes are a valuable policy lever to offset some of the more regressive features of a state’s overall tax system. However, decades of policy changes have limited the reach of the federal estate tax, and the current provisions – part of the Tax Cuts and Jobs Act signed into law in 2017 by former-President Trump – have weakened the tax more than ever. As a result, conforming to the federal estate tax would worsen Hawai’i’s already regressive tax system.

Under current law, Hawai’i exempts the first $5.49 million from the state estate tax, which was the federal estate tax exemption in 2017 it was doubled under the Tax Cuts and Jobs Act (TCJA) and since adjusted to $13.61 million for tax year 2024. In a recent report, we found that only 20 estates, or 0.39 percent of all estates in Hawai‘i, owed the federal estate tax in 2016 prior to changes in the TCJA. In 2019, after the TCJA was enacted and the most recent year for which data are available, so few estates in Hawai’i owed the federal estate tax that the Internal Revenue Service did not disclose the number of estates that paid so it would not inadvertently reveal any private taxpayer information.

In addition, most of the federal estate tax is paid by estates worth more than $20 million. In recent years, more than half of the federal estate tax was paid by estates worth more than $50 million. And even those who are above the exemption amount still pay very little under the tax. While changes to the federal estate tax under the TCJA are scheduled to expire after 2025, even conforming to pre-TCJA levels in subsequent years would still provide a massive tax break for Hawai‘i’s wealthiest households.

3. The new deduction for closely held businesses goes even further than what is permitted under federal law.

While HB 2653 is being framed as conforming to the federal estate tax, the bill also includes changes that go much further than what’s in federal law, more specifically regarding a new deduction for closely held businesses. Under federal law, there are valuation rules that let the estate value closely held businesses at less than its fair market value and rules that let the estate pay estate tax on the value of closely held businesses over time. However, HB 2653 would allow a wholesale exemption of the value of a business from the estate tax – an exemption that is much larger than what is allowed under federal law. While proponents of the bill estimate that this new exemption would cost $15 million, it’s a tax break giveaway that is unnecessary and further benefits wealthy households that already pay a lower effective tax rate than low- and middle-income taxpayers.

HB 2653 is a poor solution to a non-existent problem.

The tax revenue lost under HB 2653 would go to a small fraction of the top 1 percent of earners and further enrich families who have already benefitted more than anyone else from the society and economy that all residents have worked to build and paid for with their tax dollars. Hawai’i is one of the few states that decouples from federal estate tax law, which is a bright spot within the state’s overall regressive tax system. Instead of pursuing these estate tax reforms, Hawai’i should examine ways to improve tax fairness for low- and middle-income households who are paying a higher share of their income towards state and local taxes and ask more of high-income earners who pay the lowest effective tax rates of all Hawai’i residents.

Once again, thank you for the opportunity to provide testimony on this matter.

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