Hawaii State Legislature – 2023 Regular Legislative Session

The Hawaii State Legislature adjourned its 2023 Regular Session on May 4, 2023.  The following lists contain the tax measures that were passed as well as notable tax measures that did not pass.  Governor Josh Green has until July 11, 2023 to approve or veto the measures passed by the Legislature.  Since 2023 is the first year of the State’s biennium, the bills that did not pass may be considered again during the 2024 Regular Session.

Bills Passed by the Legislature

Pass-through Entity Tax (S.B. 1437, S.D. 1, H.D. 2, C.D. 1).  This measure allows partnerships and S-corporations to elect to pay Hawaii income tax at the entity level.  By electing to pay Hawaii income tax on Hawaii PTE income at the entity level, partners and S-corporation shareholders would be able to avoid the $10,000 individual limitation on the federal deduction for state and local taxes paid.  The amount of tax savings depends on the partner or shareholder’s federal income tax rate.  For the 2023 tax year, the highest federal income tax rate is 37%.  For example, if a partner subject to the 37% federal tax rate paid $50,000 in state taxes on the partnership income, the federal deduction was limited to $10,000.  Under this new measure, the partnership may elect to pay the tax at the partnership level allowing the entire $50,000 to be deducted.  As a result, the partner would have a federal tax savings of almost $15,000.

Individual Income Tax Relief (H.B. 954, H.D. 2, S.D. 2, C.D. 1).  This measure enhances the following income tax credits for a 5-year period beginning with tax year 2023:

  • Household and dependent care services tax credit: Increases the costs that qualify for the credit from $2,400 to $10,000 for one qualifying person and from $4,800 to $20,000 for two qualifying people;
  • Refundable state earned income tax credit: Increases the credit from 20% to 40% of the federal earned income tax credit; and
  • Refundable food/excise tax credit: Increases the income thresholds and doubles credit amounts. The maximum credit went from $110 per exemption to $220 for taxpayers who fall in the lowest income bracket based on filing status.

Internal Revenue Code (IRC) Conformity for Income and Estate Taxes (H.B. 1100, H.D. 1, S.D. 2).  There were no significant changes to Hawaii’s adoption of the IRC sections due to the enactment of federal legislation in 2022.  Although not a change to Hawaii’s conformity to the IRC, it is important to note that Hawaii conforms to the federal changes to the required minimum distribution age for retirement accounts in the federal SECURE Act 2.0, which is generally 73 years old beginning in 2023.   The federal lifetime estate and gift tax exemption was increased to $12.92 million while the exemption for Hawaii purposes remains at $5.49 million.

Maui County General Excise Tax (GET) Surcharge (H.B. 1363, H.D. 3, S.D. 2, C.D. 1).  This measure allows the County of Maui to adopt an ordinance enacting a county surcharge on GET (CS) at a rate no greater than 0.5% by December 31, 2023.  The County of Maui must use the CS revenue collected on housing infrastructure.  The Counties of Kauai and Hawaii may amend their ordinances before December 31, 2023 to use CS revenue on housing infrastructure.

New Tax on Electronic Smoking Products (S.B. 975, S.D. 2, H.D. 3, C.D. 1).  This measure imposes a new tax on electronic smoking devices and e-liquid products at 70% of the wholesale value.  The new tax is effective on July 1, 2023.

Notable Bills that Did Not Pass

If you have questions regarding how these measures may affect you, please don’t hesitate to contact us.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice. This communication may not be applicable to your specific circumstances and may require consideration of non-tax and other tax factors if any action is to be contemplated. Please contact your tax professional prior to taking any action based on this information. Accuity LLP assumes no obligation to the reader of any changes in tax laws or other factors that could affect the information contained herein.