Bill exempting jobless benefits from state taxes hits a snag

Proposed legislation that would exempt unemployment benefits from Hawaii’s income tax hit a roadblock this month when President Joe Biden signed the American Rescue Plan. While the federal relief package exempts unemployment compensation up to $10,200 from federal income taxes, it prohibits states from using the federal aid to plug budget holes created by tax cuts.

Gov. David Ige and House Finance Chairwoman Sylvia Luke say the prohibition likely ties the state’s hands when it comes to tax relief bills such as Senate Bill 614, even as some states and tax experts challenge that interpretation.

Senate Bill 614 would exempt unemployment compensation, including Pandemic Unemployment Assistance, received by Hawaii residents between March 1, 2020, and Dec. 31 when the coronavirus ravaged the local economy. The measure passed the Senate on March 11 and crossed over to the House of Representatives.

But Luke and Rep. Richard Onishi, who chairs the House Labor and Tourism Committee, said they have no intention to take it up. In addition to the federal rules, they note they would have to come up with an estimated $190 million in next year’s budget to cover the cost of the lost tax revenue.

Under the American Rescue Plan, Hawaii is set to receive about $1.6 billion to help shore up the state budget. The funding has helped plug a gaping budget hole for the next fiscal year and avoid painful cuts to government services and furloughs of government workers. But Onishi said that despite the federal relief, the state still has to be conservative in its spending. On Wednesday, the House passed its version of the state budget, which includes cuts to vacant positions and the clawing back of balances accrued in special funds that are generally outside of the budget appropriation process.

Gov. David Ige also said in an interview on Spotlight Hawaii on Wednesday that the general guidance has been that the state can’t pass any law that reduces taxes that were in effect when the federal relief package was signed this month. “So we want to make sure that we can accept the money, and if part of that means we can’t give tax relief, then we won’t,” he said. Ige said the state’s intention was always to tax unemployment benefits.

That position has frustrated some who say the state needs to do more for Hawaii’s jobless and those who have suffered financially during the pandemic. More than 580,000 Hawaii workers filed unemployment claims last year, according to the governor’s office.

Hawaii has suffered more than most states economically due largely to severe retractions in tourism. The state’s unemployment rate as of January remained the highest in the nation, at 10.2%.

Gary Hooser, a former state senator from Kauai who has played a leading role in Hawaii’s progressive movement, said it was premature to scuttle Senate Bill 614 and that workers deserved the extra relief given the state’s handling of unemployment benefits.

The state’s Department of Labor and Industrial Relations was overwhelmed with claims last year when the state’s unemployment rate soared to 21.9% in April, a rate rivaling the Great Depression. The agency distributed more than $4.3 billion in unemployment claims last year. But thousands of residents have been caught in the cracks, going months without being able to obtain their benefits due to clogged call center lines and major staff shortages.

“The state has bungled this so badly. The phones don’t work. There’s no place to go. The backlog. To me, this is the least that they could,” said Hooser in reference to passing the unemployment tax relief bill.

“And to just say no after all that these people have been through, based on some prediction that doesn’t look to be true. It just seems bad.”

The U.S Treasury Department didn’t respond to a request to clarify the federal relief rules relating to tax cuts. But a White House official told the Washington Post earlier this month that the law doesn’t say states can’t cut taxes at all, but rather “instructs them not to use that money to offset net revenues lost if the state chooses to cut taxes.”

“So if a state does cut taxes without replacing that revenue in some other way, then the state must pay back to the federal government pandemic relief funds up to the amount of the lost revenue,” the official said.

Hawaii’s lawmakers have introduced an array of measures to boost state revenues including increases to the capital gains tax, corporate taxes and taxes on high-end real estate sales, along with a proposal that would increase the income tax for the state’s top earners. But House leaders say many of these are failing and it would still be hard to cover the $190 million projected revenue shortfall created by exempting unemployment benefits from the state income tax.

Meanwhile, House leaders are looking to provide relief to Hawaii’s jobless in another form. They’ve inserted $105 million into the proposed state budget to improve the processing of unemployment claims. Onishi said the funding would go toward hiring another 300 agents for the call center at the Hawai‘i Convention Center to help sort out claims, as well as an online reservation system.

The state budget now goes to the Senate for debate.