How Act 46 puts over $3,600 back into the pockets of local working families.
If you live in Hawaiʻi, you know the reality: paradise comes with a hefty price tag. For years, we’ve topped the lists for cost of living and, painfully, the highest income taxes for working families. We complain about it at potlucks, we read about "brain drain" in the paper, and we feel it every time we look at our paystubs.
But something massive just shifted.
While many of us were focused on the day-to-day grind, the state passed what is arguably the most significant tax reform in Hawaiʻi’s history. It’s not a one-time rebate. It’s a fundamental restructuring of how the state taxes its residents, phased in over the next seven years.
By the time this law is fully implemented in 2031, Hawaiʻi is projected to flip the script entirely, moving from one of the highest-tax states for average earners to one of the lowest.
Here is a breakdown of what’s happening, and more importantly, what it looks like for your wallet.
The Two Levers: How They Are Cutting Taxes
The new law doesn't just lower a single percentage rate. It uses two powerful levers to reduce what you owe.
1. Explosive Growth in the Standard Deduction
The standard deduction is the amount of income the state essentially ignores before they start calculating your tax. For years, Hawaiʻi’s standard deduction has been laughably low compared to the federal level.
Starting in 2025, the state will begin raising that deduction significantly, aiming to match federal levels by 2031.
2. Widening the Tax Brackets
Hawaiʻi has had very narrow tax brackets. This meant that even modest wage earners quickly found themselves bumped into higher percentage tax rates. The new law drastically widens these brackets. You will have to earn significantly more money before you hit those higher tax rates.
When you combine these two factors, the taxable income for working families shrinks dramatically.
The Visual Proof: The Savings Trajectory
It’s easier to understand this impact visually. Based on analyses of the legislation, I’ve put together a couple of charts to show how this phased-in approach fundamentally changes the tax landscape here.
The Rise of the Standard Deduction (Joint Filers)This first graph shows the projected path of the standard deduction for a married couple filing jointly. Notice the steep climb over the next few years. That upward slope represents income you no longer have to pay state taxes on.
By 2031, a significant chunk of a family’s initial earnings will be completely shielded from state income tax.
Real World Scenario: The $3,600 Difference
What does that mean in actual dollars?
Let’s take a representative household—a working couple earning around $88,000 a year. Under the old system, they were hit hard. Under the fully phased-in new system, their tax liability drops off a cliff.
The graph below illustrates the estimated annual state income tax liability for that household today versus when the law is fully implemented in 2031.
That orange gap between the bars? That’s roughly $3,600 a year staying in that family's bank account. That is an extra $300 a month toward rent, groceries, utilities, or savings.
From Worst to First?
It sounds hyperbolic to say Hawaiʻi could become a "low tax state," but for working and middle-class families, the data supports it.
According to analyses by the Institute on Taxation and Economic Policy (ITEP) and local economic experts, this reform specifically targets the tax burden on lower- and middle-income residents. While high earners will still pay substantial taxes, the effective tax rate for the majority of Hawaii's workforce is about to plummet.
This isn't a magic bullet for our cost of living crisis—housing is still expensive, and shipping costs are still high. But this tax reform is the single biggest step the government has taken in decades to actually make it affordable for local families to stay in Hawaiʻi.
Keep an eye on your paystubs starting in 2025. You’ll start seeing the difference then, and it’s only going to get better over the next few years.
