Hawaii had already made up its mind not to allow an exclusion for unemployment before ARPA was enacted, just as they had made up their minds to increase its individual income tax rates to the highest in the country – higher than California.

“The federal government has a right to print money and the state doesn’t. We have to balance our budgets,” said Isaac Choy, director of the Hawaii Department of Taxation. “So every single time we give a tax benefit, like the non-taxability of U.I., or the deductibility of the PPP, the money has to come from somewhere.”

“We’ve been telling people, hey, you know, we’re not going to conform, we’re not going to conform, we’re not going to conform,” Choy said. “I don’t want to be the Grim Reaper here, but there were enough clues there that people should have been aware that there were some tax consequences to this. It shouldn’t have come as a surprise.”

The restriction in ARPA on the state tax cuts is brief and vague, but potentially quite broad:

“A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”

A Treasury spokesperson stipulated last month that the provision does not prohibit states from enacting tax cuts so long as those reduction do not rely on federal aid. And Hawaii could certainly point out that the decrease in taxes on the unemployed is offset by the increase in taxes on the wealthy.

For more of a discussion (from the conservative Tax Foundation) on the state tax cut prohibition, see

https://bit.ly/3cOTFnP