HB946

SECTION 1. The legislature finds that imported goods often carry a high, uncharged carbon cost due to long-distance transport, the use of fossil fuels, and associated greenhouse gas emissions. Locally produced goods, when they replace or displace imported goods, reduce these carbon emissions by minimizing transportation distances and fuel usage. Current market prices do not fully account for the invisible or externalized costs of greenhouse gas emissions associated with imported goods.

The legislature further finds that encouraging the production and consumption of locally sourced goods can help the State meet its climate goals, support local businesses, and reduce dependency on external supply chains.

The purpose of this Act is to establish a system under which producers of certain local goods that displace equivalent imported products may claim a carbon displacement tax credit to reflect the uncharged carbon cost avoided by not importing those goods.

SECTION 2. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to part I to be appropriately designated and to read as follows:

"§235- Carbon displacement tax credit. (a) There shall be allowed to each taxpayer subject to the tax imposed by this chapter, a tax credit for carbon displacement that shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the tax credit is properly claimed.

(b) The amount of the tax credit determined under this section for the taxable year shall be equal to the amount specified in the carbon displacement certificate issued to the taxpayer by the department of business, economic development, and tourism for the taxable year in which the certificate is issued.

(c) The tax credit allowed under this section shall be claimed against net income tax liability for the taxable year. A tax credit under this section that exceeds the taxpayer's income tax liability may be used as a credit against the taxpayer's income tax liability in subsequent years until exhausted.

(d) All claims for tax credits under this section, including any amended claims, shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credits may be claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(e) To obtain a carbon displacement certificate, a taxpayer shall submit an application to the department of business, economic development, and tourism containing:

(1) A detailed description of the goods locally produced by the taxpayer;

(2) The estimated quantity of equivalent imported product that the goods locally produced by the taxpayer will replace in the State during the applicable tax year;

(3) Documentation of market data, contracts, or sales projections demonstrating the likelihood of displacing imports; and

(4) Any additional information required by the department to assess carbon displacement.

(f) The department of business, economic development, and tourism shall approve the application and issue a carbon displacement certificate to a taxpayer if the department determines that:

(1) The goods locally produced by the taxpayer are substantially similar to the imported goods the application claims to replace;

(2) At least fifty per cent of the value added by the taxpayer for the locally produced goods occurs within the State; and

(3) There is a reasonable expectation, supported by evidence, that the goods locally produced by the taxpayer will reduce the volume of imported equivalent goods.

The carbon displacement certificate shall include the amount of the tax credit the taxpayer may claim and shall be calculated as specified in subsection (h).

(g) Any taxpayer that is issued a carbon displacement certificate shall submit an annual report to the department of business, economic development, and tourism verifying actual sales, quantities, and market share displaced. The department may adjust credits in subsequent years if actual displacement deviates significantly from projections.

(h) The department of business, economic development, and tourism shall establish by rule a standardized formula to calculate the amount of the tax credit for each unit of the local product, reflecting:

(1) The average greenhouse gas emissions factor for importing an equivalent product to Hawaii from a typical export location;

(2) Adjustments for different modes of transportation of the product by air or land; and

(3) Adjustments for any known variations in supply chain emissions.

The formula may be based upon weight, volume, or another relevant metric. The carbon displacement credit for each unit of local production shall be the greenhouse gas emissions factor multiplied by the applicable carbon cost rate. This carbon cost rate may be updated periodically to align with current state or federal carbon pricing guidelines.

(i) The department shall adopt rules under chapter 91 to implement this section, including:

(1) The methodology for verifying displaced imports;

(2) The greenhouse gas emissions factor per product category; and

(3) The procedure for credit distribution, tracking, and recapture.

(j) The department of business, economic development, and tourism may conduct periodic audits of taxpayers receiving credits to verify compliance. Taxpayers found to have knowingly submitted inaccurate information or falsified records shall be subject to penalties, including repayment of credits plus interest, and potential ineligibility for future participation.

(k) The department shall submit an annual report to the legislature that includes:

(1) The number of approved taxpayers and total amount of goods subject to the tax credit;

(2) The total amount of tax credits issued and the estimated reduction in greenhouse gas emissions; and

(3) Recommendations for improving program efficiency, adjusting the carbon cost rate, or expanding the program to additional product categories.

(l) For purposes of this section:

"Equivalent imported product" means a product that is similar in function, quality, and primary use to the locally produced good for which the tax credit is sought.

"Greenhouse gas emissions factor" means a standardized measure of carbon dioxide or carbon dioxide-equivalent emissions associated with transporting goods, as determined by the department through rulemaking, taking into account distance, mode of transport, and typical fuel usage."

SECTION 3. If any provision of this Act, or the application thereof to any person or circumstance, is held invalid, the invalidity does not affect other provisions or applications of the Act that can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

SECTION 4. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2025-2026 and the same sum or so much thereof as may be necessary for fiscal year 2026-2027 for the department of business, economic development, and tourism to review applications and issue carbon displacement certificates.

The sums appropriated shall be expended by the department of business, economic development, and tourism for the purposes of this Act.

SECTION 5. New statutory material is underscored.

SECTION 6. This Act, upon its approval, shall apply to taxable years beginning after December 31, 2024.

INTRODUCED BY:	_____________________________

HOUSE OF REPRESENTATIVES	H.B. NO.	946
THIRTY-THIRD LEGISLATURE, 2025
STATE OF HAWAII