STAND. COM. REP. NO. 547

Honolulu, Hawaii

RE: S.B. No. 1465

S.D. 1

Honorable Ronald D. Kouchi

President of the Senate

Thirty-Third State Legislature

Regular Session of 2025

State of Hawaii

Sir:

Your Committee on Ways and Means, to which was referred S.B. No. 1465 entitled:

"A BILL FOR AN ACT RELATING TO PASS-THROUGH ENTITY TAXATION,"

begs leave to report as follows:

The purpose and intent of this measure is to require, for taxable years beginning after December 31, 2024, qualified members of an electing pass-through entity to adjust their taxable income by adding back their share of taxes paid by the electing pass‑through entity.

Your Committee received testimony in support of this measure from the Department of Taxation.

Your Committee received comments on this measure from the Tax Foundation of Hawaii.

Your Committee recognizes that current state taxation law allows partnerships and S corporations to elect to pay state income taxes at the entity level, with a corresponding tax credit available to qualified members of the electing pass-through entity equal to their pro rata share of the entity taxes paid. The tax and related tax credit were intended to allow these entities to take advantage of federal income tax deductions with no revenue impact to the State. Your Committee also recognizes, however, that taxpayers claiming the state tax credit currently receive a double benefit, which results in a revenue loss for the State. Specifically, qualified members of a pass-through entity receive both:

(1) A tax credit equal to their share of pass-through entity taxes paid by their corresponding pass-through entities; and

(2) A reduction of their taxable income from the pass‑through entities,

because pass-through entity tax payments may be deducted at the entity level as business expenses.

Accordingly, your Committee finds merit in eliminating this double benefit, which may be accomplished by requiring qualified members of pass-through entities to add to their taxable incomes their share of pass‑through entity taxes paid.

Your Committee has amended this measure by changing the effective date to July 1, 2050, to facilitate further discussion on the measure.

As affirmed by the record of votes of the members of your Committee on Ways and Means that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1465, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 1465, S.D. 1, and be placed on the calendar for Third Reading.

Respectfully submitted on behalf of the members of the Committee on Ways and Means,

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DONOVAN M. DELA CRUZ, Chair