The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Finance on March 2, 2026.
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March 2, 2026, 2 p.m.
Hawaii State Capitol
Conference Room 308 and Videoconference
To: House Committee on Finance
Rep. Chris Todd, Chair
Rep. Jenna Takenouchi, Vice-Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: TESTIMONY OPPOSING HB1850 HD1 — RELATING TO CAPITAL GAINS TAX
Aloha Chair, Vice Chair and other Committee members,
The Grassroot Institute of Hawaii opposes HB1850 HD1, which would change the maximum capital gains tax rate for individuals from 7.25% to 9% and change the capital gains tax rate for corporations from 4% to 5%.
Hawaii is already ranked among the worst states in which to start a business,[1] and we at the Grassroot Institute are concerned that a higher capital gains tax could discourage business expansion and innovation.
The Hawaii Business Revitalization Task Force found that Hawaii ranks among the bottom 10 states in business costs, access to capital and technology and innovation.[2] A higher capital gains tax would frustrate future attempts to improve in any of these rankings.
A 2021 study by the Baker Institute noted that “two decades of relatively slow economic growth call for increased innovation and faster diffusion of new technology, but higher capital gains tax rates will reduce innovation and technology diffusion.”[3]
Hawaii needs more innovation, such as in the tech, agriculture and clean energy sectors, to prosper — not less.
There are also a number of sound fiscal reasons for taxing capital gains at a lower rate than ordinary income.
For one, capital gains are not indexed for inflation, thus the lower rate helps offset the fact that some portion of the gain represents inflation rather than real returns.[4]
If someone bought a stock for $50 in 2006 and sold it for $100 in 2026, they would realize a capital gain of $50. But $50 today isn’t worth as much as it was in 2006. In fact, $50 in 2006 would be worth about $80 today.[5]
So even though that person made only $20 on the sale of the stock in real dollars, they would pay taxes on the full $50.
In addition, high capital gains taxes create a “lock in” effect in which investors delay the sale of investments in order to avoid tax repercussions. This reduces economic growth by discouraging diversification and the movement of capital within the state.[6]
Curtis Dubay, chief economist at the U.S. Chamber of Commerce, wrote in 2021: “The economic models and past history all reach the same conclusion: When you significantly increase taxes on capital gains you get significantly less capital investment.”[7]
In other words, investors and entrepreneurs would be even less likely to conduct business in Hawaii because an increase in the capital gains tax would worsen Hawaii’s already poor business environment.
Furthermore, Hawaii legislators should be skeptical of optimistic tax revenue projections to be achieved via a capital gains tax hike. A study from the Congressional Budget Office on how taxes affect the decision to realize gains concluded that such decisions are very responsive to changes in taxation.
The study found a persistent elasticity of -0.79, which means that a 10% reduction in capital gains taxes would increase realizations by 7.9%. Thus, a reduction in the capital gains tax would have minimal or even a positive effect on tax revenues.[8] So increasing the rate is likely to change market behavior, which would bring in less revenue than legislators might be expecting
In short, this is not the time to make Hawaii a more expensive place to live and do business.
Thank you for the opportunity to testify.
Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] Adam McCann, “Best & Worst States to Start a Business (2025),” WalletHub, Jan. 20, 2025.
[2] “Business Revitalization Task Force Report,” November 2025,
[3] John Diamond, “The Economic Effects of Proposed Changes to the Tax Treatment of Capital Gains,” Baker Institute Center for Public Finance, Oct. 27, 2021.
[4] Stephen Entin, “Getting “Real” by Indexing Capital Gains for Inflation,” Tax Foundation, March 6, 2018.
[5] “CPI Inflation Calculator,” U.S. Bureau of Labor Statistics, comparing January 2006 and December 2025.
[6] Jane Gravelle, “Capital Gains Taxes: An Overview of the Issues,” Congressional Research Service, May 24, 2022, p. 17.
[7] Chris Dubay, “Raising the Capital Gains Tax: Who Does it Really Hurt?” U.S. Chamber of Commerce, May 13, 2021.
[8] Tim Dowd, et al., “New Evidence of the Tax Elasticity of Capital Gains,” Congressional Budget Office, June 2012, p. 17.
