Don’t Tax State Unemployment Insurance Payments

Jennifer worked in reservations at a Waikiki hotel for 11 years. Her husband, Richard, was a self-employed massage therapist. They enjoyed a decent lifestyle while raising two daughters but then the pandemic hit. Within weeks, their life changed, and they had to rely upon public assistance and waiting in line for a box of groceries.

They are not alone. There has been over 591,000 unemployment claims over the past year.  At the beginning of the pandemic, Hawaii’s unemployment rate was 2.4%. A month later it jumped to 23.8%. By the end of 2020, it was 9.3% — the highest in the nation.

To add insult to injury, when Jennifer and Richard applied for unemployment insurance, they found out that it is subject to both federal and state income tax. Why?

The government treats unemployment benefits as wages. Your unemployment benefit is not “free money;” it is fully taxed. Keep in mind that UI is a benefit paid by the government to help people who are no longer employed through no fault of their own.

Needing every cent of their benefits, they did not withhold the taxes from their UI checks. This means, they will be faced with having to come up with thousands of dollars to pay their taxes in a few months.

We need to change this.

In six states including California, New Jersey and Pennsylvania, UI payments are exempt from state taxes. While we have little control over the federal tax structure, we certainly can offer relief at the state level.

House Bill 26 (I am the primary sponsor) and Senate Bill 614 introduced this session would eliminate the state tax requirement and for those who already withheld the tax from their benefit, they would get a refund.

The Princess Ruth Keelikolani Building where state unemployment offices are housed.

Cory Lum/Civil Beat

In these unprecedented times, with families struggling, we should exempt UI from state taxes. We already exempt welfare payments, food stamps, temporary disability insurance, and workers’ compensation from state taxes.

No one denies that the situation is bleak. According to the Bank of Hawaii Foundation, one-third of residents are behind in paying their bills and more than one-fourth are struggling to put food on their table.

Many of these families have used up their checking and savings accounts, maxed out credit cards, no longer have health insurance and are facing eviction.

No one denies that the situation is bleak.

In Hawaii, many filing for UI, like Jennifer, were service sector workers making low wages to begin with. UI covers only a portion of their pay so not having to pay state tax will help them take home more money. And in turn, they will spend those dollars in the local economy.

Some would say that doing this will result in decreased revenue for the state. However, let’s keep in mind that by doing this, we will be putting money in the pockets of those most  in need.

Jennifer and Richard and hundreds of thousands of unemployed workers who filed claims need our help. It not only makes sense not to mention dollars and cents, it’s the right thing to do.