tax

HONOLULU — A federal judge’s ruling clears the way for Hawaii to include cruise ship passengers in a new tourist tax to help cope with climate change, a levy set to go into effect at the start of 2026.

U.S. District Judge Jill A. Otake on Tuesday denied a request seeking to stop officials from enforcing the new law on cruises.

In the nation’s first such levy to help cope with a warming planet, Hawaii Gov. Josh Green signed legislation in May that raises tax revenue to deal with eroding shorelines, wildfires and other climate problems. Officials estimate the tax will generate nearly $100 million annually.

The levy increases rates on hotel room and vacation rental stays but also imposes a new 11% tax on the gross fares paid by a cruise ship’s passengers, starting next year, prorated for the number of days the vessels are in Hawaii ports.

Cruise Lines International Assn. challenged the tax in a lawsuit, along with a Honolulu company that provides supplies and provisions to cruise ships and tour businesses out of Kauai and the Big Island that rely on cruise ship passengers. Among their arguments is that the new law violates the Constitution by taxing cruise ships for the privilege of entering Hawaii ports.

Plaintiff lawyers also argued that the tax would hurt tourism by making cruises more expensive. The lawsuit notes the law authorizes counties to collect an additional 3% surcharge, bringing the total to 14% of prorated fares.

“Cruise tourism generates nearly $1 billion in total economic impact for Hawai‘i and supports thousands of local jobs, and we remain focused on ensuring that success continues on a lawful, sustainable foundation,” association spokesperson Jim McCarthy said in a statement.

According to court records, plaintiffs will appeal. They asked the judge to grant an injunction pending an appeal and requested a ruling by Saturday afternoon, given that the law takes effect Jan. 1.

Hawaii will continue to defend the law, which requires cruise operators to pay their share of transient accommodation tax to address climate change threats to the state, state Atty. Gen. Anne Lopez said in a statement.

The U.S. government intervened in the case, calling the tax a “scheme to extort American citizens and businesses solely to benefit Hawaii” in conflict with federal law.

Kelleher writes for the Associated Press.

WASHINGTON — Treasury Secretary James A. Baker III faced open hostility to the Reagan Administration’s tax revision proposal Tuesday as the Senate Finance Committee began what is expected to be at least three months of testimony on overhauling the current tax code.

“The best simplification this committee could do for the country would be just to adjourn,” Sen. Steven D. Symms (R-Ida.) complained.

Senate Republican leader Bob Dole of Kansas, a committee member, conceded that progress on tax revision could be slow. “Once the initial glow has faded,” Dole said, “there are a lot of questions this committee has to deal with.”

Warning of ‘Fiscal Disaster’

Meanwhile, Martin S. Feldstein, former chairman of President Reagan’s Council of Economic Advisers, warned that the Administration’s tax proposal could be a “fiscal disaster if tax reform became a deficit-enlarging tax cut.”

Feldstein, who left the White House last year after several disputes over Administration policy toward budget deficits, told the House Ways and Means Committee that the tax proposal “is at best revenue neutral and has a substantial risk of losing revenue.”

Other economists testifying before the House panel, which originates tax legislation, also expressed skepticism over the Administration’s contention that the tax plan would raise as much revenue as the current tax system. They contended that the package could exacerbate deficits that are now expected to remain larger than $170 billion annually well into the next decade, even if the package of spending cuts now working its way through Congress becomes law.

“I suspect that the President’s proposal is a revenue loser, particularly after 1990,” said John H. Makin, director of fiscal studies at the American Enterprise Institute.

But Baker, in defending the tax proposal to the Senate panel, insisted that Reagan’s plan would lose only $11.5 billion during the next five years, substantially less than 1% of the $4.7 trillion that the government estimates it will collect in total revenues during that period.

Contradictory Attacks

In grilling Baker, senators on the tax panel attacked the White House proposal on a wide variety of sometimes contradictory points.

Sen. William V. Roth Jr. (R-Del.) complained that the proposal “tends to soak the middle class,” but he worried also that the plan would be too generous to consumers at the expense of those who save.

Some senators argued that the plan would do little to help businesses facing the threat of foreign competition, but others suggested that individuals should receive a more generous tax break even if it means increasing taxes for corporations.

Most members of the Republican-controlled committee warned that they would attempt to restore certain tax breaks that would be eliminated by the White House package.

In particular, they criticized Reagan’s proposals to abolish the deductions for state and local taxes and for two-earner couples, to eliminate the investment tax credit and alternative energy tax credits and to tax growth in the cash value of insurance policies. But Sen. Bill Bradley (D-N. J.), author of a separate tax revision proposal, argued that the White House tax plan does not go far enough in eliminating special tax preferences. He told Baker that he would try to eliminate some tax breaks for the oil industry and wealthy investors.

Exemption Hike Opposed

Sen. George J. Mitchell (D-Me.) challenged Baker’s contention that the best way to help families living below the poverty line to escape income taxes is to increase the personal exemption from the current $1,040 to $2,000 next year.

Mitchell said that he would introduce a proposal to limit the increase in the personal exemption and grant a larger increase than Reagan recommended in the standard deduction, or zero-bracket amount, a proposal that would help only taxpayers who do not itemize their deductions. Mitchell said that his approach would concentrate tax relief more directly on middle-income and lower-income families than would the Administration’s plan.

Baker vigorously defended the Administration’s plan against the attacks. “We think our plan is very fair,” he said, pointing out that the majority of taxpayers at every income level would receive tax reductions and that the average tax cut would be 7%.

JEFFERSON CITY, Mo. — To tax tips or not? That is a question that will confront lawmakers in states across the U.S. as they convene for work next year.

The Trump administration is urging states to follow its lead by enacting a slew of new tax breaks for individuals and businesses, including deductions for tips and overtime wages, automobile loans and business equipment.

In some states, the new federal tax breaks will automatically apply to state income taxes unless legislatures opt out. But in many other states, where tax laws are written differently, the new tax breaks won’t appear on state tax forms unless legislatures opt in.

In states that don’t conform to the federal tax changes, workers who receive tips or overtime, for example, will pay no federal tax on those earnings but could still owe state taxes on them.

States that adopt all of Trump’s tax cuts could provide hundreds of millions of dollars in annual savings to certain residents and businesses. But that could financially strain states, which are being hit with higher costs because of new Medicaid and SNAP food aid requirements that also are included in the GOP’s big bill that Trump signed this summer.

Most states begin their annual legislative sessions in January. To retroactively change tax breaks for 2025, lawmakers would need to act quickly so tax forms could be updated before people begin filing. States also could apply the changes to their 2026 taxes, a decision requiring less haste.

So far, only a few states have taken votes on whether to adopt the tax breaks.

“States in general are approaching this skeptically,” said Carl Davis, research director at the nonprofit Institute on Taxation and Economic Policy.

Treasury presses states to act

The bill Trump signed July 4 contains about $4.5 trillion of federal tax cuts over 10 years.

It creates temporary tax deductions for tips, overtime and loan interest on new vehicles assembled in the U.S. It boosts a tax deduction for older adults. And it temporarily raises the cap on state and local tax deductions from $10,000 to $40,000, among other things. The law also provides numerous tax breaks to businesses, including the ability to immediately write off 100% of the cost of equipment and research.

Forty-one states levy individual income taxes on wages and salaries. Forty-four states charge corporate income taxes.

Treasury Secretary Scott Bessent this month called on those states “to immediately conform” to the federal tax cuts and accused some Democratic-led states that haven’t done so of engaging in “political obstructionism.” Though Bessent didn’t mention it, many Republican-led states also have not decided whether to implement the tax deductions.

“By denying their residents access to these important tax cuts, these governors and legislators are forcing hardworking Americans to shoulder higher state tax burdens, robbing them of the relief they deserve and exacerbating the financial squeeze on low- and middle-income households,” Bessent said.

Some tax analysts contend that there’s more for states to consider. The tax break on tips, for example, could apply to nearly 70 occupational fields under a proposed rule from the Internal Revenue Service. But that would still exclude numerous low-wage workers, said Jared Walczak, vice president of state projects at the nonprofit Tax Foundation.

“Lawmakers need to consider whether these are worth the cost,” Walczak said.

Tips and overtime tax breaks

Because of the way state tax laws are written, the federal tax breaks for tips and overtime wages would have carried over to just seven states: Colorado, Idaho, Iowa, Montana, North Dakota, Oregon and South Carolina. But Colorado opted out of the state tax break for overtime shortly before the federal law was enacted.

Michigan this fall became the first — and so far only — state to opt into the tax breaks for tips and overtime wages, effective in 2026. The overtime tax exemption is projected to cost the state nearly $113 million and the tips tax break about $45 million during its current budget year, according to the state treasury department.

Michigan lawmakers offset that by decoupling from five federal corporate tax changes the state’s treasury estimated would have reduced state tax revenues by $540 million this budget year.

Republican state Rep. Ann Bollin, chair of the Michigan House Appropriations Committee, said the state could not afford to embrace all the tax cuts while still investing in better roads, public safety and education.

“The best path forward is to have more money in people’s pockets and have less regulation — and this kind of moved in that direction,” she said.

Arizona could be among the next states to act. Democratic Gov. Katie Hobbs has called upon lawmakers to adopt the tax breaks for tips, overtime, seniors and vehicle loans, and follow the federal government by also increasing the state’s standard deduction for individual income taxpayers. Republican state House leaders said they stand ready to pass the tax cuts when their session begins Jan. 12.

Corporate tax breaks

In addition to Michigan, lawmakers in Delaware, Illinois, Pennsylvania and Rhode Island have passed measures to block some or all of the corporate tax cuts from taking effect in their states.

A new Illinois law decoupling from a portion of the corporate tax changes could save the state nearly $250 million, said Democratic state Sen. Elgie Sims, chair of the Senate Appropriations Committee. He said that could help ensure continued funding for schools, healthcare and other vital services.

Illinois Gov. JB Pritzker, an outspoken Democratic opponent of Trump, also cited budget concerns for rejecting the corporate tax cut provision. He said states already stand to lose money because of other provisions in Trump’s big bill, such as a requirement to cover more of the costs of running the Supplemental Nutrition Assistance Program, known as SNAP.

“The decoupling is an effort to try to hold back the onslaught from the federal government to make sure that we can support programs like the one we’re announcing today,” Pritzker told reporters at a December event publicizing a grant to address homelessness in central Illinois.

Lieb writes for the Associated Press. AP writer John O’Connor in Springfield, Ill., contributed to this report.