RELATING TO TAXATION.

HB1617

HOUSE OF REPRESENTATIVES

H.B. NO.

1617

THIRTY-THIRD LEGISLATURE, 2026

STATE OF HAWAII

A BILL FOR AN ACT

relating
to taxation
.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

PART I

����
SECTION
1.
�
The legislature finds that based on
the carbon pricing study commissioned under Act 122, Session Laws of Hawaii
2019, and the findings and recommendations of the 2020-2022 tax review commission,
establishing a carbon cashback program that increases taxes on fossil fuels and
distributes most of the new tax revenues back to taxpayers would be a
cost-effective and equitable way to reduce the State's greenhouse gas
emissions, as well as to provide financial relief to most households in the
State.
�
The legislature further finds
that the needs addressed by the agricultural development and food security
special fund, which was effectively repealed in 2021 due to budget concerns,
are as important to the State now as ever.

����
Accordingly,
the purpose of this Act is to establish a carbon cashback program that:

����
(1)
�
Gradually increases the environmental
response, energy, carbon emissions, and food security tax to reduce fossil fuel
imports and reduce greenhouse gas emissions and pollution in furtherance of the
State's zero emissions clean economy target established in Act 15, Session
Laws of Hawaii 2018;

����
(2)
�
Distributes most of the new tax
revenues as refundable income tax credits to mitigate the effect of the
increased tax on income taxpayers and provide net financial benefits to most of
them; and

����
(3)
�
Reestablishes the agricultural
development and food security special fund.

PART II

����
SECTION
2.
�
Chapter 141, Hawaii Revised Statutes,
is amended by adding a new section to be appropriately designated and to read
as follows:

����
"
�141-
�
Agricultural development and food security
special fund; establishment.
�
(a)
�
There is established within the state treasury
the agricultural development and food security special fund.

����
(b)
�
The following moneys shall be
deposited into the special fund:

����
(1)
�
The portion of the environmental
response, energy, carbon emissions, and food security tax specified under
section 243-3.5;

����
(2)
�
Appropriations from the legislature;

����
(3)
�
Any grant or donation made to the
special fund; and

����
(4)
�
Any interest, dividend, or other
income earned on the balance of the special fund.

����
(c)
�
Moneys in the special fund may
be expended for the following purposes:

����
(1)
�
The awarding of grants to farmers
for agricultural production or processing activity;

����
(2)
�
The acquisition of real property for
agricultural production or processing activity;

����
(3)
�
The improvement of real property,
irrigation systems, and transportation networks necessary to promote
agricultural production or processing activity;

����
(4)
�
The purchase of equipment necessary
for agricultural production or processing activity;

����
(5)
�
The conducting of research on and
testing of agricultural products and markets;

����
(6)
�
The funding of agricultural
inspector positions within the department of agriculture and biosecurity;

����
(7)
�
The promotion and marketing of
agricultural products grown or raised in the State; and

����
(8)
�
Any other activity that is intended
to increase agricultural production or processing and that may lead to reduced
importation of food, fodder, or feed from outside the State.

����
(d)
�
No later than twenty days
prior to the convening of each regular session, the department of agriculture and
biosecurity shall submit a report to the legislature on the status and progress
of existing programs and activities and the status of new programs and
activities funded under the agricultural development and food security special
fund.
�
The report shall also include:

����
(1)
�
The spending plan of the
agricultural development and food security special fund;

����
(2)
�
All expenditures from the
agricultural development and food security special fund;

����
(3)
�
The targeted markets of the
expenditures, including reasons for selecting those markets;

����
(4)
�
The persons to be served using the
expenditures; and

����
(5)
�
The specific objectives of the
expenditures, including measurable outcomes.
"

����
SECTION
3.
�
Chapter 231, Hawaii Revised Statutes,
is amended by adding a new section to be appropriately designated and to read
as follows:

����
"
�231-

�
Carbon emissions tax and dividend special
fund.
�
(a)
�
There is established the
carbon emissions tax and dividend special fund, into which shall be deposited
the amount specified by section 243-3.5.

����
(b)
�
Moneys in the carbon emissions
tax and dividend special fund shall be administered by the department of
taxation and shall be expended for salaries, contracted services, supplies, and
other administrative expenses to:

����
(1)
�
Administer the environmental
response, energy, carbon emissions, and food security tax;

����
(2)
�
Administer the carbon cashback tax
credit established by section 235- ; and

����
(3)
�
Increase public awareness and
interest in the carbon cashback tax credit established by section 235-
and the other refundable tax credits.
"

����
SECTION
4.
�
Chapter 235, Hawaii Revised Statutes,
is amended by adding a new section to part III to be appropriately designated
and to read as follows:

����
"
�235-
�
Carbon cashback tax credit.
�
(a)
�
For taxable years beginning
after December 31, 2025, there shall be allowed to each qualifying taxpayer
subject to the tax imposed under this chapter, a carbon cashback tax credit
that shall be applied against the taxpayer's net income tax liability, if any,
imposed by this chapter for the subject taxable year.

����
(b)
�
The amount of the tax credit
for the first taxable year beginning after December 31, 2025, shall be equal to
the sum of the following:

����
(1)
�
For a taxpayer filing as single or
married filing separately, the amount of $52;

����
(2)
�
For a taxpayer filing as a head of
household, the amount of $52;

����
(3)
�
For a taxpayer filing a joint return
or as a surviving spouse, the amount of $104; and

����
(4)
�
The amount of $26 per dependent
claimed.

����
(c)
�
For taxable years beginning after
December 31, 2026, the amount of the tax credit for a given taxable year shall
be as specified in subsection (d), where the value of one share shall be the
amount of revenue collected through the environmental response, energy, carbon
emissions, and food security tax specified under section 243�3.5 and deposited
into the general fund in that given taxable year, divided by the number of
whole shares, where the number of whole shares is 1,440,000.

����
(d)
�
For taxable years beginning
after December 31, 2026, the amount of the credit shall be equal to the sum of
the following:

����
(1)
�
For a taxpayer filing as single or
married filing separately, the amount shall be one share;

����
(2)
�
For a taxpayer filing as a head of
household, the amount shall be one share;

����
(3)
�
For a taxpayer filing a joint return
or as a surviving spouse, the amount shall be two shares; and

����
(4)
�
The amount of one-half shares per
dependent claimed.

����
(e)
�
If the tax credit allowed to
the taxpayer under this section exceeds the amount of the income tax payments
due from the taxpayer, the excess of credit over payments due shall be refunded
to the taxpayer; provided that the tax credit properly allowed to a taxpayer
who has no income tax liability shall be paid to the taxpayer; provided further
that no refunds or payments on account of the tax credit allowed by this
section shall be made for amounts less than $1.
�

To be allowed a tax credit under this section, the individual income tax
return, including amended returns, shall be filed on or before the end of the
twelfth month following the close of the taxable year for which the credit is
allowed.
�
Failure to comply with the
foregoing provision shall constitute a waiver of the right to be issued the
credit.

����
(f)
�
Any carbon cashback tax
credits not issued pursuant to this section for the most recent taxable year
for which the return filing deadline has passed shall be allocated to the
department of human services' Med-QUEST division.
�
To determine the amount of credits not issued,
the department of taxation shall calculate the product of the number of whole
shares and the value of one share for the relevant taxable year, less the total
amount of eligible allowances for carbon cashback tax credits issued for the
relevant taxable year.
�
The department of
taxation may use a substantively similar calculation to determine the amount.

����
(g)
�
The director of taxation:

����
(1)
�
Shall revise any forms as may be
necessary to allow issuance of a tax credit under this section in a manner that
does not require an explicit claim by the taxpayer;

����
(2)
�
Shall alert eligible taxpayers of
the tax credit using appropriate means; and

����
(3)
�
May adopt rules under chapter 91
necessary to effectuate the purposes of this section.

����
(h)
�
All of the provisions relating
to assessments and refunds under this chapter and under section 231-23(c)(1)
shall apply to the tax credit under this section.

����
(i)
�
As
used in this section, "qualifying taxpayer" means an individual
subject to the taxes imposed by this chapter.
�

"Qualifying taxpayer" does not include any person who is
claimed or is otherwise eligible to be claimed as a dependent by another
taxpayer for federal or Hawaii state individual income tax purposes.
"

����
SECTION

5
.
�
Section 128D-2,
Hawaii Revised Statutes, is amended by amending subsection (a) to read as
follows:

����
"(a)
�
There is created within the state treasury an
environmental response revolving fund, which shall consist of moneys
appropriated to the fund by the legislature, moneys paid to the fund as a
result of departmental compliance proceedings, moneys paid to the fund pursuant
to court-ordered awards or judgments, moneys paid to the fund in court-approved
or out‑of‑court settlements, all interest attributable to
investment of money deposited in the fund, moneys
deposited in the fund from
the environmental response, energy,
carbon emissions,
and food security
tax pursuant to section 243-3.5, and moneys allotted to the fund from other
sources.
"

����
SECTION

6
.
�
Section
201-12.8, Hawaii Revised Statutes, is amended by amending subsection (a) to
read as follows:

����
"
(a)
�
There is created within the state treasury an
energy security special fund, which shall consist of:

����
(1)
�
The portion of the environmental
response, energy,
carbon emissions,
and food security tax specified
under section 243-3.5;

����
(2)
�
Moneys appropriated to the fund by the
legislature;

����
(3)
�
All interest attributable to investment
of money deposited in the fund; and

����
(4)
�
Moneys allotted to the fund from other
sources, including under section 196-6.5."

����
SECTION

7
.
�
Section
243-3.5, Hawaii Revised Statutes, is amended to read as follows:

����
"
�243-3.5
�

Environmental response
,
energy,
carbon emissions,
and food security tax; uses.
�
(a)
�
In addition to any other taxes provided by
law, subject to the exemptions set forth in section 243-7, there is hereby
imposed a state environmental response, energy,
carbon emissions,
and
food security tax on each barrel or fractional part of a barrel of petroleum
product sold by a distributor to any retail dealer or end user of petroleum
product, other than a refiner.
�
The tax [
shall
be $1.05
] on each barrel or fractional part of a barrel of petroleum
product [
that is not aviation fuel; provided that of the tax collected
pursuant to this subsection:
]
shall be as follows for each calendar year:

����
$5.25
for 2026;

����
$9.45
for 2027;

����
$13.65
for 2028;

����
$17.85
for 2029;

����
$22.05
for 2030;

����
$26.25
for 2031;

����
$30.45
for 2032;

����
$34.65
for 2033;

����
$38.85
for 2034; and

����
$43.05
for 2035;

provided
that the tax shall be increased by $1.00 on each barrel or fractional part of a
barrel of petroleum product each taxable year thereafter.

����
The tax imposed by this subsection shall
be paid by the distributor of the petroleum product.
�
The tax imposed for each year referenced
above shall take effect on January 1 of that year and shall continue until the
effective date of the next increment.

����
(b)
�

Tax revenues collected pursuant to subsection (a) shall be distributed
in the following priority each fiscal year, with the excess revenues to be
deposited into the general fund:

����
(1)
�
5
cents of the tax on each barrel shall be deposited into the environmental
response revolving fund established under section 128D-2;

����
(2)
�
4 cents of the tax on each barrel shall be deposited into the
energy security special fund established under section 201-12.8;

����
(3)
�
5 cents of the tax on each barrel shall be deposited into the
energy systems development special fund established under section 304A-2169.1;

����
(4)
�
3
cents of the tax on each barrel shall be deposited into the electric vehicle
charging system subaccount established pursuant to section 269-33(e); [
and
]

����
(5)
�
3
cents of the tax on each barrel shall be deposited into the hydrogen fueling
system subaccount established pursuant to section 269-33(f)[
.
]
;

����
(6)
�
15
cents of the tax on each barrel shall be deposited into the agricultural
development and food security special fund established under section 141- ;

����
(7)
�
$1,000,000
shall be deposited into the carbon emissions tax and dividend special fund
established under section 231- ;

����
(8)
�
All
of the tax collected on aviation fuel shall be deposited in the airport revenue
fund established under section 248�8; and

����
(9)
�
$1.05
of the tax on each barrel of liquid fuel sold for use in or used for small
boats shall be deposited in the boating special fund established under section
248-8, in accordance with the meaning of "small boats" as defined in
section 248-8, and the method of determining the amount of tax derived from the
sale of liquid fuel for use in or used for small boats as specified in section
248-8.

����
[
The
tax imposed by this subsection shall be paid by the distributor of the
petroleum product.

����
(b)
]
(c)
�
In addition to subsection (a), the
environmental
response, energy, carbon emissions, and food security
tax shall also be
imposed on each one million British thermal units of fossil fuel sold by a
distributor to any retail dealer or end user, other than a refiner, of fossil
fuel.
�
The tax [
shall be 19 cents
]
on each one million British thermal units of fossil fuel[
; provided that of
the tax collected pursuant to this subsection:
]
shall be as follows for
each calendar year:

����
$0.79
for 2026;

����
$1.39
for 2027;

����
$1.99
for 2028;

����
$2.59
for 2029;

����
$3.19
for 2030;

����
$3.79
for 2031;

����
$4.39
for 2032;

����
$4.99
for 2033;

����
$5.59
for 2034; and

����
$6.09
for 2035;

provided
that the tax shall be increased by $0.15 on each one million British thermal
units of fossil fuel each year thereafter.

����
The tax imposed by this subsection shall
be paid by the distributor of the fossil fuel.
�

The tax imposed for each year referenced above shall take effect on
January 1 of that year and shall continue until the effective date of the next
increment.

����
(d)
�

Tax revenues collected pursuant to subsection (c) shall be distributed
in the following priority each fiscal year, with the excess revenues to be
deposited into the general fund:

����
(1)
�
4.8
per cent of the tax on each one million British thermal units shall be
deposited into the environmental response revolving fund established under
section 128D-2;

����
(2)
�
14.3
per cent of the tax on each one million British thermal units shall be
deposited into the energy security special fund established under section 201‑12.8;
[
and
]

����
(3)
�
9.5 per cent of the tax on each one million British thermal units
shall be deposited into the energy systems development special fund established
under section 304A-2169.1[
.
]
; and

����
(4)
�
14.3
per cent of the tax on each one million British thermal units shall be
deposited into the agricultural development and food security special fund
established under section 141- .

����
[
The
tax imposed by this subsection shall be paid by the distributor of the fossil
fuel.

����
(c)
]

(e)
�
T
he tax imposed under
subsection [
(b)
]
(c)
shall not apply to coal used to fulfill [
a
signed
]
an existing
power purchase agreement between an independent
power producer and an electric utility that is in effect as of June 30, 2015[
.
]
;
provided that this exemption from taxation shall not apply to any extension of
an existing power purchase agreement or to any subsequent power purchase
agreement.
�
An independent power
producer shall be permitted to pass the tax imposed under subsection [
(b)
]

(c)
on to an electric utility.
�
In
[
which case,
]
any case in which the tax is passed on,
the
electric utility may recover the cost of the tax through an appropriate
surcharge to the end user that is approved by the public utilities commission.

����
[
(d)
]
(f)
�
A gas utility shall be allowed to recover the
cost of the tax imposed under subsection [
(b)
]
(c)
as part of its
fuel cost in its fuel adjustment charge without further approval by the public
utilities commission.

����
[
(e)
]

(g)
�
Each distributor subject to
the tax imposed by subsection (a) or [
(b),
]
(c),
on or before the
last day of each calendar month, shall file, in the form and manner prescribed
by the department, a return statement of the tax under this section for which
the distributor is liable for the preceding month.
�
The form and payment of the tax shall be
transmitted to the department in the form and manner prescribed by the
department.

����
[
(f)
]
(h)
�
Notwithstanding section 248-8 to the
contrary, the environmental response, energy,
carbon emissions,
and food
security tax collected under this section shall be paid over to the director of
finance for deposit as provided in subsection [
(a)
]
(b)
or [
(b),
]

(d),
as the case may be.

����
[
(g)
]

(i)
�
Every distributor shall keep
in the State and preserve for five years a record in a form as the department
of taxation shall prescribe showing the total number of barrels, and the
fractional part of barrels, of petroleum product or the total number of one
million British thermal units of fossil fuel, as the case may be, sold by the
distributor during any calendar month.
�

The record shall show any other data and figures relevant to the
enforcement and administration of this chapter as the department may require.

����
[
(h)
]

(j)
�
For the purposes of this
section:

����
"Barrel"
may be converted to million British thermal units, using the United States
Department of Energy, Energy Information Administration annual energy review or
annual energy outlook.

����
"Fossil
fuel" means a [
hydrocarbon deposit,
]
fuel,
such as coal,
natural gas, or liquefied natural gas, derived from
a hydrocarbon deposit
resulting from
the accumulated remains of ancient plants or animals and
used for fuel; provided that the term specifically does not include petroleum
product."

����
SECTION

8
.
�
Section
304A-2169.1, Hawaii Revised Statutes, is amended by amending subsection (b) to
read as follows:

����
"(b)
�
Deposits into the special fund may be from
the following:

����
(1)
�
Appropriations from the legislature;

����
(2)
�
A portion of the environmental
response, energy,
carbon emissions,
and food security tax pursuant to
section 243-3.5; and

����
(3)
�
Investment earnings, gifts, donations,
or other income received by the Hawaii natural energy institute."

PART III

����
SECTION
9.
�
There is appropriated out of the
general revenues of the State of Hawaii the sum of $
1,000,000

or so much thereof as may be necessary for fiscal year 2026-2027 to administer
the carbon cashback program established by this Act.

����
The
sum appropriated shall be expended by the
department of
taxation
for the purposes of this Act.

PART IV

����
SECTION
10.
�
(a)
�

The department of taxation shall submit an interim report to the
legislature no later than forty days prior to the convening of the regular
session of 2027 on preparations for the implementation of the carbon cashback
program.

����
(b)
�
The department of taxation shall
submit annual reports to the legislature no later than forty days prior to the
convening of each regular session from 2028 through and including 2036, with
information about the carbon cashback program.
�

The reports shall include revenues from the environmental response,
energy, carbon emissions, and food security tax and the amounts distributed
through the refundable tax credits under section 235- , Hawaii
Revised Statutes.
�
The reports shall
include any information necessary for the legislature to assess the need to
adjust the amounts of the refundable tax credits in future years and any
recommendations to improve the carbon cashback program.

PART V

����
SECTION
11.
�
Statutory material to be repealed is
bracketed and stricken.
�
New statutory
material is underscored.

����
SECTION
12.
�
This Act shall take effect on July
1, 2026; provided that:

����
(1)
�
Section 4 shall apply to taxable years
beginning after December 31, 2025; and

����
(2)
�
Section 7 shall apply to taxable years
beginning after December 31, 2026.

INTRODUCED BY:

_____________________________

Report Title:

Department
of Taxation; Environmental Response, Energy, Carbon Emissions, and Food
Security Tax; Carbon Emissions; Tax Credit; Agricultural Development and Food
Security Special Fund; Carbon Emissions Tax and Dividend Special Fund; Reports;
Appropriation

Description:

Reestablishes
the Agricultural Development and Food Security Special Fund.
�
Establishes the Carbon Emissions Tax and Dividend
Special Fund.
�
Gradually increases the Environmental
Response, Energy, Carbon Emissions, and Food Security tax rates and establishes
a refundable carbon cashback tax credit to offset increases for most taxpayers.
�
Requires reports to the Legislature.
�
Appropriates funds.

The summary description
of legislation appearing on this page is for informational purposes only and is
not legislation or evidence of legislative intent.