On February 10, 2025, the Hawaii Senate introduced Senate Bill 123 (SB123), a legislative proposal aimed at amending the state's income tax law by eliminating the home mortgage interest deduction for second homes. This bill seeks to address issues related to tax equity and revenue generation within the state.

The primary provision of SB123 involves a modification to Section 235-2.4 of the Hawaii Revised Statutes. The bill specifies that certain sections of the Internal Revenue Code, particularly those pertaining to the mortgage interest deduction for second residences, will not apply under Hawaii tax law. By removing this deduction, the bill aims to increase tax revenue and potentially redistribute tax benefits more equitably among residents.

Debate surrounding SB123 has already begun, with proponents arguing that the elimination of the deduction for second homes is a necessary step toward a fairer tax system. They contend that the current deduction disproportionately benefits wealthier individuals who own multiple properties, thereby exacerbating income inequality. Conversely, opponents of the bill express concerns that this change could negatively impact the real estate market and discourage investment in Hawaii's housing sector.

The economic implications of SB123 could be significant. By increasing tax revenue, the state may have more resources to allocate toward public services and infrastructure. However, critics warn that the removal of the mortgage interest deduction could lead to decreased demand for second homes, potentially affecting property values and the overall economy.

As discussions continue, experts suggest that the bill's passage could set a precedent for future tax reforms in Hawaii. If enacted, SB123 may prompt further examination of tax policies related to property ownership and investment, shaping the state's fiscal landscape for years to come. The Senate will likely hold additional hearings to gather public input and assess the potential impacts of this proposed legislation.