Hawaii's Senate has introduced a significant legislative bill, SB123, aimed at reshaping the state's income tax landscape by eliminating the home mortgage interest deduction for second homes. This move, proposed on February 10, 2025, is designed to address growing concerns over housing affordability and tax equity in the Aloha State.

The bill's primary provision seeks to remove the tax benefit that homeowners currently receive for interest paid on mortgages for their second residences. Proponents argue that this change will help level the playing field for first-time homebuyers and those struggling to afford housing in a market where prices have surged. By redirecting potential tax revenue, the state could invest in affordable housing initiatives, which are increasingly critical as Hawaii grapples with a housing crisis.

In addition to the elimination of the deduction, SB123 mandates that the Department of Budget and Finance, in collaboration with the Department of Taxation, submit annual reports to the legislature. These reports will provide insights into the administration of the new law and its impacts on the state's economy and housing market, with the first report due twenty days before the regular session in 2026.

While the bill has garnered support from housing advocates, it has also sparked debates among lawmakers and stakeholders. Critics express concerns that the removal of the deduction could disproportionately affect middle-class families who own second homes for vacation or rental purposes. They argue that this could lead to a decline in property values and negatively impact local economies that rely on tourism and rental income.

The implications of SB123 extend beyond tax policy; they touch on broader social and economic issues. By potentially increasing the tax burden on second homeowners, the bill could influence investment decisions and the overall real estate market in Hawaii. Experts suggest that if passed, the legislation could lead to a shift in how residents view homeownership and investment in the state.

As the legislative process unfolds, the future of SB123 remains uncertain. However, its introduction marks a pivotal moment in Hawaii's ongoing efforts to address housing affordability and tax equity, setting the stage for further discussions on how best to support residents in a challenging economic environment.