Gov. Josh Green signed the largest income tax cut in state history into law on Monday, giving final approval to a measure that should deliver bigger paychecks for many of Hawaii’s working people as early as the beginning of next year.

Green told a gathering of lawmakers, media and others at the State Capitol that the tax cut is a crucial part of his administration’s plans to make Hawaii more affordable, and help staunch the flow of people who are leaving the islands.

The administration predicts the new law will reduce state income taxes for 70% of working-class families, and eliminate the state income tax entirely for about 40% of all state taxpayers by 2031.

“These were the changes that we had to have because we’ve seen an exodus of people who are living paycheck to paycheck,” Green said. “We’ve seen an exodus of those individuals going to the mainland, working families, because they just can’t afford rent.”

House Finance Committee Chairman Kyle Yamashita said House Bill 2404 — which is now Act 46 — will reduce the tax burden for a median-income Hawaii family by nearly $20,000 over the next seven years. It will also reduce state income tax collections by a total of $5.6 billion by 2031, according to Green.

State Tax Director Gary Suganuma said his department will modify the tax withholding tables used to calculate how much money is taken out of each paycheck for taxes, and employees should begin receiving more take-home pay in each paycheck in January.

The state Tax Department is offering a downloadable “take-home pay calculator” that residents can use to estimate the impact of the new tax law on their own paychecks.

HB 2404 would increase the standard deductions for taxpayers from the current $4,400 for joint filers to $8,800 for tax filers next year, and then increase that standard deduction in a series of steps until it reaches $24,000 in 2031.

It would grant similarly large expansions in the standard deductions for single filers, heads of households and married couples filing separately.

It would also eliminate state income taxes for the lowest-paid filers, and adjust the all state income tax brackets to account for inflation.

The governor also signed a more modest tax measure Monday that will eliminate the state excise tax on medical and dental services for people who receive benefits under Medicaid, Medicare or the TRICARE program for the military, retirees and their dependents.

That measure is Act 47, and will reduce state tax collections by $77.5 million in fiscal year 2027, which will be the first full fiscal year after the tax break takes effect. The Tax Department expects it will reduce tax collections by $81 million the following year.

Green predicted that tax break “will bring more providers to our people, it’s super important.”

The huge income tax cut in particular has some observers concerned that the state will resort to deep budget cuts later to balance the state budget, or will forgo important projects the state urgently needs to undertake.

Nicole Woo, director of research and economic policy for the nonprofit Hawaii Children’s Action Network Speaks, said that given the large loss in revenues from the income tax cut, “we worry how lawmakers will fill that gap.”

The tax cut will reduce state collections by more than $1.4 billion in fiscal year 2032, according to the Tax Department, and the reduced collections will continue indefinitely into the future.

“We worry that needed services are going to face cuts, and needed improvements are not going to get funded in the future,” she said. “We look forward to talking with our lawmakers about how they are going to fill this budget hole without reducing social services, public education and all these other needed things in our community.”

The new law also provides large tax cuts to the wealthiest Hawaii residents “who really don’t need it,” Woo said.

But Green declared that “we won’t be cutting services,” in part because he predicts the tax cut will grow the state economy. A larger economy would translate into increases in other kinds of tax collections, such as the general excise tax.

“Individuals who are working paycheck to paycheck will spend every single dollar on local businesses, on their rent, on cars, on their health care needs. They will spend it here for their families, for school books for their children, they will all spend it right here at home,” he said.

Green also said he expects that reducing income taxes will mean residents will have more money and can rely less on Medicaid and other expensive social programs.

“As we support people’s quality of life and their ability to pay and survive on their own, a lot of those other programs will see cost savings, so we’re being smart about this,” he said.

However, Green also said his administration has begun a “deep dive into the costs that we have on the books that maybe shouldn’t be on the books.” Specifically, he said about 30% of state jobs are vacant, and unspent salaries often result in year-end surpluses of several hundred million dollars.

For positions that haven’t been filled for three or four years, Green said he wants to either raise the pay for essential state jobs to finally attract workers to fill them, or “make sure that we cut out some of the excess costs.”

“We expect to present a budget to the Legislature next year with fewer positions overall so that we get rid of some of what has been perceived as waste,” he said.

He also noted the administration has been pushing to “get more resources in many cases from travelers.”

Green campaigned on a plan to impose a new “green fee” on arriving tourists to help cope with climate change and the impacts from the millions of tourists who come here each year, but the idea has stalled at the Legislature in each of the last three sessions.