Give ‘em a (tax) break
A Honolulu-based nonprofit law firm wants state lawmakers to establish a Hawaii earned income tax credit and eliminate the income tax on the poor to ease the burden on low-income individuals and families.
This would help return money to those who need it most, as well as address the inequities in Hawaii’s tax system, which are adversely affecting the state’s most vulnerable residents, according to the Hawaii Appleseed Center for Law and Economic Justice. The measures would encourage work among low-income families, reduce poverty, increase self-sufficiency and stimulate the local economy, claimed the group’s report to the Legislature.
Last spring, the center released a report, “The State of Poverty in Hawaii and How to Restore Our Legacy of Fairness.” Several policy recommendations were made, such as increasing the minimum wage, which has been $7.25 since 2007, to a level that’s closer to a living wage. However, such a proposal gets enormous push back, particularly from businesses, said Victor Geminiani, Hawaii Appleseed Center executive director.
To “connect the dots” and make an impact, Geminiani said the center is advocating two tax policy changes already successful in other states. Now that the Legislature is in session, lawmakers are making decisions about their priorities, he added.
Sen. David Ige, the Ways and Means Committee chairman, while aware of the report, said he has yet to review it. He said it’s not unusual for the Legislature to get tax policy proposals that try to lessen the burden for low-income residents, who are already receiving help from Social Security, food stamps and other assistance programs. How to further help these people who are spending more of their household budgets on taxes, as well as ensure there’s enough revenue coming into the state and important programs are funded, is an issue lawmakers are wrestling with, he added.
While Ige said our tax polices are fair, he looks forward to reviewing the proposal and taking its contents into consideration with the Department of Taxation’s take, the governor’s budget, the state’s spending plan and forecast revenue. He wants to prevent tax increases and budget cuts to existing programs while also making sure the state has enough money for key strategic investments.
Rep. Sylvia Luke, Finance Committee chairwoman, could not be reached for comment as of press time Wednesday.
“Hawaii is one of only 15 states that levy an income tax on families earning minimum wage and one of only four that taxes those living below the poverty level,” the report states. “The aggregate state and local tax rate for our low-income population is the sixth highest in the nation. In other words, Hawaii requires its poorest taxpayers to spend more of their household budgets on state and local taxes than the vast majority of states.”
The Center on Budget and Policy Priorities found in 2011 families of four living in poverty were paying $331 in income taxes, which is higher than in all but two other states.
The Hawaii Appleseed Center is proposing a refundable Hawaii earned income tax credit, or EITC, that’s fixed at 20 percent of the taxpayer’s federal refundable EITC. An EITC is a refundable tax credit for working families that allows them to keep more of what they earn. The federal EITC has been herald by presidents as “the best anti-poverty measure” and has widespread bipartisan support because it encourages work. Twenty-five states have created their own EITC. In Hawaii, there have been unsuccessful attempts to get a local EITC since Gov. Ben Cayetano’s administration, Geminiani said.
Geminiani said Gov. Neil Abercrombie campaigned on instituting a state EITC to address poverty and grow the middle class. He also mentioned growing support from health and human services groups in recent years.
The amount of the proposed credit would depend on how much income a family has and how many children are in a family. It’s also dependent on what the claimant gets under the federal program.
Lowell Kalapa, head of the conservative nonprofit Tax Foundation of Hawaii, said Hawaii tying itself to a federal program that would allow a percentage of the federal credit amount would be “a mistake,” especially because the state would be subject to the whims of federal officials who could choose to double or quadruple the amount of the federal credit, beyond what Hawaii could afford.
According to the Internal Revenue Service, 108,000 of Hawaii’s poorest wage earners claimed the federal EITC. The amount of the federal EITC gradually rises as one earns more income until income reaches a specific level: $6,210 for childless taxpayers, $9,320 for families with one child and $13,090 for families with two or more children.
Under the proposal, individuals and married couples with no children, with maximum incomes of $13,980 and $19,190 respectively, would receive a maximum $475 federal credit and $95 state credit. A family with three or more children, with a maximum income of $50,270, would receive a maximum $5,891 federal credit and $1,178 state credit.
“Most low-income wage earners who receive EITC refunds put them immediately back into the economy by spending on day-to-day survival needs such as food and shelter,” the report stated. “A 20 percent state EITC would add roughly $36 million to more than $200 million in federal credits invested into communities throughout Hawaii.”
The center is also proposing to enact a nonrefundable Hawaii poverty tax credit that eliminates state income taxes on families whose adjusted gross income is below the federal poverty guidelines. It would also reduce by 50 percent the state income tax on families whose adjusted gross income is between 100 and 125 percent of the federal poverty guidelines.
The estimated cost to the state to implement a 20 percent state EITC with a poverty tax credit would be $47 million. The cost could be $15 million lower if a 10 percent Hawaii EITC is adopted. Geminiani said the center suggestions to help raise additional state revenues include: eliminating the tax break for capital gains income, preventing high-income taxpayers from benefiting from lower tax brackets, eliminating tax breaks for wealthy retirees, eliminating the state income tax deduction and requiring online retailers to collect Hawaii excise tax.