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The Honolulu Advertiser

Posted on: Sunday, March 31, 2002

State tax policy has failed poorest families

State officials have been quite proud of their efforts to cut taxes over the past several years as part of their efforts to kick-start a slumbering economy.

But tax-cutting with economic stimulation in mind comes at a price, a price paid — apparently — by those least able to afford it.

A new study out of the Center on Budget and Policy Priorities suggests that Hawai'i has done one of the poorer jobs overall in protecting the incomes of the poor from taxation.

In an era where people formerly on welfare are being urged to return to work, this is particularly difficult. A few examples from the study make the point vividly:

• For instance, the "threshold" at which a two-parent family of four with a family income at the estimated federal poverty level ($18,104) begins paying Hawai'i income taxes at $11,300. Compare that with nation-leading California, which doesn't kick in its income tax until that family of four earns $38,000 a year.

Hawai'i is one of 19 states that still tax household incomes below the federal poverty line.

• Even when families creep above the poverty line, the picture in Hawai'i remains grim. Many federal and state programs key assistance programs, such as school lunch subsidies and state healthcare, to incomes at 125 percent of the poverty line. But when it comes to taxes, that same two-parent family of four earning 125 percent of the poverty line can expect to pay $756 in state income taxes, the report says. That's the second highest in the nation.

Hawai'i has made some effort to ease the tax burden on the poor over the years, but clearly it has not done enough. For instance, it has raised the minimum tax threshold for a family of four twice since 1991. But even with that change, it lags behind most states in keeping the poorest wage-earners off the tax rolls.

Given the budget realities facing the current session of the Legislature, there is little hope that much will be done about tax policy toward the poor this year. But this remains an important policy issue that cannot be ignored.

There are several steps that the Legislature must take, if not this session then next:

• Increase the earned-income tax credit that is available to low-income taxpayers. And in addition to raising it, it should be more broadly publicized. If you or anyone you know at the lower end of the income scale is getting ready to pay taxes, make sure to look into that earned-income credit.

• Raise the standard deduction available to all taxpayers. This is a deduction that helps protect the progressivity of our income taxes since it is relatively more valuable to the poor than the wealthy. Hawai'i's deduction, $1,500 for singles and $1,900 for married couples, has not changed since 1989.

That means inflation (and admittedly, Hawai'i's inflation has been mild) has lessened the value of that deduction steadily over a dozen years.

Hawai'i has made it clear it will use tax policy to achieve social ends. Recently, those ends have focused on economic stimulation. It is now time to look at social justice.