State tax credit unused

By Sean Hao
Advertiser Staff Writer

A state income tax credit created in 2000 to spur the private sector to help low-income families buy homes, pay education expenses or start a business has so far drawn no takers.

The program gives investors a 50 percent state income tax credit for contributions that are used to provide as much as a 3-to-1 match on savings made by those of modest means.

Individual Development Accounts have been used locally for about five years with great success, mainly tapping matching funds from foundations and the federal government, said Greg Field, executive director of the Waimanalo Community Development Corp.

Field said Waimanalo Community Development Corp. has 30 families using the accounts, which allowed them to save for down payments on their homes. The program is particularly attractive because it helps families build assets, he said.

"That has this chemical reaction in their life," Field said. "They've got something now that they're proud of. It has a ripple effect in their lives and their community."

However, the accounts could have an even greater impact with more private-sector participation, he said. His agency has about 12 families on a waiting list for the program.

"I know if we had more matching money, we could help more families," Field said.

Generating such participation was the goal of the Individual Development Account tax credit created by legislators about three years ago. The state set aside a maximum of $1 million to pay for the credits, which have yet to be claimed by anyone, according to the Department of Taxation. Only nine states allow a tax credit for such contributions, according to Washington, D.C.-based policy researcher The Finance Project.

Field said the lack of private participation is due to inadequate public education about the tax credit and a requirement of the program that allows an investor to claim a credit for only half of the money contributed. In contrast, tax incentives such as Act 221 allow investors to deduct 100 percent of their investment in a qualified technology company.

"Given the choice between a 50 percent tax credit and a 100 percent tax credit, your heart really has to be in a certain program to do that," Field said.

However, at least one local accountant predicted that people would take advantage of the credit if they knew it existed. The Hawai'i tax credit for contributions to Individual Development Accounts is the second most generous on the state's books, next to Act 221.

"I've never heard of it," said Patrick Tanigawa, a Honolulu accountant. But "that's a good deal," he said. "If you're going to give the money out in the first place, why not take advantage of the tax credit?"

Honolulu accountant Patrick Vyas also was unfamiliar with the tax credit.

Here's how it works: You contribute $10,000 to an Individual Development Account and receive a $5,000 tax credit, or 50 percent of the contribution. If you have to pay $5,000 in state income taxes, the credit would reduce your tax liability to zero.

Your $10,000 also could be counted as a charitable contribution on federal tax returns.

The tax credit expires at the end of next year, although state lawmakers are considering extending it and increasing the amount of credit allowed.

Families looking to start an account and receive matching money must meet income requirements and participate in financial education classes that typically are provided free of charge.

On O'ahu, a family of four can earn up to $51,700 and still qualify. The maximum earnings allowed for a family of three is $46,500.

Participating families must set aside a certain amount of money each month.

Anne Marie Beck, community reinvestment act coordinator with Bank of Hawaii, said the bank oversees about 500 of the accounts, which contain total savings of about $200,000. Less than 10 percent of the participants drop out of the program for failure to stick with a savings plan, she said.

In addition to a lack of participation by private investors, administrators of Individual Development Accounts face high program costs because of the classes and one-on-one counseling, Beck said.

She said Bank of Hawaii along with several nonprofit groups that help families start Individual Development Accounts are working on a plan to increase awareness of the program that could include targeting tax preparers and investment advisers.

"We're still trying to develop that strategy," Beck said.

For more information, call Greg Field at 259-9558.