Lower-paid workers likely to get tax break
By Gordon Y.K. Pang
Advertiser Capitol Bureau
As the state Legislature reaches the midpoint of its 2005 session this week, chances are good that lower-paid workers will get a break on their state income taxes through what's known as an earned income tax credit.
Like the federal earned income tax credit, a state earned income tax credit would provide higher benefits to those with children, and to those making up to $15,000 annually. According to numbers provided by 3Point, a public interest consulting firm that submitted testimony on the bill, a credit equal to 20 percent of the federal credit — based on 2004 tax year figures — would be worth $820 for a family of four or more with an annual income of $15,000. For a family of four making $25,000 annually, a 20 percent state credit would mean $439, while a single person with no children in that salary range would not receive any credit. Source: 3Point, a public interest consulting firm State income tax relief measures EARNED INCOME TAX CREDIT: What it does: Provides a tax credit for working tax filers who earn within specified federal limits. How it works: Those who already get a federal tax credit would get a tax credit off their state income taxes based on a percentage of the federal credit. Who it helps: Roughly between 70,000 and 80,000 of the lowest wage-earning individuals and families who already receive a federal tax credit; for instance, a family of four making no more than $35,458. How much it will cost the state: A credit based on 5 percent of the federal earned income tax credit would cost about $6 million; a 20 percent credit would cost about $23 million. INCREASING STANDARD DEDUCTION: What it does: Raises the standard deduction for those who don't itemize. How it works: Increases the dollar amount the government allows you to subtract from your total income before calculating actual taxes. Who it helps: Any individual or family who files state income taxes and does not itemize deductions, typically those on the lower end of the earnings spectrum. The administration estimates more than 300,000 filers, about half of the total, would see some benefit. How much it will cost the state: Actual amounts yet to be determined, but the administration's proposal would cost, at full implementation,$21.7 million annually. EXPANDING TAX BRACKETS: What it does: Expands the income tax brackets without increasing the rates while forgiving taxes altogether for those making $8,000 or less. How it works: "Pushes" the income brackets upward so that most filers would pay at lower tax rates than they now do. Who it helps: Anyone making less than $100,000 would get some relief, and the tax department estimates that's about 695,000 people; the amount of savings per family or individual is under dispute. How much it will cost the state: The Department of Taxation originally estimated $58.9 million annually, but now believes the amount could be much higher.
State earned-income tax credits are in place in 17 states and the District of Columbia. In addition, the federal government provides a separate credit tied to earned income. Around 70,000 to 80,000 Hawai'i families and individuals now get the federal credit and they would be the ones eligible to receive the state credit.
How much would people get?
The proposal is among three measures now before the Legislature that could add up to hundreds of dollars a year for some individuals and families, and could cost the state millions of dollars.
The measures, which also include raising the standard deduction and expanding tax brackets, grew out of a push announced at the beginning of the legislative session to provide some sort of relief for low- and middle-income Hawai'i families.
The three proposals made it out of the Senate Ways and Means Committee last week and will be up for final votes today.
The chairmen of the money committees in the House and Senate said that if there's going to be a tax relief bill moving out of the Legislature this year, odds are it will be an earned income tax credit program that's similar to, and tied to, the federal earned income tax credit.
While supporters of a state earned income tax credit believe it's the best way to provide relief for those most in need, opponents question its methodology, potential for abuse and how many people it would help.
Under Senate Bill 1410, which is expected to advance out of the Senate this week, eligible filers would receive a state credit that's equal to 5 percent of their federal earned income tax credit. House Bill 957, expected to move out of the House this week, would provide a 20 percent credit.
"An earned income tax credit targets the lowest waged families and the people who need the cash assistance the most," said Teresa Bill, who assists University of Hawai'i low-income and welfare students through the group Bridge To Hope.
A key attraction of an earned income tax credit is that it can provide huge incentives for people to work, said Brent Dillabaugh, special projects manager for the Hawai'i Alliance for Community Based Economic Development.
However, Lowell Kalapa, president of the Tax Foundation of Hawai'i, said he does not like the idea of tying the credit to the federal calculation, which contains variables that change from year to year that the state cannot control. Initially designed to refund low-wage earners what they pay in Social Security and unemployment taxes, "over the years, they just pulled numbers out of the air," he said.
He also doesn't like the "refundable" nature of the credits. The credit is called refundable because a taxpayer claims it as a refund on a tax return, even though in some instances, the filer doesn't make enough money to actually pay taxes.
"There could be occasions where you get paid more back than what you would otherwise have paid in income taxes."
Kalapa said he agrees with those who believe low-wage earners should not be taxed for trying to make a living, but said he would prefer that lawmakers support Gov. Linda Lingle's plan to increase the standard deduction.
State Tax Director Kurt Kawafuchi also opposes the bill, saying there has been a high instance of abuse on the part of filers who overclaim. Kawafuchi said the IRS estimated it lost as much as $10 billion in illegitimate claims in 1999.
Although the IRS has since cracked down on abuses, Kawafuchi said he is still wary. "Whenever you have a refundable credit, it's like free money," he said. "By it's nature, you invite a lot more potential abuse."
Proposals to provide tax cuts by raising the standard deduction and expanding tax brackets also remain on the table this legislative session.
The standard deduction is the amount that can be deducted from your wages and salaries in order to calculate your adjusted gross income, which determines how much tax you pay. For Hawai'i taxpayers, it is currently $1,900 for a married couple and $1,500 for a single person.
The tax system is divided into brackets based on income. As the brackets increase, so do the rates filers must pay. By expanding the brackets, taxpayers would be pushed down into lower brackets and therefore pay less taxes.
On the House side, only the earned income tax credit bill moved out of committee and is poised for final passage. The House Finance Committee last week advanced the state's budget package without any tax cuts.
House Finance Chairman Dwight Takamine, D-1st (N. Hilo, Hamakua, N. Kohala), said whether any tax break plan makes it out of the Legislature could hinge on the Council on Revenues, which makes the revenue projections on which the state bases its budget decisions, when it meets today to consider a possible upward forecast.
Takamine said if there is money for a tax cut, he's inclined to keep to the House majority's theme of helping the "quality of life" for those at the lower rung of the income ladder, which would mean good news for those supporting earned income tax credits.
Ways and Means Chairman Brian Taniguchi, D-12th (Manoa, McCully), said that although he is not sure how other senators feel, he is leaning toward supporting the earned income tax credit. "Personally, it seems that might be the best (option)," Taniguchi said.
Kawafuchi acknowledged those who would get a state earned income tax credit might see a larger benefit, but notes more people would get a break by raising the standard deduction.
The tax department calculates that about 41 percent of the state's 578,000 tax filers now take the standard deduction rather than itemize. An additional 78,000 would move to a standard deduction if it was raised to the levels proposed by the administration, meaning more than half of those filing state income taxes would benefit from the plan.
The administration wants to combine raising the standard deduction with a reintroduction of a food and medical tax credit of $55 per person for those families with adjusted gross income of up to $40,000.
Reach Gordon Y.K. Pang at gpang@honoluluadvertiser.com or at 525-8070.
