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The Honolulu Advertiser
Posted on: Wednesday, February 22, 2006

Families in poverty pay state taxes, too

By Dennis Camire and Greg Wright
Advertiser Washington Bureau

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Center on Budget and Policy Priorities: www.cbpp.org

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WASHINGTON In Hawai'i, a family of four with a poverty-level income would owe $470 in state income tax the second-highest amount in the nation making it more difficult to climb out of poverty, according to a study being released today.

Last year, 19 states taxed two-parent families of four that lived below the federal poverty line of $19,961, up from 17 states in 2004, said the report from the liberal-leaning Center on Budget and Policy Priorities.

A single-parent family of three earning minimum wage in Hawai'i $13,000 annually would owe $185 in state income taxes under current state law, the study found.

Brent Dillabaugh, public policy director for Hawai'i Alliance for Community-Based Economic Development, said imposing income taxes on families not making enough money to cover basic needs is opposite of how the state tax policy should work.

"We are supposed to be creating positive incentives for people to work and be able to meet their needs," said Dillabaugh, whose organization advocates for locally based economic development.

The Center on Budget and Policy Priorities, which tracks how fiscal policies affect low-income people, wants states to stop collecting income taxes from people who can least afford to pay them.

"Taxing the incomes of the working-poor families runs counter to the efforts of policymakers across the political spectrum to help families work their way out of poverty," wrote the report's authors, Jason Levitis and Nicholas Johnson.

NUMBERS NOT SURPRISING

State income taxes make it more difficult for low-income families to afford childcare, transportation and housing as they struggle to climb out of poverty, the report said.

But Chris Edwards, director of tax policy for the Cato Institute in Washington, said the study's findings were not shocking.

"It's not a big deal that some modest-income people in some states paid some income tax," Edwards said. "Any supposed disadvantage that low-income people face with state taxes is far overwhelmed by the enormous advantage they have under the federal tax system."

In all, 41 states and the District of Columbia levy income taxes, while nine states do not. And often, state income taxes are deductible on federal returns, which also provide several breaks, including earned income and child tax credits, to shield most poor people from paying federal taxes.

The center's report says one of the worst states for the working poor is Alabama, which taxes families that earn as little as $4,600 a year, the lowest state income tax threshold in the nation.

RELIEF MAY BE IN SIGHT

Hawai'i starts taxing a family of four at $11,500 the fourth lowest in the nation and a single-parent family of three at $9,800, the third lowest.

Other states also taxing families in poverty include Indiana, Michigan, Montana and West Virginia, the report said.

Still, Hawai'i and some other states are working to lessen the income tax burden on low-income families.

The Hawai'i Legislature is considering a number of bills that would increase the standard deduction, create an earned income tax credit, widen tax brackets and institute a $100-per-person refundable tax credit for food and healthcare services for taxpayers with incomes below $50,000.

Lowell Kalapa, president of the Tax Foundation of Hawai'i, said one problem is the state hasn't increased the standard deduction $1,650 for a single parent and $1,900 for a married couple in two decades.

"The result is that we have almost the lowest threshold before we do start taxing the poor at the low end of the scale," he said. "Our thought is that before you start buying into the federal earned income tax credit, you fix the system, which is basically the standard deduction, and lower tax rates at the bottom end."

Reach Dennis Camire at dcamire@gns.gannett.com.