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The Honolulu Advertiser
Posted on: Sunday, April 22, 2007

Will tax refund be much relief?

StoryChat: Comment on this story

By Derrick DePledge
Advertiser Government Writer

TAX RELIEF

House and Senate negotiators say they are looking at these options for tax relief as the session ends:

Tax refund: Every taxpayer would get a refund in the $1 to $50 range, satisfying a state constitutional requirement for a refund this session because of two consecutive years of healthy budget surpluses.

According to the state Department of Budget and Finance, lawmakers have been required to provide refunds 17 times since 1978, and in all but four years, the refund was $1. Taxpayers received larger refunds in 1981 ($100), 1982 ($100), 1989 ($125) and 1990 ($60).

Food credit: Taxpayers would receive a credit on food that could vary depending on income, with lower-income taxpayers likely getting a larger credit.

Lawmakers repealed a $27 per person food credit in 1998.

State earned income tax credit: A state credit would be added on top of a federal earned income tax credit for the working poor.

The federal credit, which primarily benefits workers with children, is meant to offset Social Security payroll taxes and offer an incentive to work. The credit is awarded based on income and family size, with the top of the eligibility scale at $38,348 for a married couple with two children in the 2006 tax year.

Lawmakers had been considering a state credit of 20 percent of the federal credit, which would cost the state an estimated $25 million a year, but may opt for something smaller.

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Torn by political and financial pressures, state lawmakers are still unsure about how much money they will give back this session in tax relief.

The state constitution requires a tax refund after two straight years of robust budget surpluses which a vibrant state economy has provided but with only a few days left to finish the state budget, lawmakers have narrowed their choices but have not committed to a model.

The main options are a $1 to $50 rebate for every taxpayer, a tax credit on food that could vary by income, and a state earned income tax credit for the working poor.

House and Senate Democratic leaders could choose one or a combination of these options, but first want to lock up spending on education, health and human services, public-worker union contracts, and other priorities.

"The budget is a work in progress right now," said state Senate Majority Leader Gary Hooser, D-7th (Kaua'i, Ni'ihau). "We're looking at all the needs of the state very carefully, and I think our focus is first and foremost to address the most urgent needs, which would be education, housing and natural resource protection.

"Certainly, tax relief is something that's important for us, but we're going to take care of those urgent needs first."

The tax relief being considered by Democrats is dramatically lower than the two-year $346 million tax package proposed by Gov. Linda Lingle in January. The Republican governor called for $100 or $25 refunds for every taxpayer, depending on income, along with raising the standard income tax deduction, indexing tax breaks to inflation, eliminating the general-excise tax on basic foods, and other relief.

HIDDEN TAX INCREASES

Aware that majority Democrats will likely not follow Lingle's recommendations, administration officials have been urging lawmakers to at least focus on the income tax burden by indexing the standard deduction, the personal exemption and tax brackets each year for inflation so they would not lose value. Kurt Kawafuchi, the state's tax director, estimates that adjustments for inflation would reduce state income by about $10 million a year.

"People are struggling with the high cost of living and they are getting hit with this hidden tax increase every year because of the inflation factor," Kawafuchi said.

With Lingle urging significant tax relief each year she has been in office, many Democrats see the debate as political and believe the governor will dismiss anything less than she has proposed as inadequate. Some Democrats believe they received little public credit for the $50 million in tax relief they approved last session, including an increase in the standard deduction and expanded tax brackets so some people pay lower rates.

But Republicans argue that Democratic leaders are half-hearted about tax relief. Since the state constitution was amended in 1978 to require a refund when the general fund balance exceeds revenues by 5 percent for two consecutive years, lawmakers have had to give money back 17 times. In all but four of those years, the refunds were $1.

Democrats have agreed to tax relief voluntarily in other years, like last year, but Republicans remain suspicious.

"My feeling on this is that the least possible tax relief that the majority can get away with is what's going to happen," said state House Minority Leader Lynn Finnegan, R-32nd (Lower Pearlridge, 'Aiea, Halawa). "But I don't think they can come out with a dollar this session."

INFLATION FEARS

State House Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee; and state Sen. Rosalyn Baker, D-5th (W. Maui, S. Maui), the chairwoman of the Senate Ways and Means Committee, have cited inflation fears and the projected slowing of the state's economy as reasons to be cautious financially.

The state Council on Revenues has predicted steady 6 percent revenue growth through 2008, while the Lingle administration has estimated the state's budget surplus to sit at $466 million when the fiscal year closes at the end of June.

While a number of tax relief options remain on the table, lawmakers are speaking about their prospects with caution.

For example, a rebate for every taxpayer may fall toward the middle-to-lower end of the $1 to $50 range. A food credit may be heavily weighted toward lower-income taxpayers. And an earned income tax credit for the working poor may be less than what was discussed earlier this session: a state credit valued at 20 percent of the existing federal credit.

There also is a chance lawmakers will revive a tax exemption on ethanol-blended gasoline that expired at the end of last year, which could save consumers money if it is passed on by the oil and gas industry and results in lower gas prices.

"I think some version of these things are going to pass," said state House Majority Leader Kirk Caldwell, D-24th (Manoa).

Over the past few weeks, some House Democrats who want tax relief have said privately they are getting signals from leadership that only the constitutionally required rebate was likely and that other tax credits would be put off until next session. But House leaders have insisted over the past few days that nothing has been decided.

"I would be surprised if all there is is a rebate," Caldwell said.

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com.