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The Honolulu Advertiser

Posted at 1:59 a.m., Thursday, February 15, 2007

State's tax burdens on poor among the nation's largest

News Release

WASHINGTON — Hawai'i levies among the nation's highest income taxes on low-income working families and its national ranking is worsening by some measures, according to a report from the Center on Budget and Policy Priorities.

Creation of a state Earned Income ax Credit, one of two policy responses the Hawai'i legislature is considering this year, would bring meaningful tax relief to low-income families at moderate cost, the report states.

"An EITC would bring more tax relief to low-income families — and at less cost than the tax proposal by Governor Lingle —because an EITC would be targeted on the families who need it," said Jason Levitis, an analyst at the center and author of the report.

Of the 42 states with income taxes, Hawai'i levies the nation's highest taxes on families of three with incomes at the poverty line and at 125 percent of the poverty line. And Hawai'i's tax thresholds (the level of income at which families begin to owe income tax) are among the nation's lowest, thousands of dollars below the poverty line.

Taxing the incomes of working-poor families undermines the efforts by policymakers across the political spectrum to help families work their way out of poverty, the report notes. The federal government has exempted working-poor families from the income tax since the mid-1980s, and most states now do so as well.

Last year, Hawai'i and several other states that continue to levy high income taxes on low-income families (such as Alabama and West Virginia) enacted major tax cuts. But those other states generally did a better job than Hawaii of targeting tax relief on low-income families. As a result, while Hawai'i's tax cut has modestly reduced taxes for the working poor, the state's ranking has actually worsened by some measures in the past year.

The Hawai'i legislature is considering two primary proposals for low-income tax relief: a package of permanent tax cuts proposed by Governor Lingle and a state EITC proposed by leaders of the legislature. While both approaches would provide significant tax relief to low-income families, an EITC would provide greater benefit at less cost because it is targeted on those families. (The benefits of the governor's proposal, in contrast, are distributed more broadly.)

The governor's proposal would cost about $60 million per year and yet would leave Hawai'i among the worst states in the nation in terms of its income-tax burden on low-income families. An EITC set at 20 percent of the federal EITC would cost less than half as much — about $26 million per year — and would make Hawai'i above average in this area.

"With an EITC, Hawai'i's income tax would no longer be one of the nation's most burdensome on low-income families. That would be an important step forward, especially given Hawaii's high cost of living," said Levitis.

A state EITC also would moderate the imbalance in Hawai'i's tax system, under which low-income residents pay a higher share of their income in taxes than wealthier residents do, Levitis noted.

The full analysis can be found at: http://www.cbpp.org/2-14-07sfp.htm.