A tax credit that would help low-wage working families squeezed by rising rents and other costs is up for decision-making by the Senate Ways and Means Committee today.
Hawaii would follow the lead of 26 other states and the District of Columbia if it adopts a state version of the federal Earned Income Tax Credit. The credit enjoys bipartisan backing nationally as well as locally.
“Everyone from Paul Ryan on the right to Bernie Sanders on the left have lauded the benefits of the EITC,” said Victor Geminiani, co-executive director of the Hawaii Appleseed Center for Law & Economic Justice. “The EITC is built around trying to subsidize low-wage jobs. The whole purpose of this program is to use limited money to help the people that are most hurting.”
Senate Bill 2299 would create a refundable state tax credit equal to 10 percent of the federal Earned Income Tax Credit. The federal credit boosts the take-home pay of low-wage earners and is aimed at poor households with children but is also available on a smaller scale to single workers.
The bill was introduced by Senate Vice President Will Espero (D, Ewa Beach-Iroquois Point), Ways and Means Vice Chairman Donovan Dela Cruz (D, Wahiawa-Whitmore-Mililani Mauka) and Sens. Rosalyn Baker (D, West Maui-South Maui) and Suzanne Chun Oakland (D, Downtown- Nuuanu-Liliha).
The tax credit is attracting support from a broad and growing coalition. The House Republican Caucus, led by Minority Leader Beth Fukumoto Chang (R, Mililani-Mili- lani Mauka-Waipio Acres), included a state EITC in its package of bills this session.
“Our state tax system is very regressive — the working poor are often hurt by our existing tax structure,” Fukumoto Chang said in an interview. “One of the places that I think we can get support across the aisle is on this particular issue. … There is a push for it nationally. I think it’s a really good idea so we can help address some of the poverty issues that we have in Hawaii.”
At a Feb. 5 hearing, the bill won support from numerous organizations, including Aloha United Way, the Hawaii Primary Care Association, the state Office of Hawaiian Affairs, the Hawaii State Commission on the Status of Women and the League of Women Voters of Hawaii.
Democratic Party Chairwoman Stephanie Ohigashi considers the credit a way to address income inequality by helping lower-echelon earners whose wages have stagnated while incomes at the top tier have shot up. At the same time, the credit boosts local businesses, she said.
“It encourages work and puts resources into the hands of those who need them and are most likely to spend them … at a time when inequality in income in the U.S. is the highest in 88 years,” Ohigashi said.
The federal Earned Income Tax Credit can give a family with three children as much as a $6,200 refund annually. In Hawaii in 2013, the average EITC refund was $2,400, and roughly 110,000 households received it, according to the IRS. The state version would give those households an additional 10 percent of whatever federal refund they receive.
“A state EITC is a sound way of ensuring that Hawaii’s working families have a little extra cushion to catch them” when they need it, said Scott Fuji, executive director of PHOCUSED, a nonprofit advocacy group.
The proposed tax credit is expected to cost the state $24 million a year, according to the state Tax Department. Proponents say that money would be spent by recipients and generate as much as twice that much in local economic activity.
The Tax Department expressed reservations about the bill in testimony to the Ways and Means Committee. Tax Director Maria Zielinski said the department appreciates the intent of the bill, but advised against a refundable tax credit for fear of fraudulent claims.
“Nonrefundable tax credits limit the incentive for fraud because they only benefit taxpayers to the extent of their tax liability,” she testified. “Although it seems simple to base a new Hawaii EITC on a portion of the federal EITC, the Department has no independent way to determine whether an EITC claim is proper.”
The Tax Foundation of Hawaii weighed in with numerous concerns about the bill, from its cost to its social goal. It said the tax credit is complicated and that the IRS has reported a 22 percent error rate for it.
“The EITC amounts to nothing more than a back door welfare program, handing out money merely because a person falls into a low-income category and has joined the workforce with a dependent or two,” the foundation said in written testimony.
Geminiani of the Hawaii Appleseed Center said that errors don’t mean that filers were overpaid. They include small technical mistakes as well as underpayments, he said. He added that the error rate was well below rates in other federal programs such as the small-business loan program.
IRS Commissioner John Koskinen encouraged people to file for the EITC this tax season, calling it “an important credit for hard-working Americans, and one of the government’s best tools to fight poverty.”
The federal EITC was passed in 1975 under President Gerald Ford and expanded under President Ronald Reagan as a way to incentivize work and reduce poverty. Research shows that the extra money it provides has a tangible effect on families who receive it, from better maternal health to better school performance for children over the long term, advocates say.
“EITC is an investment in our keiki and our future,” said Noriko Namiki, executive director of the YWCA of Oahu. “Children who grow up in homes with additional income through the EITC have improved health and educational outcomes, helping prepare a stronger workforce.”
GET YOUR CREDIT
While legislators consider creating a state Earned Income Tax Credit, the IRS recommends that workers be sure to claim the existing federal credit. It advises households earning up to $53,000 annually to visit IRS.gov/eitc Opens in a new tab to see whether they qualify. Free help filing the form is available through the IRS Volunteer Income Tax Assistance program.
