[ OUR OPINION ]

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Income tax cuts should
target the working poor

THE ISSUE State legislators are looking at ways to reduce state income taxes.

HAWAII'S recovering economy is triggering talk of tax cuts or an overhaul of the state's tax code by this year's Legislature. The state's mounting financial needs should be addressed fully before lawmakers consider rewriting the state's tax code. However, some changes are warranted immediately to assist workers living in poverty.

Hawaii's current income tax on the working poor now is among the nation's highest. A family of four with an income as low as $11,600 -- less than two-thirds of the federal poverty line -- still must pay income taxes in Hawaii, according to Bob Zahradnik, senior policy analyst at the Washington-based Center on Budget and Policy Priorities. A family of four whose income was right at the poverty level of $18,390 in 2002 had an income tax bill of $378.

"This income tax burden has the effect of making poor working families poorer," he said in a report last year. "This is particularly problematic at a time when state welfare policy strives to encourage low-income families to work themselves off welfare and out of poverty."

Governor Lingle has favored increasing the standard income tax deduction for married couples from the current $1,900 to $4,200, eliminating income taxes for many of the working poor. The federal deduction for couples is $7,850.

Lingle's proposal generally would benefit low- and middle-income families; about 72 percent of families with incomes below $30,000 use standard deductions. The very poor -- those making less than $11,600 -- would not benefit at all.

Zahradnik suggests a method targeted more at the working poor and very poor -- an earned income tax credit, increasing as income rises for very low-income families and phasing out for families with higher incomes. The annual loss in revenue would be about the same as Lingle's proposal -- $20 million -- but its focus on the poor would be much greater.

While Lingle's proposal would increase the level at which a two-parent family of four begins paying taxes from $11,600 to $13,900, Zahradnik figures that use of the earned income tax credit would increase that income threshold to $21,000. The family would save $127 through the raising of the standard deduction but $828 through the earned tax credit formula.

Workers making less than $11,600 would not benefit from an increase in the standard deduction, but all of the working poor would benefit through the tax credit.

Ten states have enacted earned income tax credits in the past eight years, based on the federal credits available to working families with two or more children and incomes up to $34,000. The state credit amounts range from 5 percent to 50 percent of the federal credit. Zahradnik's cost estimate of an earned income tax credit for Hawaii is based on it being set at 20 percent of the federal level.