Increasing standard deduction would help more taxpayers
ONCE again, a national study has ranked Hawaii among the meanest states in the nation when it comes to taxing our poorest families. The Center for Budget and Policy Priorities found that of the 42 states that levy an income tax, Hawaii has the second-highest rate of taxing the poor, particularly those at the poverty level. Only Alabama taxes its poor more than we do.
This is a distinction that we as a community should be embarrassed by, and it is something we no longer should tolerate.
As we have done every year since 2003, the Lingle-Aiona administration is proposing comprehensive tax relief that would help those who need it most. Our proposed tax package would provide $346 million in relief over two years, which would specifically help low-income residents as well as working families.
Two of the proposals that would provide the most significant and long-term relief are raising the standard deduction to allow Hawaii wage earners to keep more of their take-home pay, and automatically adjusting certain tax measures annually to account for inflation.
Increasing the standard deduction would reduce the taxes paid by almost two-thirds of Hawaii's poor and many middle-income families. Last year, the Legislature recognized the benefit of adjusting the standard deduction and raised the amount to 40 percent of the federal level. This is a step in the right direction, but our taxpayers who are struggling to make ends meet need and deserve more tax relief.
We are asking the Legislature to increase the standard deduction to 75 percent of the federal standard deduction. With this meaningful increase, married couples who file a joint return would be able to deduct $7,500 rather than the current amount of $4,000. Single taxpayers would be able to deduct $3,750 rather than $2,000. This adjustment in the standard deduction would grant tax relief to 64 percent or 375,000 Hawaii taxpayers.
Raising the standard deduction, which has long been recommended by tax experts including nearly every Tax Review Commission since 1985, would help more taxpayers than the narrower earned income tax credit that also is being considered by the Legislature.
While the EITC has merit, it would benefit only 14 percent of the population, or approximately 72,000 taxpayers -- five times fewer than the number of people who would be helped by adjusting the standard deduction.
The EITC would not reach certain segments of the community. Young families under age 25, retired couples over 65 and disabled individuals would not qualify for the EITC. Those who do qualify for the EITC can only make a certain amount of money and have a certain number of children in order to maximize the benefit. The EITC would provide no benefit to a working family with two wage-earners with a combined income of approximately $40,000 a year. A married couple with one child can earn only $34,001 before the EITC is lost.
In contrast, increasing the standard deduction would provide $238 in tax relief to a working family of four earning $40,000. The standard deduction would not discriminate against a taxpayer based on his or her age, income, number of children or ability to work.
A second proposal, the Tax Payer Protection Act of 2007, would protect taxpayers from the hidden tax that results from annual inflation. This would ease the tax burden by requiring that the standard deduction, personal exemption and tax brackets be adjusted every year to take into account inflation. Such adjustments would allow the tax measures to retain their value over time and relieve taxpayers of the hidden tax increase they face each tax season. This change would benefit 942,300 taxpayers (nearly 82 percent of all taxpayers) and save them $10 million per year.
The hard-working people of Hawaii need and deserve tax relief now. Raising the standard deduction and adjusting tax measures annually for inflation would provide significant, long-term relief and help more Hawaii families to cope with the cost of living. Unless the Legislature acts now to pass these important measures, our working families, especially the poor, will fall further behind.
Kurt Kawafuchi is the director of the state Department of Taxation.