Earned income credit can lift working families out of poverty
AS if we needed to be reminded, it's tax time again. At this time of year, I get to take community volunteers, accountants, attorneys and my students to homeless shelters, low-income housing projects and immigrant support organizations to provide free income tax preparation assistance.
For 20-plus years this also has been the time of year when I have hope to see a change in the way Hawaii treats its working poor and homeless. And once again, I am disappointed with what I see.
The disappointment comes when I see a struggling Micronesian family at Loliana, a homeless transition shelter, get a hand up from the federal earned income tax credit only to find that they are living in the state that imposes the highest income tax on the poor in America. The burden Hawaii places on the working poor becomes obvious to them when they find that while they live below the poverty level they still have to pay state income taxes.
Disappointment comes again at a community center when a single parent having a hard time making ends meet on her earnings of $25,000 gets a federal tax credit/refund, then finds she has to pay Hawaii income tax.
That single parent I worked with this past week asked me the $64,000 question: "What is the state doing about this?"
Star-Bulletin columnist Richard Borreca raised the same question in a recent front-page article about the heavy tax burden that Hawaii places on its working poor ("Lawmakers hope to ease tax on poor," March 28).
One of the things that the state can do to help the working poor is to enact a state version of the federal EITC. This is not a new idea, nor a total cure for poverty. Still, the EITC has been found to be successful in helping the working poor out of poverty. It has been proven effective in 20 other states that have enacted the EITC into law.
The EITC was praised by former President Ronald Reagan as "the best antipoverty, the best pro-family, the best job creation measure to come out of Congress." The EITC allows low-income families not only to reduce their annual federal tax burden to zero, but even to receive money back to help raise themselves out of poverty. The EITC is available only to taxpayers who have earned income during the tax year, and is, therefore, an incentive for them to join and remain in the labor force.
However, critics of a state EITC have cited high fraud and error rates and the cost to the state.
While fraud is a problem, recent Internal Revenue Service studies have found that the incidences of fraud and error are declining. Additionally, assistance is being made available for working poor families to get free expert help to do their taxes. Organizations ranging from the IRS to Aloha United Way and the Hawaii Asset Building Coalition are providing free tax help and financial literacy education to hundreds of working poor families around the state.
A 20 percent EITC will cost the state money, around $20 million a year. But its financial benefits can slow and even help to stop the downward slide of many of our neighbors into homelessness. We easily give $75 million tax credits to big developers, but we hesitate to give hard-working poor families any reward for their efforts.
The EITC provides focused tax relief. The EITC is designed to and has been proven to lift families out of poverty. The EITC also has been proven effective in encouraging work among welfare recipients; studies show it has a larger impact in inducing single mothers to work than any other program.
Hawaii's Legislature has had a state EITC bill on its agenda for several years now. This year, for the benefit of our neighbors who work all too hard for all too low wages, the Legislature should pass a state EITC.
Wayne M. Tanna is a professor of accounting at Chaminade University in Honolulu.