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Raising standard deduction
would help needy families

As Governor Lingle has done for the past three years, she will propose significant tax relief for low-income families next legislative session. Among the tax relief proposals is raising the standard deduction (whereby increasing the take home pay of Hawaii's lowest-income wage earners); providing tax credits to needy families for food, medical services and nonprescription drugs; and providing refundable tax credits to employers and families who purchase long-term care insurance.

The administration believes these proposed tax relief measures would benefit more people than the earned income tax credit (EITC) being advocated by Rep. Brian Schatz.

During this past legislative session, the Legislature considered enacting a Hawaii EITC pegged at 20 percent of the federal EITC. While the purpose of the EITC is certainly noble in its intent to help certain limited categories of low-income workers, there is a broad range of taxpayers who would not benefit from the EITC. The unemployed, retirees with no earned income (e.g., wages, self-employed income, etc.), taxpayers under 25 years old or over 65 years old, married couples with one or more children and a combined earned income greater than $36,000, and married couples who cannot claim any children (e.g., because the other parent claims the child or the children are adults) and a combined earned income greater than $12,500 would not qualify for the EITC.

If the EITC is enacted, the number of Hawaii resident tax returns claiming the EITC is estimated to be 72,000. In contrast, the number of Hawaii resident tax returns that could be filed claiming the proposed increased standard deduction and food and medical services tax credit is estimated to be 334,000.

The EITC is also not user-friendly, which results in a high level of errors, overclaims and complications. Based on the Internal Revenue Service's experience, the error rate is high. For example, the IRS estimates that approximately $8.5 billion of the federal EITC were claimed in error for the 1999 tax year. The complexity of the EITC also forces some taxpayers to pay tax professionals to prepare their tax returns and would require additional resources by the Hawaii Department of Taxation to administer and enforce.

The Lingle-Aiona administration's proposals would provide greater relief to those at the lower end of the income scale and are user-friendly. Those who are elderly, sick and disabled would receive no benefit from an earned income tax credit, but would definitely benefit from the proposed increased standard deduction and food and medical services tax credit. Our first priority should be to cut taxes for the vast majority of Hawaii's families who deserve tax relief, not just certain limited categories of workers.

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