Include Hawaii's poor in tax reduction package

THE ISSUE A budget policy organization ranks Hawaii as the second-worst state in taxing the incomes of the working poor.

THE drooping economy of the 1990s might have served as a rationale for Hawaii's callous tax treatment of its most needy citizens, but the state now enjoys prosperity. Governor Lingle's tax package and Democratic-sponsored legislation should be merged to end Hawaii's standing as the nation's most regressive blue state among the 42 that impose income taxes.

Across the board, Hawaii's income tax bite on low-wage earners, as compiled by Washington-based Center on Budget and Policy Priorities, is deplorable, trailing only Alabama in disdain for the working poor:

» Hawaii imposes a tax of $373 for a single-parent family of three with income at the federal poverty level of $15,577, and $470 for a two-parent family of four with a poverty-level income of $19,961. Most states impose no tax on families with such incomes or give them refunds in the form of tax credits.

» Hawaii charges $185 to a family of three led by a parent making the minimum wage, amounting to an income of $13,000. Only six states impose any tax on such families, and a dozen states provide refunds ranging from $24 to nearly $1,400.

» A two-parent family of four, with one parent earning the minimum wage, still pays $50 in Hawaii income tax. It is one of only three states that tax such impoverished families. Fifteen states make refunds ranging from $32 to more than $1,400.

» The state income tax of a two-parent family of four making $24,951 -- 125 percent of the poverty line -- is $808 in Hawaii, third-highest behind Kentucky and Oregon. Eleven states impose no taxes or provide refunds to such families.

Hawaii needs to use a significant amount of the current revenue surplus to address the problem. Lingle and numerous legislators have proposed increasing the standard deduction, now $1,650 for a single parent and $1,900 for a married couple, far less than in most states. The governor proposes raising the state's standard deduction to 75 percent of the federal deduction, which is $7,300 for a single parent and $10,000 for a married couple. That would amount to a tax break for families at all income levels.

Other bills would join Hawaii with 16 states that provide earned income tax credits, ranging from 5 percent to 50 percent of the federal level. Federal credits of 40 cents for every dollar earned, up to a benefit of $4,400, are available to working families with two or more children and incomes up to $34,000.

"The bottom line is that we are collecting income taxes from people who simply can't afford them," Lingle said in her address to the Legislature. The solution is to include an earned income tax credit based on 20 percent of the federal level, at a cost of $17.5 million, in the governor's $157 million tax-reduction package.