Lawmakers hope to ease tax on poor

Hawaii's poor, those with children and income below the federal poverty level, must still pay state tax on their meager earnings.

Although state tax laws have been called "cruel" by Gov. Linda Lingle, the state Legislature has not changed them to help the poor.

Now a new national study also is faulting the state.

The Center on Budget and Policy Priorities released a survey of the 42 states that levy an income tax, and Hawaii has the second-highest rate of taxing the poor.

The study notes that overall, states' income tax treatment of the poor has improved greatly since the early 1990s, but Hawaii and Alabama have lagged behind.

The study by the center, which has been described as liberal by the national Tax Foundation, quoted Lingle: "We are collecting income taxes from people who simply can't afford to pay them."

The study concluded: "A number of states would do well to heed her words."

In Hawaii, the state Legislature is working on two tracks: Increase the standard deduction so that those making under a certain amount would not have to pay income taxes, or would pay a smaller amount; or create an earned income tax credit similar to the one already in place in the federal tax code.

"I don't know if the earned income tax credit or the standard deduction will be the vehicle, but there is interest in helping lower-income families," said Sen. Carol Fukunaga, chairwoman of the economic development and taxation committee.

Fukunaga (D, Lower Makiki-Punchbowl) said Hawaii changed its tax laws in the past decade when it was going through an economic downturn and has not yet readjusted the tax rates or credits.

"We repealed a lot of the tax credits that helped the poor when we didn't have the revenue to do what we wanted. Now that the economy is more robust, we can do more," Fukunaga said.

Former Senate President Robert Bunda, who championed middle-class tax cuts last year, said the economy is doing well, "So I think we can afford both."

"We all know the poor are being taxed too much," Bunda said.

While the Legislature is divided on either a standard deduction increase or a new earned income tax credit, the Lingle administration is still pushing for the increased standard deduction.

Kurt Kawafuchi, state tax director, says the standard deduction also would help those who would not qualify for the earned income tax credit because they are not earning income.

"The earned income tax credit is not user-friendly, it has a high error rate and it would not help the handicapped, the unemployed and (those) who have been injured and don't have any earned income," Kawafuchi said.

"The earned income tax credit is a good concept, but we don't think it is the right vehicle," he said.

The center said the credit could cost the state up to $17.5 million a year in lost taxes. Moving the state standard deduction to the federal level of $7,300 for a single parent and $10,000 for a married couple would cost about $103 million.