Tax Policies that Will Help End Poverty for Hawai'i's Lowest-Income Families

Click here to view the report in full.

As you know, residents in Hawai’i are faced with a number of severe economic barriers to attaining and maintaining self-sufficiency. Our state has the highest cost of living in the United States. The monthly food cost alone for a family of four in Hawai’i is 61% higher than on the mainland. The cost for shelter in Hawai’i is also the highest in the nation, with 75% of those living at or below the poverty level spending more than 50% of their income on housing.

In addition, our residents earn the lowest adjusted incomes than anywhere else in the country. This dilemma is often called the “Price of Paradise” but it has a particularly harsh effect on those living in poverty.

Finally, Hawaii is one of only fifteen states that levy an income tax on families earning minimum wage and one of only four that taxes those living below the poverty level. The aggregate state and local tax rate for our low income population is the sixth highest in the nation. In other words, Hawaii requires its poorest taxpayers to spend more of their household budgets on state and local taxes than the vast majority of states. According to a 2009 analysis by the Institute on Taxation and Economic Policy, the poorest 20 percent of Hawaii taxpayers spent an average of 12.2 percent of their income on state and local taxes each year, while the state’s middle-income taxpayers spent an average of 11.2 percent and the state’s top 1 percent of taxpayers (those earning more than $400,000) paid just 6.3 percent of their income in state and local taxes.

Our report recommends that the State of Hawaii adopt two tax measures to address the needs of low income individuals and families. Both programs will put money directly back in to the pockets of those low income wage earners who need it most by adopting:

  • A refundable Hawaii Earned Income Tax Credit (“Hawaii EITC”), which is proposed to be fixed at 20% of the taxpayer’s federal refundable earned income tax credit.
    chart describing EITC benefits
  • A non-refundable credit to eliminate income tax on the poor (“Poverty Tax Credit”) for the purpose of (a) eliminating state income taxes on families whose adjusted gross income is below the applicable federal poverty level and (b) reducing by 50% the state income tax on families whose adjusted gross income is between 100% and 125% of the applicable federal poverty level.

    estimated costs to state for poverty tax credit

Our report also briefly discusses five possible tax policy modifications that could equitably generate significant additional tax revenues that would more than pay for the costs of enacting the Hawaii EITC and the Poverty Tax Credit. They include:

  • Eliminating the preferential tax break for capital gains income
  • Preventing high-income taxpayers from benefiting from lower tax brackets
  • Eliminating pension tax breaks for wealthy retirees
  • Eliminating the state income tax deduction on state returns
  • Improving sales tax enforcement by requiring online retailers to collect the tax

Adopting a Hawaii EITC and a Poverty Tax Credit programs will go a long way to helping our low income citizens who are facing a daunting struggle to escape poverty.

Click here to view the report in full.
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