Not only does Hawaii have the highest cost of living in the country, it also has some of the highest overall taxes on the poor. A new report from the Hawaii Appleseed Center, however, explains how to change the tax code to take some pressure off the state’s low-income families. Using data from CTJ’s partner organization, the Institute on Taxation and Economic Policy (ITEP), the report proposes a new poverty tax credit that would eliminate state income taxes for any Hawaii family below the poverty line. This change would end the state’s embarrassing distinction as one of just 15 states that actually taxes its poor deeper into poverty through the state income tax.
Rather than simply enacting the poverty credit in isolation, the report also recommends pairing it with a refundable Earned Income Tax Credit (EITC) equal to 20 percent of the federal EITC. Together, these two reforms would both incentivize work and chip away at the regressivity of a state tax system that requires its poorest residents to pay more of their household budgets in taxes than any other group (PDF). As the Appleseed report shows, these two credits would boost the after-tax income of Hawaii’s poorest families by 1.4 percent, while costing the state $47 million in foregone revenue.
Like many states, Hawaii has more than a few tax breaks on the books that are expensive and unjustified, and the Appleseed experts offer up five of them as suggestions for how the state could replace that foregone revenue (and then some) without compromising vital state services:
1- Repeal the state’s sharply regressive tax break (PDF) for capital gains income.
2- Phase-out the benefits of lower tax brackets for high-income taxpayers.
3- Pare back the state’s enormous tax breaks for wealthy retirees (PDF).
4- Eliminate the state’s nonsensical deduction for state income taxes paid.
5- Enact an “Amazon law” to require more online retailers to collect and remit the sales taxes currently due (PDF) on purchases made by Hawaii residents.
Taken together, the reforms in the Appleseed report could greatly reduce the unfairness built in to Hawaii’s tax code, and put it on a more sustainable footing for generating sufficient revenues in the years ahead.