LIHU‘E — A bill in the state Legislature could potentially mean more money in the pockets of working families on Kaua‘i.
House Bill 1507 would make the Earned Income Tax Credit (EITC) — which gives a tax break to low- and middle-class families who earn an income — permanent and refundable while raising the capital-gains tax.
The EITC was implemented in Hawai‘i in 2018, but is set to expire in December 2022. In 2020, some 64,000 Hawai‘i households claimed the state EITC, totaling almost $21 million in credits.
Making the credit refundable would mean that, when a family’s credit exceeds the amount they owe income tax, the IRS will send them the additional money.
Proponents see the measure as both a means of reducing poverty and generating revenue.
“We want the families at the bottom to have more money to spend in the economy,” said Will Caron,
communications director at the Hawai‘i Appleseed Center for Law and Economic Justice.
“At the same time, we want to collect a little more of the wealth that’s being trapped at the top of the system that’s not circulating through the economy or doing society any good. That can help the state invest in other programs to make life more livable for folks here.”
On Kaua‘i, introducing a refundable EITC could boost the income of 5,452 families by $420 on average, while adding $2,840,179 in economic activity, according to a 2020 report published by Hawai‘i Tax Fairness, a coalition of community organizations.
The report also states that 41% of families on Kaua‘i would get the full benefit of the EITC if it is made refundable.
The EITC has also been shown to improve the health and educational outcomes of children while increasing employment for parents, according to the Center on Budget and Policy Priorities.
Thomas Yamachika, president of the Tax Foundation of Hawai‘i, was more cautious about the EITC, citing research from the U.S. Treasury which showed that 20% of refunds are either a mistake or intentionally filed incorrectly by bad actors, and added that tax credits are often not claimed because eligible citizens are not aware of them. He advocated instead for a simpler tax system that excluded the lowest-income citizens from taxation altogether.
“Right now our tax brackets kick in at a very, very low amount,” said Yamachika. “Let’s not start taxing people until they’re past the poverty line.”
The House Committee on Economic Development discussed HB1507 Tuesday, recommending the measure in a 7-1 vote.
While the majority of the public testimony supported the bill, opponents worry that the increased capital-gains tax — the bill would raise the capital-gains tax from 7.25% to the highest marginal rate applicable to their tax bracket — will have negative impacts on the state’s economy.
“This provision is an incentive for some to move out of state, thus depriving our islands of a robust tax base, and in many cases, philanthropists,” wrote Neal K. Okabayashi, executive director of the Hawai‘i Bankers Association in his testimony, describing a hypothetical situation in which Elon Musk is incentivized to move to Hawai‘i from Texas in order to avoid a capital-gains tax.
Nicole Woo, director of research and economic policy at the Hawai‘i Children’s Action Network, pointed out that Hawai‘i is one of nine states that allows capital gains to be taxed at a lower rate than regular income.
“This tax break benefits those at the top,” she wrote in her testimony, “including non-residents who profit from investing in real estate in Hawai‘i.”
State Rep. Richard H.K. Onishi, who represents Hilo and other towns on Hawai‘i Island, expressed reservations about the double taxation of capital gains and the fact that the EITC bill is already included in a majority caucus omnibus bill, House Bill 2510. State Rep. Val Okimoto, who represents Mililani, voted against the measure.
The bill will now go before the House Finance Committee. A companion bill in the Senate has passed the first reading and has been deferred by the Ways and Means Committee.
•••
Guthrie Scrimgeour, reporter, can be reached at 647-0329 or gscrimgeour@thegardenisland.com.
