The following testimony was presented February 14, 2023, by the Grassroot Institute of Hawaii to the House Committee on Education, and the House Committee on Economic Development.
___________
February 14, 2023
2 p.m.
Conference Room 309 and Via Videoconference
To: House Committee on Education
Rep. Justin Woodson, Chair
Rep. Lisa Marten, Vice Chair
House Committee on Economic Development
Rep. Daniel Holt, Chair
Rep. Rachele Lamosao, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: HB1049 — RELATING TO INCOME TAX
Comments Only
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on HB1049, which would implement the “Green Affordability Plan.”
Announced by Gov. Josh Green in his State of the State address, the “Green Affordability Plan,” if enacted, would effectuate one of Hawaii’s largest tax reduction proposals in state history, putting approximately $312 million back into taxpayers’ pockets.[1]
We applaud the governor for introducing such a bold plan and thank the Legislature for considering this important proposal, especially considering how skyrocketing inflation on top of Hawaii’s already-high cost of living has made it hard for low-income and working class families to afford basic necessities such as food, rent and medical care.
We have some concerns about this measure, but we believe its overall effect on Hawaii residents would be positive.
It would be positive in two ways.
First the plan would double the personal exemption and increase the standard deduction amounts of the state personal income tax, plus index them and the income tax brackets to inflation.
Second, it would increase the food excise tax credit, the low-income renters tax credit, the earned income tax credit (EITC) and the child and dependent care tax credit, and create a tax credit for teachers who purchase classroom supplies out-of-pocket.
The bill’s first prong, in making changes to the state income tax, would provide relief to residents across the board. Doubling the personal exemption from $1,144 to $2,288 would lower pre-tax income of all residents. HB1049 would also more than double the standard deduction, as shown below.
| Standard deduction | Current law | GAP |
| Single filer | $4,400.00 | $10,000.00 |
| Married filing jointly | $2,200.00 | $5,000.00 |
| Head of household | $3,212.00 | $7,500.00 |
| Married filing separately | $2,200.00 | $5,000.00 |
Indexing the personal exemption, the standard deduction and the income tax brackets to inflation — as suggested by the 2020-2022 Tax Review Commission — would ensure that this relief automatically increases in inflationary times.[2]
No longer would employees be punished simply for receiving a cost-of-living adjustment. Many families that did not receive pay raises in the previous year might also benefit if tax brackets increase and they are moved into a lower bracket.
There is precedent for indexing tax laws to inflation. The federal government already does this for tax brackets, the standard deduction, the EITC and certain exclusions.[3] For example, due to high inflation, the IRS reported that for tax year 2023, the standard deduction for married couples filing jointly had increased by $1,800.[4]
The second prong of the “Green Affordability Plan” would dramatically increase several existing refundable state tax credits and would create a tax credit specifically designed to assist teachers in purchasing classroom supplies. The plan would:
>> Double the dollar amount of the food excise tax credit and increase the income eligibility by $10,000.
>> Increase the amount and eligibility of the low-income renters tax credit.
>> Increase the amount of the child and dependent care tax credit from $2,400 to $10,000 for a single child and drastically increase the percent of qualified expenses that individuals or families could claim.
>> Increase the EITC from 20% to 30% of the federal EITC.
>> Create a $500 tax credit for teachers who spend their own money to purchase classroom supplies.
All of these credits, except for the teacher tax credit, would be refundable, meaning taxpayers could receive a tax refund larger than their income tax liability.
In general, increasing these tax credits would provide relief to low- and middle-income families.
However, as to our concerns with these proposals, our view is that straightforward tax cuts — such as exempting food and medical care from the excise tax, or changing the income tax brackets — would be preferable to tax credits.
Tax cuts deliver relief immediately, either at the cash register or in a paycheck, whereas credits provide relief once a year at tax time. Waiting months for a credit to kick in makes budgeting harder and allows inflation to reduce the value of the credit.
Further, many tax credits are complicated, which makes it harder for eligible taxpayers to claim them.
For the tax year 2019, the IRS estimated that only 83.6% of eligible Hawaii taxpayers claimed the earned income tax credit. This number is slightly higher than in previous years, but over the past decade, the amount of non-claimers has hovered around 20%.[5] And little wonder: The IRS guidance on the 2022 EITC was 38 pages long.[6]
The tax credit for Hawaii’s low-income renters is likewise somewhat complicated. The renters must provide their landlords’ GET number, for example, to fill out the tax form.
Tax credits are also susceptible to fraudulent and improper payments.
Hawaii’s EITC, for example, is indexed to the federal EITC. However, the federal EITC — and therefore, Hawaii’s EITC — contains a significant amount of so-called “improper payments.” The U.S. Treasury Department’s Inspector General for Tax Administration estimated that 28% of EITC payments in 2021 — equivalent to $19 billion — were improper.[7]
In testimony on another measure this session, the state Department of Taxation reported that “refundable credits are more susceptible to fraud” than nonrefundable credits.[8] Considering that four of the five tax credits addressed in the “Green Affordability Plan” are refundable, this change could exacerbate existing improper claims.
The national Tax Foundation reports an additional concern with the EITC: It can penalize work.
According to the Tax Foundation, “While the EITC can encourage work by rewarding entry into the workforce or additional hours of work, it can also discourage work by declining in value as the worker’s income increases. Workers therefore have an incentive to work less in order to maintain the larger EITC payment.”[9]
However, even with these concerns, we believe that the overall goal of this bill — creating tax relief for Hawaii residents — is a good one.
The changes to the standard deduction and personal exemption as well as the decision to index the deduction, exemption and tax brackets to inflation are all welcome reforms.
It is even possible that these reforms will benefit the economy as a whole, as they will help reduce the cost of living and put more money back in the pockets of Hawaii residents.
We commend the governor for submitting this measure and the committee for considering it, as it could prove essential in making Hawaii more affordable for years to come.
Thank you for the opportunity to submit our comments.
Sincerely,
Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
_____________
[1] “Actions Rooted in Values,” State of the State Book, Jan. 23, 2023, p. 18; Blaze Lovell, “‘Too Much On The Line’: Hawaii Gov. Josh Green Promises To Tackle Tough Issues Head On,” Honolulu Civil Beat, Jan. 23, 2023.
[2] “2020-2022 Report of the Tax Review Commission,” Dec. 20, 2021, p. 23.
[3] Robert McClelland, “What The IRS Inflation Adjustment Really Means,” Tax Policy Center, Oct. 21, 2022.
[4] “IRS provides tax inflation adjustments for tax year 2023,” Internal Revenue Service, Oct. 18, 2022.
[5] “EITC Participation Rate by States Tax Years 2012 through 2019,” U.S. Internal Revenue Service, accessed Feb. 13, 2023.
[6] “Earned Income Credit (EIC),” IRS Publication 596, 2022, p. 1.
[7] “Programs Susceptible to Improper Payments Are Not Adequately Assessed and Reported,” U.S. Treasury Department, Inspector General for Tax Administration, May 6, 2022, p. 3.
[8] Gary Suganuma, Testimony on HB233, Feb. 3, 2023, p. 1.
[9] Robert Bellafore, “The Earned Income Tax Credit: A Primer,” Tax Foundation, May 2019, p. 11.
