The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Finance on March 1, 2023.
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March 1, 2023
2:30 p.m.
Conference Room 308 and Via Videoconference
To: House Committee on Finance
Rep. Kyle Yamashita, Chair
Rep. Lisa Kitagawa, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: HB1049 HD1 — RELATING TO INCOME TAX
Comments Only
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on HB1049 HD1, which would implement the “Green Affordability Plan.”
Announced by Gov. Josh Green in his State of the State address, the 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]
It would double the personal exemption and increase the standard deduction amounts of the state personal income tax, and index them and the income tax brackets to inflation.
It also would increase the value of the food/excise tax credit, the low-income renters tax credit, the earned income tax credit and the child and dependent care tax credit, and create a tax credit for teachers who purchase classroom supplies out-of-pocket.
We applaud the governor for introducing such a bold plan, and we 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 many Hawaii residents to afford basic necessities such as food, rent and medical care.
The HD1 version of the bill amends the low-income rental tax credit, the food/excise tax credit and the child and dependent care tax credit to resolve the “benefits cliff” issue that was recently pointed out by the Economic Research Organization at the University of Hawai‘i and the Department of Taxation.[2]
By removing the benefits cliffs that would have punished lower- and middle-income families for earning more income, these fixes should ensure that the GAP does not discourage work — an important consideration when evaluating tax credits.
We stand by our previous comments that the higher standard deduction and personal exemption would benefit taxpayers.
We also stand by our support for indexing the personal exemption, the standard deduction and the income tax brackets to inflation — as suggested by the 2020-2022 Tax Review Commission — because that would ensure that this relief automatically increases in inflationary times.[3]
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.
Regarding the tax-credit proposals, we would like to remind the committee that the federal earned income tax credit — 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.[4]
It is unclear whether the penalties added for fraud in this bill would be effective at addressing improper payments under the EITC, but the HD1 changes added in this bill likely would help mitigate the possibility of improper or fraudulent payments for the other tax-credit claims.
In general, 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
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[1] “Actions Rooted in Values,” State of the State Book, Jan. 23, 2023, p. 18, 20.
[2] Dylan Moore, “Cliffs in the GAP: A Design Flaw with an Easy Fix,” Economic Research Organization at the University of Hawai‘i, Feb. 10, 2023; and Testimony of Gary Suganuma, on HB1049, Feb. 14, 2023, p. 10.
[3] “2020-2022 Report of the Tax Review Commission,” Dec. 20, 2021, p. 23.
[4] “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.
