The Earned Income Tax Credit is a proven tool for fostering economic prosperity, providing opportunities for working families to climb the economic ladder and strengthening local businesses. Based on the federal Earned Income Tax Credit (EITC), the state EITC is a tax credit that reduces or eliminates workers’ tax liability. The EITC has been praised as the most effective anti-poverty program in the U.S.; has been endorsed by every president since Richard Nixon; and continues to receive broad, bipartisan national support. Both Democrats and Republicans have hailed it as the most effective anti-poverty tool in the nation.
In July 2017, Hawai‘i passed a law (HB 209) to create a non-refundable state EITC worth up to 20 percent of the federal EITC to help working families keep more of their earnings. It is estimated that the Hawai‘i EITC will provide $135 million in much-needed tax relief to low-income and working-class families over five years.
Hawaiʻi ranks second nationally in how heavily we tax our low-income households. In fact, we are in the minority of states that actually pushes low-income people deeper into poverty with taxes. As a result, nearly half of our state’s residents live paycheck-to-paycheck.
Our lowest-income households pay over 13% of their income in state and local taxes, while those at the top pay less than 8%. The main reason for this inequity is the General Excise Tax (GET), applied to almost all goods and services, which hits low-income and working-class families almost ten times harder than those at the top. Households in the bottom fifth of the income spectrum make an average of $10,100 per year. They pay 11% of their income in the GET, for an average of $1,111 per year. In contrast, they pay about 0.5% in state income tax, for an average of $50.
That is why we also need to have robust refundable tax credits for low-income and working-class households. If tax credits are refundable, filers can get tax refunds when their credits total more than the amount of income tax that they owe.
For example, a single parent of one child, working full-time at the minimum wage, earns $18,500 annually, and would owe Hawai‘i about $170 in state income tax. If this filer’s refundable tax credits amount to $500, then he or she would receive a tax refund of $330, which could go a long way towards catching up on bills and debts.
The federal EITC is a tax credit that reduces or eliminates workers’ tax liability. A state EITC mirrors the federal credit, and provides eligible households with an additional credit based on a percentage of the federal EITC.
The unique structure of the EITC ensures that those most in need receive the most benefit. The EITC is only available to people who earn income through low-wage work, targeting those with families. Most of the people who receive the credit are raising children. It helps families who, despite working, are still unable to make ends meet and who do not qualify for other programs. Because the EITC is targeted at families with children, it is particularly effective at alleviating the impact of child poverty. About 18,000 children in Hawaiʻi are kept out of poverty due to the federal EITC each year.
The federal credit is refundable, meaning that if a family’s credit is greater than their tax liability, the remaining portion of the credit is returned to the family. The size of the credit depends on a family’s filing status, number of dependent children, and income. As a family earns more, the credit grows, levels off, and eventually phases out as the family’s need decreases. This tax credit offers working families a hand up by encouraging them and supporting work and reducing the use of public assistance. It’s a modest investment that can make a big difference in the lives of working families.
Hawai‘i’s low-income families face the second-highest tax rate in the nation, with our lowest-income households paying almost twice as much of their income (over 13%) in taxes as those in the top fifth (who pay 8% or less). A main reason for this disparity is the General Excise Tax (GET), which is applied to nearly all goods and services in Hawai‘i. It hits our low-income and working-class families much harder because they spend almost all of their earnings on items and services that are taxed by the GET.
Working families in Hawai‘i have seen their purchasing power shrink in recent years. High rents, stagnant wages, and increasing energy and food costs mean a family’s dollar has to stretch further each year just to meet basic needs. The state EITC puts thousands of dollars back into the pockets of working residents with far-reaching benefits for both parents and children. A state EITC that was equal to 10 percent of the federal EITC would directly add roughly $25 million to low and moderate-income communities throughout Hawai‘i. However, because each dollar of EITC can generate up to $2.00 of economic activity, the overall economic benefit to Hawai‘i communities is closer to $42 million.
The state EITC incentivizes work because it allows families to keep more of what they earn. This increases household earnings and reduces the need for public assistance. For families with very low wages, the credit increases with each dollar earned, which encourages adults to work more hours, consequently enabling them to gain a firmer foothold in the workforce and be more resilient in the face of temporary setbacks like pay reductions or layoffs. For families working their way into the middle class, this helps prevent minor hiccups from becoming major setbacks.
Households that are not in immediate need can also opt to save their refunds. Almost 30 percent of Hawai‘i’s households are “liquid asset poor,” meaning that they do not have enough liquid assets to survive for three months at the poverty level in the absence of other income. A state EITC can help families achieve greater economic security and address this issue.
In 2013, the federal EITC kept 6.2 million people out of poverty nationally. More than half of those were children. In fact, the number of children living in poverty would be 25 percent higher without the federal EITC.
The benefits of the EITC are immediate and long-lasting. Children and young adults in families receiving the federal and state EITC experience financial, educational and health benefits that strengthen their foundations for future success. Approximately 18,000 children in Hawai‘i were kept out of poverty due to the federal EITC each year between 2011-2013; a state EITC further bolsters working families’ incomes. Children in families who receive a credit worth around $3,000 during their early years can see their school performance boosted by the equivalent of approximately two extra months of school. The EITC is also linked to higher test scores, especially in math, for low-income students in elementary and middle school. Children whose families currently receive the EITC also have higher high school graduation rates and levels of college enrollment.
Children also see increased earnings as a result of their parents receiving the EITC. Children in families who receive a credit worth $3,000 before the age of 6 work an average of 135 more hours a year between ages 25 and 37 and receive an average of 17 percent more annual earnings.
Better School Performance: The EITC is linked to higher test scores, especially in math, for low-income students in elementary and middle school. A credit that’s worth around 3,000 during a child’s early years may boost performance by the equivalent of two extra months of school.
Greater College Enrollment: Children in families who receive the EITC have higher rates of college enrollment. One study estimated a $1,000 boost for an EITC-eligible family with a high school senior raised the likelihood of college attendance the next fall by 10 percent.
Increased Work and Earnings in the Next Generation: For each $3,000 a year in added income that children in a working-poor family receive before age 6, they work an average of 135 more hours a year between 25 and 37 and their annual earnings increase by 17 percent.
The federal EITC is linked to healthier moms and babies. It has been associated with increased birth weight for newborns and self-reported improvements in maternal health. Over 127,000 children in Hawai‘i will benefit from increased financial stability through the state EITC. Young children in families with enough income to cover basic necessities, like going to the doctor when they are sick and giving them breakfast before school, do better and go further in school.
A state EITC helps local businesses. When working families struggle, businesses suffer. By helping workers keep more of their hard-earned wages, the credit would directly benefit local businesses through increased consumer spending. Additionally, encouraging more financially stability indirectly supports local businesses in the form of more reliable employees with stronger incentives to work more.
The state EITC benefits employers because workers who can pay for basic necessities are more dependable employees than those who struggle financially. Workers can spend the credit on childcare for their kids and reliable transportation to get to work, helping them become successful employees. In addition, as much as 36 cents of every dollar an employee acquires through the federal EITC ultimately flows to employers.
When workers keep more of what they earn, they put some of those dollars back into the economy when they make purchases. The rounds of spending and re-spending have a direct impact of businesses and their production, employment, and income. Businesses can then hire more workers and increase their profits. In addition, a study in California showed that for every $150,000 of tax credit claimed, an additional job was created. Ideally, the state EITC in Hawai‘i will eventually lead to more jobs in the local economy as well.
Honolulu Star-Advertiser, June 25, 2016
For those worried about the next generation, some encouraging news: Drug and alcohol abuse among Hawaii’s teenagers, as well as teen pregnancy rates, have declined dramatically over the past few years.
Hawaii’s numbers reflect what’s happening nationwide. National surveys report the rate of teenagers giving birth in the U.S. dropped below 25 births per 1,000 teen females, a record low, in 2014. There also was a steady decline in the use of alcohol, cigarettes and many drugs, both illicit and prescription, among American eighth-, 10th- and 12th- graders over the past five years.Good news, to be sure. But will this trend continue?
Honolulu Civil Beat, February 15, 2016
Every child should have the opportunity to thrive and achieve their full potential regardless of the conditions they are born into. Yet for many of the children in Hawaii, the socioeconomic status at the time of their birth and early childhood can either set them ahead or hold them behind.
How a State Earned Income Tax Credit would Benefit Hawaiʻi’s low-income Families and Children
The federal Earned Income Tax Credit (EITC) has long been recognized as one of the nation’s most effective anti-poverty measures, lifting millions of Americans out of poverty each year by allowing them keep more of what they earn. The tax credit targets low-income and moderate-income families and is credited with encouraging work and supporting children’s development through various stages of life. Despite the effectiveness of the federal EITC in reducing poverty among working families, earnings plus the federal tax credit do not guarantee an escape from poverty for all families struggling to make ends meet. In many cases, state level EITCs have helped to fill that gap across the country. Unfortunately, Hawaiʻi remains one of 24 states without a state EITC. In a state where low-income residents pay more state and local taxes as a share of their income than higher-income residents, a refundable credit against state income taxes would contribute toward keeping the tax system fair. A Working Family Credit or state EITC equal to at least 10% of a filer’s federal EITC would also be a highly cost-effective way to help many of Hawaiʻi’s low-income families meet their basic needs with their own income.
Policy Basics: The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a federal tax credit for low- and moderate-income working people. It encourages and rewards work as well as offsets federal payroll and income taxes. Twenty-six states, plus the District of Columbia, have established their own EITCs to supplement the federal credit.
Rewarding Work Through State Earned Income Tax Credits
Despite some economic gains in recent years, the number of Americans living in poverty has held steady over the past four years. At the same time, wages for working families have remained stagnant and more than half of the jobs created by the economic recovery since 2010 were low-paying, mostly in the food services, retail, and employment services industries. Our country’s growing class of low-wage workers often faces a dual challenge as they struggle to make ends meet. First, wages are too low and growing too slowly – despite recent productivity gains – to keep up with the rising cost of food, housing, child care, and other household expenses. At the same time, the poor are often saddled with highly regressive state and local taxes, making it even harder for low-wage workers to move out of poverty and achieve meaningful economic security. The Earned Income Tax Credit (EITC) is designed to help low-wage workers meet both those challenges.
Fact Sheet: The Earned Income Tax Credit from Representative Fukumoto
The federal Earned Income Tax Credit (EITC) is a refundable tax credit that can be claimed by people with low-wage jobs (it doesn’t apply to unemployment benefits or other assistance). Currently, 26 other states and the District of Columbia have implemented a state EITC to enhance the benefits of the federal EITC credit. Hawaii currently does not have a state EITC; however, the Republican Caucus is proposing one this year.
Policy Basics: State Earned Income Tax Credits
Twenty-six states and the District of Columbia have created earned income tax credits (EITCs) to help families struggling to get by on low wages make ends meet and provide basic necessities for their children. These credits build on the benefits of the federal EITC, offering a hand up to families that work. They also are easy to administer, with nearly every dollar going directly to the working families that the credits were created to help.
States with EITCs
General information on which states have EITCs, the year each was enacted, how close they are to the federal EITC, and if they are refundable or not.