How lawmakers can strengthen the signature working families tax credit to truly help those who need it most.
Nearly half of Hawai‘i’s residents struggle to make ends meet. Caught between rising costs and stagnant wages, families continue to fall behind despite working one or more jobs. What if a public program could give these families more economic security, improve health and educational attainment, and support upward mobility? Hawai‘i Budget & Policy Center (HBPC)’s latest policy brief focuses on just such a program: the Earned Income Tax Credit (EITC).
The EITC is a powerful tool for lifting families out of poverty. It encourages work and creates economic security by giving families the boost needed to support healthy lives, get a good education, and increase future earnings.
In 2018, the federal EITC lifted about 5.6 million people out of poverty, including about 3 million children. The number of poor children would have been more than 25 percent higher without the EITC. The credit reduced the severity of poverty for another 16.5 million people, including 6.1 million children.
The EITC is also among the most effective means of fiscal stimulus available to us, providing $1.24 in community benefit for every $1 spent.
“This policy brief further validates the direct impact that a refundable EITC can have toward helping Hawai‘i’s low-income working people,” said Peter Ho, Chairman, President and CEO of Bank of Hawaii. “It is a proven and effective strategy in helping working families make ends meet.”
“The success of the Earned Income Tax Credit is so striking that most states and some local governments have implemented similar programs,” said Beth Giesting, director of HBPC.
This includes Hawai‘i, which established a nonrefundable state EITC program in 2017, scheduled to sunset in 2023. The federal government and 24 of 29 participating states and the District of Columbia offer a refundable EITC. Refundable means that eligible tax filers get a refund if the tax credit they’ve earned is more than the taxes they owe. Refundability makes the EITC much more effective, especially for families with the lowest incomes. That’s because these families are likely to qualify for tax credits that amount to more than their income tax liability.
The state Department of Taxation reported that Hawai‘i’s EITC was claimed by 55,656 households and provided $15.3 million in benefits in 2018, its first year. However, due to its nonrefundable nature, the financial benefits overwhelmingly did not got toward the families that need it most.
Although the lowest-income working families qualify for the largest tax credit, they owe little in taxes. As a result, they can use only a fraction of the tax credit they’ve earned. A refundable tax credit would give them—and the communities where they live and work—the full benefit of the EITC tax refund.
“Creating our state Earned Income Tax Credit was an important first step,” Giesting said. “However, Hawai‘i can and should strengthen its EITC to ensure that those who need it most have access to its full value. This year, Hawai‘i lawmakers can strengthen the positive effects of the EITC and widen the pool of Hawai‘i residents that can benefit from it by passing Senate Bill 2309 on to the governor.”
The bill proposes to make the State EITC refundable, and removes the sunset provision that would end it after 2023.
“Hawai‘i should fully embrace the potential of EITC to maximize its effectiveness for the tens of thousands of the struggling working families it was intended to help,” said Giesting. “Doing so would also significantly boost the economic stimulus and job creation roles that the EITC can play. We should not delay changing the state EITC to realize all its benefits for the people of Hawai‘i.”