State tax system takes toll on low-income

We all know it’s expensive to live in Hawaii. It comes with the territory. Housing, fuel, food, electricity and eating out costs more than what you would pay in most places. No surprise. We do our best to adjust our lifestyles according to what we can afford.

But there are some costs of living in the Aloha State that don’t always seem fair, and one of those costs is the focus of a new study released Wednesday by the Institute on Taxation and Economic Policy and the Hawaii Appleseed Center for Law and Economic Justice.

It found that Hawaii’s lowest income residents pay almost two times more in taxes as a percent of their income compared to the state’s wealthiest residents. This aggressive taxation of low-income residents leaves Hawaii with the country’s second heaviest tax burden on people in poverty.

The study, “Who Pays?,” analyzes tax systems in all 50 states and factors in every major state and local tax, including personal and corporate income taxes, property taxes, and sales and other excise taxes. The analysis shows that in Hawaii, households with income in the lowest quintile spend 13.4 percent of their income in taxes, while those in the top 1 percent pay just 7 percent of their income.

That certainly doesn’t sound very fair.

“Hawaii has the highest cost of living in the country and the sixth-highest rate of poverty under the U.S. Census’s supplemental poverty measure,” said Victor Geminiani, executive director of Hawaii Appleseed. “Yet, we are the second worst state in the country for taxing our people deeper into poverty.”

And why is that?

This is in part because Hawaii relies more heavily on sales and excise taxes to raise revenue and is less dependent on personal income taxes, which tend to be more progressive (meaning the higher one’s income, the higher one’s effective personal income tax rate).

According to the Institute on Taxation, there is a reason for the problem. In recent years, anti-tax advocates across the country have pushed for tax policies that would reduce tax rates for the wealthy and businesses.

Here in Hawaii, the 2009 tax rate increases on the wealthiest households are scheduled to sunset this year. Aggressive tax cuts that favor businesses and the wealthy can result in states having difficulty adequately funding basic public obligations such as education, which can lead to increasing the taxes that fall more heavily on the poor.

“In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else,” said Matt Gardner, executive director of ITEP. “Upside down state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem. State policymakers shouldn’t wring their hands or ignore the problem. They should thoroughly explore and enact tax reform policies that will make their tax systems fairer.”

OK, so what’s the solution?

For the upcoming session, Hawaii Appleseed has proposed four tax policy changes that will create a fairer, more progressive tax policy that helps struggling families make ends meet. Its major priorities include adjusting the refundable, low-income household renters credit for inflation —from $50 per exemption to $150, and $30,000 to $60,000 for the income eligibility threshold.

This credit has not been adjusted for inflation since the 1980s, let alone for skyrocketing rents. Another top priority is the creation of a state earned income tax credit, set as a percentage of the federal credit, which will help working families keep more of what they earn.

Often lauded as the most effective anti-poverty program in the country, half the states have created their own EITC. Hawaii, the most expensive state in the country, should follow their lead.

Other tax initiatives proposed include adjusting the refundable food/excise tax credit for inflation; this credit has not been increased since its creation in 2007 and continues to lose ground as prices rise.

The high cost of living in Hawaii is no secret, so no one should live here and complain about it. But a taxation system that hits the poor the hardest should be adjusted.

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