Report Title:

Earned Income Tax Credit Program

Description:

Creates a pilot program led by the department of taxation to assist low-income families to claim the federal earned income tax credit. Makes appropriations.

THE SENATE

S.B. NO.

1415

TWENTY-THIRD LEGISLATURE, 2005

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

relating to earned income tax credits.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The legislature finds that approximately seventy-seven per cent of eligible low-income families in Hawaii claim the federal earned income tax credit, but over 19,000 more could claim the credit if properly informed. The federal earned income tax credit is available to families with two or more children and who have incomes below $34,458; families with one child and income below $31,338; and a family with no children and income below $12,490. The amount of tax credits vary based on several factors; however, the average tax credit for all Hawaii claimants in the 2002 tax year was approximately $1,578. The provisions of the earned income tax credit define children to include children, grandchildren, friends, disabled family members, and most importantly in Hawaii for this income group, hanai children, if the family members are dependent on the family for support.

Studies in other states find that low-income families spend their earned income tax credit amounts on basic necessities, such as rent, food, utilities, and household goods. These expenditures are made in the neighborhoods where the families live, and therefore support small businesses and low-income communities. The legislature finds that this spending results in a direct influx of dollars from the federal government into Hawaii where the dollars are spent in Hawaii and taxes are paid on the dollars spent. More importantly, the legislature finds that projects in other states, such as Illinois and New Jersey, indicate that these expenditures result in an increase in jobs to provide the goods and services demanded.

For example, the legislature notes that an Illinois project found that for each dollar invested in assisting low-income families to claim the federal earned income tax credit, $27 in credits were brought into the state. The tax counseling project that was instituted for $100,000 in Chicago resulted in three thousand five hundred individuals being serviced and $3,000,000 in credits being obtained.

The legislature finds that the Internal Revenue Service reports that twenty-four per cent of Hawaii's 267,426 tax returns or 64,212 returns were submitted in 2002 with earned income tax claims. The total tax credits claimed were $101,387,000, or an average of $1578 per return. Based on a study of tax returns filed from January 1, 2002 to February 28, 2003 for Hawaii addresses (GAO-02-290R, December 14, 2002), there was a potential of 19,438 additional claimants. Based on the average tax credit of $1578, as much as $30,000,000 went unclaimed. Filing these returns could result in $30,000,000 in earned income tax credits being claimed by Hawaii residents, most of which would be spent in Hawaii neighborhoods.

The legislature finds that if filings for the federal earned income tax credits were increased by only ten per cent, more than $3,000,000 would be added to the economy. With a utilization multiplier of five, this added $3,000,000 in the economy would generate approximately $625,000 in additional excise taxes. The additional funds would also stimulate economic activity and result in job creation.

The legislature finds that a collaborative of nonprofit agencies in conjunction with the IRS have begun a Volunteer Income Tax Assistance (VITA) program. VITA's goal is to assist low-income families and individuals in claiming the earned income tax credit. The program provides free, confidential tax preparation services, and will coordinate a public information campaign to inform target populations currently unaware of their eligibility for the earned income tax credit. The legislature finds that the State's partnership in any tax outreach campaign is critical to its success.

The purpose of this Act is to establish a pilot program to assist low-income persons to claim the federal earned income tax credit.

SECTION 2. Earned income tax credit pilot program. (a) A pilot program shall be created to assist persons whose incomes are within the range of eligibility for the earned income tax credit to claim the federal earned income tax credit. The pilot program shall be comprehensive and shall:

(1) Provide free tax counseling and income tax return preparation for these low-income persons;

(2) Implement an informational campaign to educate the public about the availability of the credit, the eligibility requirements, and procedures for claiming the credit; and

(3) Provide outreach services to target populations such as families making the transition from welfare to work, non-English speakers, and families with hanai children.

(b) This pilot program shall be under the direction of the department of taxation and shall run for three years, until June 30, 2008. In order to implement the program in time for the 2005 and 2006 tax years, a grant-in-aid will be made to Aloha United Way for $200,000 per year to assist low-income residents in claiming the federal earned income tax credit. For the 2007 tax year, the department of taxation shall issue a request for proposals, in a manner that is time sensitive to the tax season, to contract with nonprofit agencies that work with low-income persons to deliver this project. The request for proposals shall state that payment to the nonprofit agency under the contract shall be calculated based upon a formula of twenty per cent of the total claimed amount on returns filed by assisted individuals; provided, however, that the total payment to such agency under the contract shall not exceed $200,000. The department of taxation shall require the contractor in collaboration with Aloha United Way to report on the accomplishments of the three-year program as necessary to enable the department to submit a report on the results of this program to the legislature at least twenty days before the regular session of 2008.

SECTION 3. There is appropriated out of the general revenues of the State of Hawaii the sum of $200,000, or so much thereof as may be necessary for fiscal year 2005-2006, and the same sum, or so much thereof as may be necessary for fiscal year 2006-2007, for the earned income tax credit pilot program.

SECTION 4. The sum appropriated shall be expended by the department of taxation for the purposes of this Act.

SECTION 5. This Act shall take effect on July 1, 2005.

INTRODUCED BY:

_____________________________