Report Title:

Taxation; Earned Income Credit

Description:

Provides a refundable state earned income tax credit (EITC) equivalent to twenty percent of the federal EITC. Requires the refundable portion of the EITC to be reimbursed by federal Temporary Assistance for Needy Families (TANF) or state TANF Maintenance of Effort funds.

HOUSE OF REPRESENTATIVES

H.B. NO.

3228

TWENTY-THIRD LEGISLATURE, 2006

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO TAXATION.

 

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

SECTION 1. The legislature finds that earned income tax credits (EITC) provide tax reductions and wage supplements for low- and moderate-income working families. The federal tax system has included an EITC since 1975, with major expansions in 1986, 1990, and 1993, and an additional expansion in 2001. In 2002, more than twenty-one million families and individuals filing federal income tax returns, nearly one out of every six families who filed, claimed the federal EITC.

The EITC has been widely praised for its success in supporting work and reducing poverty. The federal credit now lifts more children out of poverty than any other government program. Some four million nine hundred thousand people, including two million seven hundred thousand children, were removed from poverty in 2002 as a result of the federal EITC. The federal EITC also has been proven effective in encouraging work among welfare recipients. According to a study by the Center on Budget and Policy Priorities, the EITC has a large impact on encouraging more single mothers to work. Support for the EITC has come from across the political spectrum.

The EITC is a federal refundable tax credit. Families are eligible for the EITC if their income is at or below $35,458 and investment income is limited to $2,650 per year. The 2004 federal poverty guideline was $12,490 for a family of two, $15,670 for a family of three, and $18,850 for a family of four in the District of Columbia and forty-eight contiguous states (it is slightly higher in Alaska and Hawaii). The maximum credit in 2004 was $2,604 for families with one child, and $4,300 for families with more than one child. The federal EITC supplements wages of low-income families and complements welfare reform efforts. The tax credit helps lift families out of poverty and can be used as a tool to build assets.

The legislature also finds that federal Temporary Assistance for Needy Families (TANF) regulations permit TANF money to be used to fund refundable tax credits. According to the United States Department of Health and Human Services' Administration for Children and Families' TANF Financial Data report for 2003, ten states use TANF to fund their state earned income tax credit programs:

(1) Minnesota and Wisconsin use federal TANF funds to pay for their refundable state EITC;

(2) Indiana, Kansas, Maryland, New York, and Wisconsin use state maintenance of effort (MOE) money designated to a separate state program for their refundable state EITC;

(3) Massachusetts and Vermont use state MOE money for their refundable state EITC; and

(4) New Jersey uses both federal TANF and state MOE moneys for its state refundable EITC.

The purpose of this Act is to provide a refundable state EITC and require the refundable portion of the EITC to be reimbursed by federal TANF or state TANF MOE funds.

SECTION 2. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235-   Earned income tax credit. (a) Each resident individual taxpayer who:

(1) Files an individual income tax return for a taxable year; and

(2) Is not claimed or is not eligible to be claimed as a dependent by another taxpayer for income tax purposes;

may claim a refundable earned income tax credit. The tax credit, for the appropriate taxable year, shall be equal to twenty per cent of the earned income credit allowed under Section 32 of the Internal Revenue Code and reported as such on the resident individual's federal income tax return.

(b) In the case of a part-year resident, the tax credit shall equal the amount of the tax credit calculated in subsection (a) multiplied by the ratio of adjusted gross income attributed to this state to the entire adjusted gross income computed without regard to source in the state pursuant to section 235-5.

(c) For purposes of claiming the tax credit allowed by this section, a resident individual taxpayer shall use the same filing status on the taxpayer's Hawaii income tax return as used on the taxpayer's federal income tax return for the taxable year. In the case of a husband and wife filing separately, the credit allowed may be applied against the income tax liability of either, or divided between them, as they elect.

(d) The earned income tax credit shall be reduced by other tax credits allowed under this chapter. If the tax credit under this section exceeds the taxpayer's income tax liability, the excess of tax credits over liability shall be refunded to the taxpayer; provided that no refund or payment on account of the tax credits allowed by this section shall be made for amounts less than $1.

(e) All claims, including any amended claims for tax credits under this section, shall be filed on or before the end of the twelfth month following the close of the taxable year for which the tax credit may be claimed. Failure to comply with this subsection shall constitute a waiver of the right to claim the tax credit.

(f) The director of taxation:

(1) Shall prepare such forms as may be necessary to claim a tax credit under this section;

(2) May require proof of the claim for the tax credit;

(3) Shall alert eligible taxpayers of the tax credit using appropriate and available means;

(4) Shall prepare an annual report to the governor and legislature containing:

(A) The number of credits granted for the prior calendar year;

(B) The total amount of the credits granted; and

(C) The average value of the credits granted to taxpayers whose earned income falls within various income ranges;

and

(5) May adopt rules pursuant to chapter 91 to effectuate this section.

(g) On a regular basis, the director of taxation, with the assistance of the director of human services, shall calculate the value of the refundable portion of the tax credits provided under this section that qualifies for reimbursement from temporary assistance for needy families funds. The director of taxation shall provide the director of human services with such tax credit records and information as are necessary to support draws of funds. The director of human services shall reimburse the director of taxation for the costs of providing the information required by this section.

(h) Temporary assistance for needy families funds are appropriated, as provided by law in the Temporary Assistance for Needy Families Authorization Act, to the director of human services based on calculations under subsection (g) that qualify for reimbursement from the temporary assistance for needy families funds for income tax refunds. The draws of temporary assistance for needy families funds shall be made each fiscal quarter based on calculations of credits authorized by the director of taxation and shall be deposited to the credit of the general fund."

SECTION 3. New statutory material is underscored.

SECTION 4. This Act shall take effect on July 1, 2006.

INTRODUCED BY:

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