Individual Development Accounts, Version 2.0

by Tom Yamachika, President, Tax Foundation Hawaii

Individual Development Accounts, a program that seems to be gaining traction at our Legislature, is a way to help lower-income people build self-sufficiency.

Under conventional welfare rules, applicants for public assistance are awarded assistance based on need, which means that if the applicants have assets that could be sold or used to support the applicant, benefits are either reduced or denied. That, of course, discourages needy folks from saving or working. Would you rather sit idle and get free money, or work and get your earnings taken away? Tough choice.

So here is what happens with an IDA. If an eligible person deposits money into the account, a sponsor such as a government agency matches the deposit. The amount of the match depends on the program, but it results in more money being made available for the eligible person’s overall goal such as buying a first home, paying for education or training costs, or starting a small business. Typically, the eligible person will need to sit down with a case worker to define the person’s goals and will sign an agreement to that effect. The person will need to have earned income, and will need to agree to take classes in financial literacy. The funds in the IDA can then be used only for specific purposes.

Most IDA programs only let you save a limited amount of money, usually $4,000 to $6,000. This includes the money deposited and any matching funds. Once the limit is reached, no more deposits into the account are allowed. IDA programs also last only a limited number of years, like five years.

One important point is that federally funded IDAs won’t count in the calculation of resource limits for other federal programs such as Supplemental Security Income, Food Assistance, and Medicaid.

With all of this, there should be no reason for welfare recipients to simply sit on their okoles. They can find employment and go back to school for more education and training, and thereby proceed down the road toward self-sufficiency.

The federal government and many states now have IDA programs. At the turn of the century, we had one too. It was enacted in 1999 and is still contained in HRS chapter 257, which we never bothered to repeal even though the program sunset in 2004 – perhaps people were thinking that the program would be resurrected someday. It was run by the Department of Human Services, and it lasted from 2000 to 2004. At the time that our Legislature enacted the program back at the turn of the millennium, the Foundation had glowing things to say about it (and there are some who say it was rare for my predecessor to have glowing things to say about any state program).

At that time, the IDA program offered a tax credit to folks who would provide the matching funds to go into the accounts. If was a 50% match, meaning that if Joe Citizen contributed $100 to his IDA and Nonprofit X contributed $100 in matching funds so that Joe Citizen then had $200 to spend on education or starting a business, than Nonprofit X would get a $50 State tax credit. At the time, however, the credit wasn’t well used – 9 taxpayers claimed $3,000 during that program’s five-year history.

Discussions at the Legislature are now focused on what IDA Version 2.0 is going to look like. The current versions of the legislation are now in House Bill 334 and Senate Bill 1081. Hopefully, this program can make a positive difference in people’s lives and not cause massive damage to the public fisc.