Can We Best Help the Poor by Making Their Lives Complicated?

by Tom Yamachika, Interim President, Tax Foundation of Hawaii

Now that the folks projecting state revenues think that there will be a few bucks extra this session, lots of social service agencies have swarmed around lawmakers urging them to use some of them for relief of the poor. Among the proposals being considered are a low-income credit; a food and excise tax credit; a low-income household renters’ credit; an earned income tax credit; and a special tax credit for seniors (those 65 or over). There are others.

Before we go too far down the path, there are a couple of things to think about.

At the moment, the Hawaii standard deduction is a measly $2,200. One personal exemption is $1,144. That means if you are single and you earn more than $3,344 you will pay Hawaii tax. The federal poverty level for a single person in Hawaii is $13,420. A person making that amount will find over $10,000 subject to Hawaii tax, and would be in not the lowest bracket, but the fourth tax bracket at 6.4%. That same person will find $10,000 exempt and only $3,420 taxable for federal tax purposes.

Does that apply to families too? For a family of four, the federal poverty level is $27,430. The standard deduction of $4,400 and four personal exemptions total $8,976, leaving $18,454 – also taxable in the fourth tax bracket at 6.4% for married individuals filing jointly. So yes, families are in the same boat here.

The credits apparently are being proposed by policymakers who think it doesn’t make a lot of sense to have the tax system beat up on people at or near the poverty level. Will the credits accomplish this?

In Hawaii, we have special rules for credits. If you are the beneficiary of a credit, you need to claim it on a tax return. If you don’t claim it within 12 months after the end of the year for which you are eligible to claim it, then you lose it. Forever. So those who don’t file returns thinking they don’t have to, or those who file but either forget to claim the credits or don’t know about them, lose the credits and will have to pay tax.

So what is going to happen when you have three or four tax credits (and perhaps enhancements of some existing credits) and you throw them at the average person who is living at or below the poverty line, obviously struggling with life’s basic necessities? There are certainly people who will be able to pick up on the new tax laws, properly claim the credits, and may get a few dollars back in state tax refunds. There are others who may get free or low-cost filing help, from VITA or similar programs or, perhaps, relatives. But what happens to everyone else? They get a tax whack!

So here’s a wild idea – why don’t we get these people off the tax system altogether? Let’s hoist the standard deduction or the personal exemption amounts so our tax system doesn’t even require the filing of a tax a return from folks at the federal poverty level. What’s the point in trying to make their lives miserable with complicated tax forms and instructions that they might not understand? And, for that matter, should we be paying out enormous sums to get out to the community with taxpayer educational outreach so people at least know the tax credits are there, write the forms and instructions necessary to claim the credits, and then modify the necessary computer systems to accept those credit forms and pop out the refunds that the taxpayers might get as a result? Can’t we use those precious taxpayer dollars toward enforcement of the laws we have now, to go after folks who owe taxes under the system we have now, and make life fairer for the vast majority of us who comply with the system we have now?

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