SB2309 SD1

SECTION 1. The legislature finds that Act 107, Session Laws of Hawaii 2017, established a nonrefundable earned income tax credit. However, the legislature notes that the federal earned income tax credit is refundable, and that two-thirds of the working families in Hawaii who are eligible for Hawaii's earned income tax credit are not benefitting because the tax credit is nonrefundable. A refundable tax credit means that a person can receive a tax refund when the amount of the credit is more than the person's income tax liability. The earned income tax credit is designed to help low-income families that include children keep more of their earnings. Making the State's earned income tax credit refundable would assist a greater number of needy families.

The legislature also finds that, according to the Institute on Taxation and Economic Policy, Hawaii places the nation's second heaviest state and local tax burden on low-income households. In fact, Hawaii's lowest-income families pay fifteen per cent of their income in state and local taxes, while those at the top of the income scale pay only about nine per cent. The main reason for this inequity is the general excise tax, which is applied at different points along the supply chain, causing its true cost to be compounded many times higher than the percentage that retailers charge at the point-of-sale to consumers. As a result, the general excise tax disproportionately burdens low-income families, who spend virtually all of their earnings on goods and services that are subject to the general excise tax——nine times more than those with the highest incomes.

Hawaii households that earn less than $20,000 per year pay 10.5 per cent of their income in the general excise tax, in contrast to 0.6 per cent in state income tax. As a result, without refundability, the state earned income tax credit cannot return significant portions of general excise tax payments to low-income working families, since the amount that they pay in the general excise tax is larger than the amount that they owe in state income taxes.

The legislature also notes that, in its current form, the state earned income tax credit will cease to be available for taxable years beginning after December 31, 2022.

Extensive research shows that the earned income tax credit is especially beneficial to women and children. According to the National Women's Law Center, "The [earned income tax credit] is particularly important to women, who typically earn less than men and are more likely to bear the expenses of raising children on their own."

The Center on Budget and Policy Priorities finds that expansions of the federal earned income tax credit contributed to "subsequent increases in work among single mothers and female heads of households . . . . In addition, the research shows that by boosting the employment of single mothers, the earned income tax credit reduces the number of female-headed households receiving cash welfare assistance . . . . The [earned income tax credit] may also improve the health of infants and mothers[.]"

An analysis by the Federal Reserve Bank of New York concludes that the "[earned income tax credit] is successful in helping single women climb the wage ladder."

The Congressional Budget Office states that the "[earned income tax credit] leads to an increase in the share of less-educated women that will be eligible for Social Security retirement benefits and leads to an increase in their monthly benefit amount. Thus, the existence of the [earned income tax credit] contributes to the financial security of affected women as they age and retire."

Accordingly, the purpose of this Act is to make the state earned income tax credit permanent and refundable.

SECTION 2. Section 235-55.75, Hawaii Revised Statutes, is amended to read as follows:

"[[]§235-55.75[~~] Earned~~] Refundable earned income tax credit. (a) Each qualifying individual taxpayer may claim a [~~nonrefundable~~] refundable earned income tax credit. The tax credit, for the appropriate taxable year, shall be twenty per cent of the federal earned income tax credit allowed and properly claimed under section 32 of the Internal Revenue Code and reported as such on the individual's federal income tax return.

(b) For a part-year resident, the tax credit shall equal the amount of the tax credit calculated in subsection (a) multiplied by the ratio of Hawaii adjusted gross income to federal adjusted gross income.

(1) Files a federal income tax return for the taxable year claiming the earned income tax credit under section 32 of the Internal Revenue Code; and

(2) Files a Hawaii income tax return using the filing status used on the federal income tax return for the taxable year and claiming the same dependents claimed on the federal income tax return for the taxable year.

(d) The credit allowed under this section shall be claimed against the net income tax liability for the taxable year. [If the tax credit under this section exceeds the taxpayer's income tax liability, the excess of the tax credit over liability may be used as a credit against the taxpayer's net income tax liability in subsequent years until exhausted.] If the tax credit claimed by the taxpayer under this section exceeds the amount of the income tax payments due from the taxpayer, the excess of credit over payments due shall be refunded to the taxpayer; provided that the tax credit properly claimed by a taxpayer who has no income tax liability shall be paid to the taxpayer; and provided that no refunds or payments on account of the tax credit allowed by this section shall be made for amounts less than $1. All claims, including amended claims, for a tax credit 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 credit may be claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(e) No credit shall be allowed under this section for any taxable year in the disallowance period. For purposes of this subsection, the disallowance period is:

(1) The period of ten taxable years after the most recent taxable year for which there was a final administrative or judicial decision that the taxpayer's claim for credit under this section was due to fraud; and

(2) The period of two taxable years after the most recent taxable year for which there was a final administrative or judicial decision disallowing the taxpayer's claim for credit.

(f) The director of taxation:

(1) Shall prepare any forms 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 public report to the legislature and the governor containing the:

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

(B) Total amount of the credits granted; and

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

[~~(g) This section shall apply to taxable years beginning after December 31, 2017, but shall not apply to taxable years beginning after December 31, 2022.~~]"

SECTION 3. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 4. This Act shall take effect on July 1, 2050, and apply to taxable years beginning after December 31, 2020.

THE SENATE	S.B. NO.	2309
THIRTIETH LEGISLATURE, 2020		S.D. 1
STATE OF HAWAII