Creating a Fairer State Tax System and Economy for All Families
November 2013
Executive Summary
In Hawaiʻi and across the nation, an increasing number of people are slipping into poverty; moderate-income families are struggling more than ever. Our state has drifted from its longtime commitment to economic justice for all families, while income inequality has grown.
An increasing reliance on regressive taxation for state revenue comes at great expense to our low-income households, especially those in poverty. We have failed to adjust our tax system to account for harsh economic realities and allowed the value of the minimum wage to decline dramatically. While the consequences of these policies hit low-income households the hardest, poverty weakens the social fabric of our community and affects all of us. Supporting our low and moderate-income families is critical to the wellbeing of all our people and to the strength of our economy.
Hawaiʻi’s infamous “price of paradise” makes meeting day-to-day needs a constant struggle for low and moderate-income residents. Hawaiʻi has the highest cost of living in the country:
Food costs for a family of four are 68 percent more than what they are on the mainland.
Hawaiʻi has the highest cost of shelter in the nation; with almost three quarters of extremely low-income people spending more than half of their income on housing.
Electricity and gas prices are the highest in the country.
In large part due to the high cost of basic necessities, Hawaiʻi has been consistently ranked as the worst state in which to earn a living.
Yet the economic challenges facing low-income households are not limited to the cost of living. The regressive structure of Hawaiʻi’s tax system makes it even harder for families to make ends meet:
The bottom 40 percent of households in Hawaiʻi pay almost 13 percent of their income in state and local taxes, while the top 1 percent pay around 8 percent.
Hawaiʻi is one of only 15 states that tax the income of residents living in poverty.
Hawaiʻi’s General Excise Tax (GET) is effectively one of the highest statewide sales tax rates in the nation. Because the GET applies to nearly all goods and services, the tax burden of the GET falls most heavily on our lowest-income households who must spend a larger share of their income on basic necessities, most of which are taxed at the full GET rate.
Credits intended to reduce the disproportionate share of taxes paid by low- and moderate-income households have not been updated for years, even decades. The imbalance grows greater each year as inflation and the cost of living increase and the credits stay the same. One such credit, the low-income household renters credit, is worth less than 40 percent of its original value based on inflation alone.
Given these features of Hawaiʻi’s tax system, our residents living in poverty pay a greater share of their income in state taxes than those in all but three other states. The highest cost of living in the nation and one of its most oppressive and regressive tax structures combine to form a nearly inescapable prison of poverty.
Hawaiʻi’s low minimum wage only makes matters worse—it is lower than 19 other states and the District of Columbia, all of which have lower costs of living. Hawaiʻi’s minimum wage has not been updated for more than six years to keep up with inflation or wage increases of higher-income earners.
It is time for Hawaiʻi to take action and reduce inequity in our community by using economic policy to help working families. To this end, Hawaiʻi should make five policy changes that will make a significant difference in the economic wellbeing of low- and moderate-income workers:
Adjust the food/excise credit for inflation over the past 6 years.
Adjust the low-income household renters credit for inflation over the past 30+ years.
End income taxation of low-income workers living below or near the poverty line.
Create a state earned income tax credit.
Increase the minimum wage.
While some of these proposals will diminish the state’s tax collections, this report suggests a number of options which would generate significant new revenues for Hawaiʻi. Many of these proposals would also help make the tax system more equitable by ensuring everyone pays their fair share; for example, by eliminating tax breaks for capital gains income which is earned almost exclusively by wealthy individuals.
The total cost of the low and moderate-income tax relief proposals would be $77 million, while the proposed revenue-generating measures would raise $689.9 million for the state—covering this tax relief many times over. Simply collecting taxes from online and mail-order purchases—which are already owed, but not remitted—would generate as much as $183.3 million in additional revenue.
The cost to our community and families, as well as the expensive social services needed to help families struggling to survive, is far too high for Hawaiʻi to bear. We have a moral obligation to Hawaiʻi’s families to take decisive action and return to our state’s progressive heritage of community responsibility, equal opportunity and fairness. Adopting these recommended economic policy proposals will guide us back to a time of shared prosperity.