ELIMINATING INCOME TAXFOR THOSE BELOW POVERTY

LEVEL

2010-2013 Hawaii Tax Review C i iCommission

Presented by Titin Sakata

1

August 29, 2012

INTRODUCTION

The 2010-2013 Tax Review Commission requested an analysis of the potential revenue impact of eliminating individual income tax for taxpayers who fall below poverty level. taxpayers who fall below poverty level.

Topics:Who is in poverty?Who pays Hawaii’s individual income tax?Tax credits for the poorTax credits for the poorEstimating the potential revenue impactDiscussion

2

WHO IS IN POVERTY?

3

WHO IS IN POVERTY?Federal poverty thresholds vs. guidelines

Poverty Thresholds Poverty GuidelinesIssuing Agency Census Bureau Department of Health and

Human ServicesPurpose/Use Statistical — calculating the

number of people in povertyAdministrative — determining financial eligibility for certain programs

Geographic Variation

There is no geographic variation; the same figures

There is one set of figures for the 48 contiguous states and ; g

are used for all 50 states and D.C.

gD.C.; one set for Alaska; and one set for Hawaii.

Determination It uses money income before It varies by programs to of Poverty

ytaxes and does not include capital gains or noncash benefits (such as public housing, Medicaid, and food

y p gdetermine eligibility. It could be gross income, net income before or after taxes, or some other measure of income.

4housing, Medicaid, and food stamps).

other measure of income.

POVERTY LEVELFor this exercise, we use poverty guidelines as it has a set of figures for Hawaii

2012 Poverty Guidelines

Persons in 48 Contiguous States and the

Family/Household D.C. Hawaii Alaska1 $11,170 $12,860 $13,9702 $15,130 $17,410 $18,9203 $19 090 $21 960 $23 8703 $19,090 $21,960 $23,8704 $23,050 $26,510 $28,8205 $27,010 $31,060 $33,7706 $30 970 $35 610 $38 7206 $30,970 $35,610 $38,7207 $34,930 $40,160 $43,6708 $38,890 $44,710 $48,620

For families with more $3 960/additional $4 550/additional $4 950/additional 5

For families with more than 8 persons, add:

$3,960/additional person.

$4,550/additional person.

$4,950/additional person

HAWAIII A I CO TAINDIVIDUAL INCOME TAX

DATA

6

INDIVIDUAL INCOME TAX RATES

For tax years 2009 to 2015.

1.40% Under $2,400 Under $4,800 Under $3,6003.20% 2,400 " 4,800 4,800 " 9,600 3,600 " 7,200

Tax Rates

Taxable IncomeSingle/MFS Joint Head of Household

3.20% 2,400 4,800 4,800 9,600 3,600 7,2005.50% 4,800 " 9,600 9,600 " 19,200 7,200 " 14,4006.40% 9,600 " 14,400 19,200 " 28,800 14,400 " 21,6006.80% 14,400 " 19,200 28,800 " 38,400 21,600 " 28,8007 20% 19 200 " 24 000 38 400 " 48 000 28 800 " 36 0007.20% 19,200 24,000 38,400 48,000 28,800 36,0007.60% 24,000 " 36,000 48,000 " 72,000 36,000 " 54,0007.90% 36,000 " 48,000 72,000 " 96,000 54,000 " 72,0008.25% 48,000 " 150,000 96,000 " 300,000 72,000 " 225,0009 00% 150 000 " 175 000 300 000 " 350 000 225 000 " 262 5009.00% 150,000 " 175,000 300,000 " 350,000 225,000 " 262,50010.00% 175,000 " 200,000 350,000 " 400,000 262,500 " 300,00011.00% Over $200,000 Over $400,000 Over $300,000

7

100000

Figure 1. Individual Income Tax Data - No. of Returns

No. of Returns with Liability

88,716

77,03680000

90000No. of Returns with No Liability

57,993

65,06468,758

60000

70000

48,088

39,97236,29136,398

40000

50000

21,513

27,562

20000

30000

0

7,5183,551 1,955 1,135 745 565 407 2,017

12,079

5,834 1,829 702 177 91 36 210

10000

SS 5K 0K 0K 0K 0K 0K 5K 0K 0K 0K 0K 0K 0K 0K 0K 0K ER

8

$0 &

LE

S

$1 -

5

$5K

-10

$10K

-20

$20K

-30

$30K

-40

$40K

-50

$50K

-75

$75K

-10

0

$100

K -

150

$150

K -

200

$200

K -

250

$250

K -

300

$300

K -

350

$350

K -

400

$400

K -

450

$450

K -

500

$500

K &

OV

E

Income Group

$234,690,612$250,000,000100,000

Figure 2. Individual Income Tax Data - Total Liability

Tax Liability

$176,887,301

$200,000,000

$225,000,000

80,000

90,000No. of Returns with Liability

$149,271,625

$172,950,168

$150,000,000

$175,000,000

60,000

70,000

$80,907,280$100,000,000

$125,000,000

40,000

50,000

$32,325,371

$66,269,533$75,559,449 $75,764,748

$49,307,321

$34,403,256$50,000,000

$75,000,000

20,000

30,000

$0 $320,122$4,137,301

$32,325,371$24,552,797

$19,161,582$16,863,079

$13,620,445$0

$25,000,000

0

10,000

SS 5K 0K 0K 0K 0K 0K 5K 0K 0K 0K 0K 0K 0K 0K 0K 0K ER

9

$0 &

LE

S

$1 -

5

$5K

-10

$10K

-20

$20K

-30

$30K

-40

$40K

-50

$50K

-75

$75K

-10

0

$100

K -

150

$150

K -

200

$200

K -

250

$250

K -

300

$300

K -

350

$350

K -

400

$400

K -

450

$450

K -

500

$500

K &

OV

E

Income Group

$140,000100,000

Figure 3. Individual Income Tax Data - Average Liability

Average Tax Liability

$116,356 $120,000

80,000

90,000No. of Returns with Liability

$80,000

$100,000

60,000

70,000

$60,00040,000

50,000

$17 598$21,632

$25,720$29,846

$33,465

$20 000

$40,000

20,000

30,000

$0 $15 $86 $364 $860 $1,395$1,890$2,719$4,113$6,275$10,078

$13,885$17,598

$0

$20,000

0

10,000

SS K K K K K K K K K K K K K K K K R

10

$0 &

LE

S

$1 -

5K

$5K

-10

K

$10K

-20

K

$20K

-30

K

$30K

-40

K

$40K

-50

K

$50K

-75

K

$75K

-10

0K

$100

K -

150K

$150

K -

200K

$200

K -

250K

$250

K -

300K

$300

K -

350K

$350

K -

400K

$400

K -

450K

$450

K -

500K

$500

K &

OV

E

Income Group

TAX RELIEFS (TAX CREDITS) AVAILABLE FOR THE LOWER

INCOME GROUP11

FOOD/EXCISE AND RENTERS’ TAX CREDITSFood/excise tax credit

Federal AGI Tax Credit Amount for Households of:Federal AGI1 2 3 4 5

Under $5,000 $85 $170 $255 $340 $425 $5,000 - $10,000 $75 $150 $225 $300 $375 $10,000 - $15,000 $65 $130 $195 $260 $325 $15,000 - $20,000 $55 $110 $165 $220 $275 $20,000 - $30,000 $45 $90 $135 $180 $225 $30,000 - $40,000 $35 $70 $105 $140 $175 $ , $ , $ $ $ $ $$40,000 - $50,000 $25 $50 $75 $100 $125 $50,000 and over $0 $0 $0 $0 $0

Low income household renters’ tax credit

H ii AGI Tax Credit Amount for Households of:12Hawaii AGI

1 2 3 4 5Under $30,000 $50 $100 $150 $200 $250

ESTIMATING THE POTENTIAL REVENUEI AC O E A G I CO TAIMPACT OF ELIMINATING INCOME TAX

FOR THOSE IN POVERTY

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DETERMINATION OF POVERTYAssume poverty means taxpayers with adjusted gross income (AGI) Assume poverty means taxpayers with adjusted gross income (AGI) below the poverty guidelines

Formula: If both Federal and Hawaii AGI are below poverty guidelines, then ordinary liability tax rate is 0%

Why both Federal and Hawaii AGI?Examples of the differences between Federal and Hawaii AGIExamples of the differences between Federal and Hawaii AGI

Federal Adjusted Gross Income

Hawaii Adjusted Gross Income

COLA Not included IncludedContribution to State Not included IncludedEmplyees' Retirement SystemOut-of-state Bonds Not included IncludedEmployers-funded Pensions Included Not included

Social Security Benefits Included Not includedSocial Security Benefits Included Not includedFirst $5,881 of Military Reserve or Hawaii National Guard Duty Pay

Included Not included

Payments to An Individual Housing Account

Included Not included

14Housing Account

Data: 2004 individual income tax data

Figure 1-A. Individual Income Tax Data - No. of Returns with No Liability (Proposed = No Tax on Households with AGI Below Poverty Guidelines)

89,81690,000

100,000

No. of Returns with No Liability

No. of Returns with No Liability (Proposed)

68,758

60 000

70,000

80,000

55,038

45,452

40,000

50,000

60,000

36,398

20,000

30,000

,

12,079

5,8341,829

702 17791

8,9521,729 262 112

0

10,000

S K K K K K K K 15702 177

$0 &

LE

SS

$1 -

5K

$5K

-10

K

$10K

-20

K

$20K

-30

K

$30K

-40

K

$40K

-50

K

$50K

-75

K

Income Group

REVENUE IMPACT OF ELIMINATING INCOME TAXFOR THOSE BELOW POVERTY LEVEL

Reported liability would decrease by an estimated $17.7 million$

111,900 additional returns with zero liability

R l i lik l hi h Revenue loss is likely higher

It could be several times higher than the estimated greduction in reported liability

12 years average difference between reported liability12-years average difference between reported liabilityand tax collection: $143 million (or 14%)

Possible explanation: Withholding of tax by 16Possible explanation: Withholding of tax by employers, but employees did not file tax returns

IMPACT OF ELIMINATING INCOMEIMPACT OF ELIMINATING INCOMETAX FOR HOUSEHOLDS WITH AGI

BELOW POVERTY GUIDELINESBELOW POVERTY GUIDELINES17

IMPACT OF ELIMINATING TAX TO THOSE BELOWPOVERTY LEVEL – HYPOTHETICAL EXAMPLES

1. Single: Income $10,000

Current ProposedAdjusted Gross Income $10,000 $10,000 Standard Deduction 2,000 2,000 Exemption 1 1,040 1,040 Taxable Income 6,960 6,960 T Li bili B f C di 229 0 Tax Liability Before Credits 229 0 Renter's Credit 50 50 Food/Excise Tax Credit 65 65 Tax Liability After Credits 114 (115)

2. Single Parent with One Child: Income $15,000

Current ProposedAdjusted Gross Income $15 000 $15 000 Adjusted Gross Income $15,000 $15,000 Standard Deduction 2,920 2,920 Exemption 2 2,080 2,080 Taxable Income 10,000 10,000 Tax Liability Before Credits 320 0

18Tax Liability Before Credits 320 0 Renter's Credit 100 100 Food/Excise Tax Credit 110 110 Tax Liability After Credits 110 (210)

IMPACT OF ELIMINATING TAX TO THOSE BELOWPOVERTY LEVEL – HYPOTHETICAL EXAMPLES

3. Elderly Couple: Income $15,000

Current ProposedAdjusted Gross Income $15,000 $15,000 Standard Deduction 4,000 4,000 Exemption 4 4,160 4,160 Taxable Income 6,840 6,840 T Li bili B f C di 32 0 Tax Liability Before Credits 132 0 Renter's Credit 200 200 Food/Excise Tax Credit 110 110 Tax Liability After Credits (178) (310)

4. Family of Five: Income $25,000

Current ProposedAdjusted Gross Income $25 000 $25 000 Adjusted Gross Income $25,000 $25,000 Standard Deduction 4,000 4,000 Exemption 5 5,200 5,200 Taxable Income 15,800 15,800 Tax Liability Before Credits 562 0

19Tax Liability Before Credits 562 0 Renter's Credit 250 250 Food/Excise Tax Credit 225 225 Tax Liability After Credits 87 (475)

DISCUSSION ON ELIMINATING INCOMETAX FOR THOSE BELOW POVERTY

LEVEL

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DISCUSSION ON ELIMINATING INCOME TAX FORTHOSE BELOW POVERTY LEVEL

Tax reliefs available to lower income householdsFood/excise tax creditFood/excise tax creditLow income household renters’ credit

How do you define “income” to determine poverty?y p yIssue with using AGI to determine poverty

AGI includes business loss, capital loss, depreciation, etc.Low or negative AGI, but not necessarily poor

Alternative options to provide tax reliefs to lower income households

Increase food/excise tax credit amountsIncrease food/excise tax credit amountsIncrease the credit amount for the low income household rentersIndex/increase standard deduction

21Index/increase personal exemption

22