SB741

SECTION 1. The federal earned income tax credit is a refundable tax credit for qualifying wage earners. The federal earned income tax credit was approved by the United States Congress in 1975, and has developed through the years as more emphasis was directed at supporting working families with lower incomes. The federal earned income tax credit has become the largest and most cost-efficient federal anti-poverty and work incentive program for families with low to moderate incomes. Families may continue to qualify for the federal earned income tax credit even with increased earnings since tax credits increase until earnings reach two hundred per cent of the federal poverty level. Tax credits gradually begin to phase-out as family earnings continue to increase. It also decreases tax liabilities for families eligible for the federal earned income tax credit.

The family economic self-sufficiency pilot program in Hawaii began in October 2005, coordinated by Aloha United Way, under the direction of the department of labor and industrial relations, office of community services. The program provides free and confidential tax preparation services to households eligible for the federal earned income tax credit. The program produces and distributes outreach materials to inform the community about the federal earned income tax credit, and coordinates the activities of a large number of volunteers and agencies within the community. Additionally, the family economic self-sufficiency pilot program collaborates with other interested agencies on additional asset building efforts including literacy programs, anti-payday lending initiatives, and alternatives to expensive commercial refund anticipation loans. All of these efforts will be directed at low- to moderate-income populations.

Studies have shown that the federal earned income tax credit program has made significant impact on moving low income families out of poverty. The program assisted 4.4 million people nationwide out of poverty in 2003, of which 2.4 million were children. The program contributes to families becoming self-sufficient and less dependent on other forms of public assistance. Families will be able to build their own safety nets, providing a foundation for their economic self-sufficiency. According to research, families with accumulated assets are found to be goal-oriented and civic-minded, and most importantly, their children are less likely to be impoverished when they reach adulthood.

The federal income tax credit income eligibility guidelines for tax year 2006 are:

(1) Families with one child that had an annual income of less than $32,001 or $34,001 for joint-filers, may receive as much as $2,747 in federal earned income tax credit;

(2) Families with two or more children that had an annual income of less than $36,348 or $38,348 for joint-filers, may receive as much as $4,536 in federal earned income tax credit; and

(3) Individuals with no children that had an annual income of less than $12,120 or $14,120 for joint filers, may receive as much as $412 in federal earned income tax credit.

In addition to assisting families with low- to moderate-incomes, the federal earned income tax credit also provides financial benefits to the State by providing federal moneys which will be spent in the State's economy. According to the Internal Revenue Service, in tax year 2004, there were eighty-one thousand seven hundred seventy-two tax returns filed that received the federal earned income tax credit in Hawaii, totaling $133,400,000 of federal moneys issued to Hawaii families. This amount is an average credit of $1,632 per federal earned income tax credit claimant.

Nationally, however, the Internal Revenue Service and the United States Government Accountability Office estimate that approximately twenty-five per cent of the eligible federal earned income tax credit population did not claim this tax credit. This equates to over twenty-seven thousand Hawaii households that may be eligible for the federal income tax credit, but did not claim it on their returns. This leaves approximately $45,000,000 of federal moneys unclaimed by Hawaii residents. The failure of eligible Hawaii residents to claim the federal earned income tax credit also reduces state tax revenues.

Aloha United Way received $100,000 in state funds in fiscal years 2005 and 2006 to coordinate the federal earned income tax credit pilot program. In the 2005 tax year, total tax filings at free tax preparation sites increased from three hundred seventy-two to six hundred sixty (a seventy-seven per cent increase). The federal earned income tax credit filings increased from one hundred twenty-five to two hundred thirty-five (an eighty-eight per cent increase). The total federal earned income tax credit for the sites assisted by the family economic self sufficiency program totaled approximately $1,500,000. In recognition of the level of filings during this first year, the target number of filings through free sites for the 2006 tax year has been increased to one thousand five hundred.

The purpose of this Act is to make a grant to Aloha United Way, in order for it to continue the family economic self-sufficiency pilot program that assists low- to moderate-income families and individuals to claim the federal earned income tax credit.

SECTION 2. (a) Under the direction of the department of labor and industrial relations, office of community service, the federal earned income tax credit pilot program is administered by Aloha United Way under its family economic self sufficiency program. The pilot program assists individuals and families whose incomes are below the eligibility guidelines to claim the federal earned income tax credit. The program shall continue to provide:

(1) Free tax counseling and income tax return preparation for individuals and families with low to moderate incomes;

(2) Outreach services to local communities targeting eligible federal earned income tax credit households; and

(3) Information through campaign efforts to increase public awareness, volunteerism, and to improve financial literacy.

(b) The pilot program shall continue its operation until June 30, 2008. To continue the program, a grant-in-aid shall be issued to Aloha United Way for $185,000 a year to assist low- to moderate-income families and individuals to claim the federal earned income tax credit. For the taxable year 2008, the department of labor and industrial relations, office of community service shall issue a request for proposal in a timely manner, taking into consideration the tax season, to contract with a nonprofit agency or agencies to assume the responsibility for this program. The requested contract shall be calculated based upon a formula of ten per cent of the total claimed amount on returns filed by assisted individuals; provided that the total payment to such agency under the contract shall not exceed $200,000. The department of labor and industrial relations, office of community service shall require Aloha United Way to report on the accomplishments of the pilot program as necessary to enable the department to submit a report on the results of the program to the legislature at least twenty days before the regular session of 2008.

SECTION 3. There is appropriated out of the general revenues of the State of Hawaii the sum of $ , or so much thereof as may be necessary for fiscal year 2008-2009, for the federal earned income tax credit program.

The sum appropriated shall be expended by the department of labor and industrial relations, office of community service for the purposes of this Act.

SECTION 4. This Act shall take effect on July 1, 2007.

INTRODUCED BY:	_____________________________

THE SENATE	S.B. NO.	741
TWENTY-FOURTH LEGISLATURE, 2007
STATE OF HAWAII