At the Hawaii State Capitol where the Legislature is in session, there is a great deal of political rhetoric going around. Because there is a $700 million surplus in the state general fund, the governor and legislators are talking about tax relief.

The problem with all this rhetoric is just that – it’s rhetoric. Webster defines tax relief as a “removal or lightening of something oppressive, painful or distressing.”

The constitution mandates that lawmakers adopt a tax refund or tax credit in the session following two successive years when the balance in the general fund at the close of those fiscal years is equal to or greater than 5% of the revenues received by the general fund for each respective fiscal year.

While the constitutionally mandated tax refund may be viewed as tax relief, it is actually a signal that the state=s tax structure is generating more than what is needed to operate state government.

It is a signal that more than likely the tax rates and structure are taking too much in tax dollars from the economy and that lawmakers need to address that issue. Thus, lawmakers will be forced to adopt a tax refund or credit of some amount, that refund or credit is not the tax relief the growing surplus signals.

The administration has come up with its passel of bills to provide tax relief in the form of changes to the income tax with everything from raising the standard deduction to automatically adjusting the standard deduction, personal exemption and income tax brackets to accommodate the effects of inflation.

The other half of its “tax relief” package takes the form of pandering to specific constituencies such as its proposal to exempt 11 basic food items to granting additional exemptions to families with children to exempting vehicles owned by members of the National Guard and the Armed Forces Reserves from the state and county vehicle taxes and registration fees.

Proposals from lawmakers are no better although many profess to be tax relief strategies, many amount to nothing more than back door ways of handing out monies. Perhaps the most often used mechanism to accomplish this goal is the infamous tax credit. Indeed, some lawmakers are pushing the adoption of the federal earned income tax credit as a way to provide Arelief@ to the working poor.

The federal earned income tax credit (EIC) provides an incentive to low-income households to remain in the workforce. The credit is targeted at households with children, but the credit is also available at a lower amount to low-income households without children.

The credit is based on a number of tests for earned income, investment income, number of qualifying children, dependency, etc. Given the complexity of the credit, the IRS will optionally calculate the amount of the credit for taxpayers. The IRS reports an error rate of greater than 25% for this credit.

Proposals in the hopper would adopt an earned income credit by merely taking a percentage of the amount that the taxpayer would be eligible for under the federal table or determination. The genesis for the federal EIC was to offset the burden of Social Security payroll taxes that might have otherwise been paid to low-wage income earners, but were instead paid to the federal government by the employer.

Enacted in 1975 at the federal level primarily as a means of tax relief, the credit was expanded three times during the 1980=s and 1990s by the federal government to boost income from work and lessen poverty among families with children.

In other words, it became a tool by which the federal government undertook social policy beginning with the first expansion of the credit in 1986.

Thus, what started out as a mechanism to “refund” payroll taxes that might otherwise have been paid to low and moderate-income workers has turned into a subsidy for these families. While federal policy makers have the luxury of expending millions of dollars to accomplish a social goal through the tax system, state lawmakers do not have the same level of resources.

Depending on the level of income, the amount of the federal credit will vary, but then taking a percentage of that amount will more than likely provide those families a credit greater than the taxes that might have been due on that income.

In other words, adopting a percentage of the EIC will create a negative income tax, providing a rebate greater than the taxes that otherwise may have been due.

In other words the EIC would become a “back door” welfare program with little oversight over the amount of assistance actually needed. What is even scarier is that taking a percentage of a number calculated at the federal level means surrendering the oversight over this tax policy to Congress.

Should Congress substantially increase the amount of the credit, local lawmakers may find that the treasury may not be able to support the program and they may have to raise taxes on other taxpayers.

”’Lowell L. Kalapa is the president of the Tax Foundation of Hawaii, a private, non-profit educational organization. For more information, please call 536-4587 or log on to”’ http://www.tfhawaii.org

”’HawaiiReporter.com reports the real news, and prints all editorials submitted, even if they do not represent the viewpoint of the editors, as long as they are written clearly. Send editorials to”’ mailto:Malia@HawaiiReporter.com

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