EITC: Devil in the Details
by Tom Yamachika, President Tax Foundation Hawaii
On July 10, 2017, Governor Ige proudly signed House Bill 209, a bill that establishes a Hawaii earned income tax credit (HI-EITC for short). The EITC has been described as “a federal tax credit that helps families work their way into the middle class. Since its inception in 1975, the federal EITC has been hailed as the most effective anti-poverty program in the U.S., improving the futures of low- and moderate-income workers and that of their communities.” But it looks like there are going to be lots of devils in the details.
HI-EITC is a temporary credit, effective for years 2018 through 2022. It and two other anti-poverty credits are being paid for by a permanent income tax increase. This, of course, makes me wonder what will happen at the end of 2022. If HI-EITC goes away, will legislators move the income tax rates back down? Oh! I’d better stop dreaming.
HI-EITC, according to the bill, is 20% of the federal EITC “allowed and properly claimed … and reported as such on the individual's federal income tax return.” What does that all mean? Clearly, if a taxpayer fills out a Form 1040 and claims $1,000 in federal EITC, then the HI-EITC will be 20% of that amount, or $200. But figuring the federal amount is not easy. There are 17 pages in the most recent Form 1040 instructions devoted to the EITC, including multiple worksheets, definitions, and tables (out of 106 pages total in the Form 1040 instruction book). In several places, the IRS offers to figure the credit for you. To take the IRS up on this offer, the taxpayer needs to write “EIC” on the dotted line next to the place where the dollar amount of the credit would normally be written, and then leave the later tax computation lines blank. If a taxpayer does this, has the taxpayer just killed any chance of obtaining HI-EITC? The taxpayer has properly claimed the EITC for federal purposes, but can’t enter a dollar amount for the federal credit on the Hawaii tax forms because the taxpayer doesn’t know the amount. Does that mean the federal EITC is not “reported as such” on the Form 1040? “Reported as such” must mean something different from “properly claimed,” otherwise why use those words? If not “reported as such,” is HI-EITC disallowed? If there is any possibility of disallowance, the Department should be telling us exactly how to avoid it, and soon. Once the floodgates open, a glitch in credit qualification could cause pandemonium.
And what about refunds for the rest of us who are waiting for them? In the beginning of 2017, the Department warned taxpayers that they might need to wait 16 weeks for a refund check after filing a Hawaii state return, comparable to delays in 2015 and 2016. The Director of Taxation then foresaw the same until 2019, after having flagged 638 returns as problematic in 2016. In the first years of implementing the credit, the Department of Taxation will feel some pressure to look at returns with HI-EITC very carefully. IRS reports that 104,000 returns from Hawaii filed EITC claims in 2016. Thus, we can expect 100,000 or so HI-EITC claims in 2019 for the 2018 calendar year. Does that mean the refund delays will be longer than 16 weeks, or will affect years after 2019? Good grief!
This, of course, is just scratching the surface. The EITC is a decades-old federal program, but our state has zero experience implementing and administering it. It is, of course, possible that our Department could smoothly incorporate all the knowledge developed by IRS in administering the federal program, resulting in no hiccups whatsoever on our side … darn it, did I start dreaming again?