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Two states are on the verge of embracing a tried and tested anti-poverty policy, the Earned Income Tax Credit (EITC). In the past two weeks, lawmakers in both Hawaii and Montana passed EITC legislation, which governors in both states are expected to sign.
Once officially enacted, these states will join 26 other states and the District of Columbia in using EITCs to boost low-wage workers earnings and to offset some of the regressive state and local taxes they pay.
While both bills will improve tax fairness, reward work, and help families meet their basic needs, they have notable differences.
Hawaii’s HB 209 would enact a sizeable EITC equal to 20 percent of the federal credit. But the bill includes three unusual provisions that will limit the credit’s usefulness to low-income families. First, the credit would be nonrefundable, meaning that taxpayers earning too little to owe state income tax will receive no benefit. Second, Hawaii taxpayers could claim the credit only after all of the state’s existing refundable credits have been applied. And third, the credit would expire after tax year 2022. Hawaii lawmakers should consider lifting these restrictions during the next legislative session.
Montana’s HB 391, enacted via a bipartisan effort, includes an EITC equal to 3 percent of the federal credit. Unlike Hawaii’s proposed EITC, this credit would be refundable, meaning that Montanans would receive a refund for the portion of the credit that exceeds their income tax bill. The importance of refundability hinges on the fact that it can be used to offset any state and local taxes paid, rather than only income taxes. This is particularly important given the upside-down nature of state and local tax systems where low- and moderate-income families pay a bigger share of their income in taxes than wealthier taxpayers. While Montana’s EITC would represent a meaningful step toward poverty alleviation, the 3 percent credit would become the lowest in the nation, behind Louisiana’s 3.5 percent credit.