Public conversations about tax policy are usually focused on tax rates. We are accustomed to thinking about tax policy as little more than a means for the government to raise revenues. This is unfortunate because these discussions too often overlook the important ways that we use tax policy to promote other state policy priorities.

Any attention we pay to the tax code’s network of tax credits, deductions, write-offs, etc. is usually to criticize them. However, many of these provisions are important policy tools that have been crafted to support important economic activities or underserved groups.

Much of the criticism of ways that our tax system favors powerful special interests is well justified. But many of our tax credits actually help support groups most would agree need our help. A recent poll of Hawaii residents found that 86 percent of respondents support the concept of a tax credit that lets low- and moderate-income working families keep more of what they earn to help meet basic needs.

View of buildings in metro Honolulu. 24 nov 2014. photograph Cory Lum
More than 40 percent of Honolulu residents are renters, and most of those spend more than 30 percent of their income on rent. Hawaii has more such “cost burdened” homes than any state in the nation. Cory Lum/Civil Beat

One good example of this kind of credit is our state’s low-income household renters credit (LIHRC), a credit created by the state Legislature 40 years ago to address a mounting rent crisis and correct inequities in the system that favors landlords over renters.

In 1981, the Legislature set the amount of this refundable tax credit at $50 per exemption, and made it available to low-income renters earning less than $30,000 annually. The credit has not been adjusted since, and $50 is 1981 dollars is worth only about $19 today.

The LIHRC is a prime example of how the tax code can be used to help address pressing social problems of homelessness, income inequality and the lack of affordable housing.

Approximately 42 percent of our households rent, and a majority of them are cost-burdened, meaning they pay more than 30 percent of their income toward rent (the standard definition of housing affordability). Our rate of cost-burdened households is the highest in the nation.

The Legislature in 1981 set this refundable tax credit at $50 per exemption and made it available to renters earning less than $30,000.

This is no surprise, as the fair market rent for a two-bedroom unit in Hawaii is $1,644 per month. A full-time worker would need to earn $31.61 per hour for this rent to be affordable — the highest housing wage in the nation. Yet the mean wage for a renter is just $14.49. At this wage a family needs 2.2 full-time jobs to afford rent.

Our lowest-income households face an even more crushing cost burden: 71 percent are paying more than half of their income in rent. Even moderate income households struggle, with 67 percent of households earning 51 percent to 80 percent of the area median income facing a housing cost burden; these households are generally ineligible for public assistance.

Of course, most of us recognize this problem. In fact, the survey mentioned above found that 95 percent of those polled consider high housing costs a very serious or important problem that impacts people’s quality of life.

Not only does this particular credit show how tax policy can be used as a sophisticated tool for addressing our deep social problems, it also shows some of the pitfalls that these programs are subject to.

We are used to thinking in terms of reacting to a problem, solving it and then moving on. But all too often, these programs are created to address a problem and then not revisited to make sure that they continue to do the work they were meant to.

Having a credit to support low-income renters is important. But under the current credit structure, a family of four trying to survive on less than $30,000 per year would receive a mere $200 in tax relief after having spent over $19,000 in rent (based on fair market value for a two-bedroom apartment).

The Legislature is currently considering House Bill 2166, which would adjust the current credit to make up for the inflation since 1981. If adjusted to fully account for inflation, the credit would be worth $150 per exemption for families that earn under $60,000.

The measure has already cleared the House, and if it passes Senate Committee on Ways and Means this morning, it will go before the full Senate for consideration.

Hawaii has the second most regressive tax system in the nation. We need to carefully consider, not only the amount of revenue raised by the system, but how the system distributes the tax burden among our residents. And when we adopt credits that help balance that burden, we cannot leave a thoughtfully crafted approach subject to the whims of inflation.

Our tax policy can be an important tool for addressing social and economic problems, but if we are not careful, it can make the problems worse.

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