Bernadette "Bernie" Garrett walked into a free tax clinic at the Goodwill Store on Beretania Street last year with a bag full of her old tax forms and receipts and plopped it down on a table in front of the stunned tax preparer.

Garrett, a state social services aide, had not done her taxes in years and her records were a mess. Fortunately, she did not owe the government any money. But the single mother of three from Waimanalo learned she had been missing out on a federal tax credit to help low-income workers escape poverty.

"The money is almost secondary, it really is," Garrett said. "What it's about, for me, is being responsible and enabling myself to be self-sufficient."

Garrett is among about 88,000 Hawai'i taxpayers who take advantage of the federal earned-income tax credit, which is intended to offset Social Security payroll taxes and offer an incentive for work.

State House and Senate Democrats are thinking about following 20 other states that provide a state credit on top of the federal credit as an added incentive. A state credit valued at 20 percent of the federal credit would cost the state an estimated $25 million a year in lost revenue, and is one of several major tax relief options before the Legislature this year.

Hawai'i's 2 percent unemployment rate in December was the lowest in the nation and has fallen to its lowest point in 30 years, but lawmakers are hearing from many workers who say their jobs do not pay enough to cover rising housing, energy and food costs.

Andrew Aoki, a research consultant with the firm 3Point, said adding a state credit would help workers build assets that could be used to pay off debt, start a savings account, or invest in education or business opportunities. The credit also would help reward people leaving welfare by showing the value of staying in the work force.

"Taxes here have become particularly oppressive on low-income families," said Aoki, whose briefings helped influence Senate Democrats to include a state credit in their legislative package.

OPPOSING VIEWS

The Lingle administration has opposed a state earned-income credit in the past, saying that while good-intentioned, it would not have as wide a reach as other tax relief. The state Department of Taxation described it last year as "substantially inadequate tax relief for the working poor" that may only help a fraction of those who qualify.

"You're leaving out a large amount of the population who need tax relief," said Kurt Kawafuchi, the state tax director.

The department also cited problems of error and fraud with the federal credit, and estimated that a state credit could lead to nearly $6 million in erroneous claims in the Islands. The federal government has found that the three leading errors with its credit are taxpayers who claim children who do not qualify because they do not live with them for more than half the year; describe their filing status incorrectly; or underreport family income.

While Democrats are looking at the earned income credit, Gov. Linda Lingle has proposed $346 million in tax relief that provides substantial one-time tax refunds, breaks on basic food, ethanol-blended gasoline and caring for children or elderly parents, and further raises the standard income tax deduction. The Republican governor also would index the standard deduction, the personal exemption and tax brackets every year for inflation.

State lawmakers are required by the constitution to provide tax relief this session because two consecutive years have occurred in which the budget surplus exceeded expected revenues by 5 percent. House and Senate Democrats are discussing some sort of combination that may include a small-to-modest refund check for all taxpayers and targeted relief, such as a state earned-income credit, for low-income workers.

Democrats have said the revenue picture for the session will not be clear until the next forecast by the state Council on Revenues and the size of raises in new public-worker union contracts.

The $25 million cost of a state credit puts it at the lower end of the tax relief estimate by state House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo Valley, Wilhelmina Rise) — who has talked about $25 million to $50 million in relief. It also has a political benefit for Democrats in that it was not one of Lingle's recommendations.

"It's targeted at working families. If you don't work, you don't get it," said state Senate Majority Leader Gary Hooser, D-7th (Kaua'i, Ni'ihau), who said a state credit is one of several items in the Senate Democrats' package to promote asset building. "It can give people a nest egg."

BETTER SHOT THIS YEAR

A state credit was among the tax relief options last session, especially in the House, but it was fought by the Lingle administration and lawmakers ultimately preferred raising the standard income tax deduction and expanding tax brackets so more taxpayers would pay lower rates.

This session, the idea seems to have more weight. State Sen. Rosalyn Baker, D-5th (W. Maui, S. Maui), the chairwoman of the Senate Ways and Means Committee; and state Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, both said they would consider a state credit.

Baker said she had been skeptical of the credit last session but is more open after attending a briefing on its merits.

"We're looking at a variety of possibilities," she said. "We don't turn a deaf ear to people who are really struggling in our community."

Oshiro said many Democrats believe targeted relief for the poor and middle class is better than larger refunds for everyone. "We're looking at making sure that those who need the most help, get the most," he said.

Aoki, the research consultant at 3Point, said Internal Revenue Service data show that the federal earned-income credit is especially popular with taxpayers in Waipahu, Wai'anae, urban Honolulu, Wahiawa, Hilo, 'Ewa Beach, Kane'ohe and Kailua.

Hawai'i taxpayers claimed federal credits worth $141.4 million in 2004, according to the IRS. Nationally, 19.4 million taxpayers took credits worth $35 billion that year.

The federal credit has been criticized as too complicated, which is one possible reason why some workers who qualify do not apply, but some who work with low-income families say many do not realize the credit is available. The credit is also refundable, meaning that taxpayers can get a refund check even if their federal tax liability is lower than the credit.

A state credit, since it is added as percentage on top of the federal credit, is not complicated. States also may be able to use federal welfare dollars to cover the refundable portions of the credit.

State Rep. Della Au Belatti, D-25th (Tantalus, Makiki, McCully), said she prefers a state credit along with Lingle's proposal to index other tax breaks to inflation.

"This will encourage people to save and to build their assets and to get out of poverty," she said.

Garrett, the state social services aide, has two adopted children and a biological son who might qualify for the federal credit this year. She said adding a state credit would help low-income workers become more financially secure.

"You have to start somewhere," she said. "I know there are people out there who are needier than me. But it helped pull me up."

Garrett also wants to volunteer at the free tax clinics at Goodwill and is learning how to help others with their tax preparation. "I got," she said, "so I'm going to give back."

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com.