A Washington-based think tank urged Hawai'i's lawmakers to approve a proposed local earned income tax credit to ease the burden on low-income working families who face one of the highest tax rates in the nation.

Hawai'i ranks No. 1 in income taxes on families of three with incomes between the poverty line and 125 percent of the poverty line, according to a report from the Center on Budget and Policy Priorities, a Washington-based nonpartisan research group. The state also has among the lowest thresholds for paying income tax, it added.

The think tank said an earned income tax credit proposal being considered by legislators was superior to a package of tax cuts proposed by Gov. Linda Lingle because it would bring more tax relief to families.

"With an EITC, Hawai'i's income tax would no longer be one of the nation's most burdensome on low-income families," said Jason Levitis, a center policy analyst and author of the report. "That would be an important step forward, especially given Hawai'i's high cost of living."

The group said Lingle's proposal would cost about $60 million a year but that Hawai'i's income tax burden on low-income families would remain one of the worst in the nation. It said a state earned income tax credit set at 20 percent of the federal earned income tax credit would cost about $26 million a year.

But the head of the nonprofit Tax Foundation of Hawai'i said that basing a state EITC on the federal credit would be a mistake. Lowell Kalapa said the proposed state EITC has "nothing to do with any kind of state tax burden."

"If we're going to design some kind of tax relief for our residents, it should be designed based on the taxes that we impose on those residents by the state and not take a percent of the federal," Kalapa said.

He said the Tax Review Commission estimated that an EITC of 20 percent would have cost the state between $22 million and $23 million in lost revenue based on 2005 returns.

Kalapa said it would be more beneficial to low-income families if the state increased the standard deduction or changed the threshold before imposing the state income tax. He added that a tax credit should be designed to reflect how much a family pays in general excise taxes and provide a rebate based on the family's income.

"At least then there's some logic to say, OK, we're imposing the 4 percent, let's give back the 4 percent to the very poor, let's give back portions of the 4 percent to those just above the very poor," Kalapa said. "Then it kind of makes sense. There is a relationship."

Reach Curtis Lum at culum@honoluluadvertiser.com.