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Sunday, November 13, 2011
Utilizing the Tax System to Track the Economy
By Lowell L Kalapa @ 1:16 PM :: 3813 Views :: Energy, Environment

by Lowell L. Kalapa, Tax Foundation of Hawaii

The state’s official coven of wizards, the Council on Revenues, generally uses various economic indicators to shape their forecast of general fund tax revenues for the current fiscal year and six years beyond.

These forecasts then become the basis for lawmakers and the administration in shaping the state’s spending plan known as the biennial budget. The budget, therefore, is driven by the economic indicators in that the greater the activity, the more likely there will be growth in tax revenues. The wizards on the Council on Revenues use economic indicators such as the number of visitor arrivals, visitor spending, the growth in personal income and inflation. One can certainly understand that an increase in visitor traffic or the amount that those visitors spend on a daily basis will affect taxes like the general excise tax which is imposed every time a product or service is purchased.

The number of visitors and the amount they spend will also affect how many employees a hotel, a retail shop or a bus company will need to provide those services, be they housekeepers, sales clerks or waiters or waitresses. Those employees will, in turn, be paid; some of which is withheld in income taxes and the amount taken home is spent at the grocery store or the mall or the auto repair shop. Again, the amount of economic activity is reflected in the amount of taxes collected.

But do folks know that the tax system can also help track the welfare of the economy and how it is doing? One of the most sensitive of taxes levied in Hawaii is the state’s general excise tax because it is so comprehensive. That is, it is imposed every time a product or service is turned over or sold. And it is not just at the retail level.

When general excise taxpayers file their monthly, quarterly or semiannual returns, they must indicate what activity generated the gross income they are reporting. In addition to “retailing,” the 4% activities are broken out by contracting, theater and amusements, services, commissions, rentals, hotel rentals, interest, and the 4% use tax if goods were purchased out of state for consumption by the business. This breakdown by activity gives observers an idea of where the economic activity is taking place. A slowdown in construction activity, for example, will show up in the “contracting” line on the general excise tax form. Gross income on the “theater and amusements” line will indicate how confident consumers feel about the economy if there is growth in this area which would largely be discretionary spending.

But the real soothsaying lies in the lesser half percent rate categories, as those activities are precursors of future economic activity. For example, the 0.5% rate is imposed on all wholesale sales. If wholesale sales increase as evidenced by the collections at this rate, then it is a pretty good indicator that retailers anticipate an upswing in their sales by adding to their inventory.

Another category where the lower rate is imposed is on manufacturing and producing. When sugar was king and pineapple fields blanketed the landscape, these two categories were critical to the state’s economy as they reported how much was being grown and how much pineapple was being canned and how many tons of sugar was being milled in the state. Today, those categories report agricultural activity as well as how much is being made in the state to be sold either to markets outside the state or to wholesalers who will then sell those goods to retailers in the state.

Some novice observers of the state’s tax system have suggested that the 0.5% rate be dumped as it seems to be more of a nuisance than a real revenue raiser for the state’s treasury. What those observers don’t appreciate is the fact that the wholesale rate helps to keep track of that is going on in the economy. A similar mistake was made more than 30 years ago when a state official decided that the general excise tax collections didn’t need to be broken out at the 4% or retail level and a whole fiscal year was lost before anyone realized how much that detail told us about the state’s economy.

So, in addition to collecting revenues for the state, the tax system is a very important tool in tracking the state’s economy.

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