by Lowell L. Kalapa, Tax Foundation of Hawaii
The other day, an advocate for a program that state government has been trying to implement for nearly two decades asked why couldn’t taxpayers support a hike in the general excise tax rate even just a quarter of a percent to support this program.
The perception that Hawaii taxpayers enjoy such a low rate of “sales tax” leads to calls for a hike in the general excise tax because most people see the tax as just that - a retail sales tax like those found on the mainland. Unfortunately, Hawaii’s general excise tax is nowhere akin to the retail sales taxes found on the mainland as it applies to all transactions that take place in the state.
That means the tax is applied both at the retail level, like a retail sales tax, and at the wholesale level. The tax applies regardless of whether or not the goods or services are to be used by the final consumer or are to be used in the production of goods or services that will then be included in the cost of goods or services sold by the purchasing business. This means all of the overhead costs of a business are subject to the tax by comparison to some states where the retail sales tax is not applied on business-to-business transactions.
More importantly, unlike the retail sales tax, Hawaii’s general excise tax applies to all services. On the mainland, the retail sales taxes apply largely to the sale of goods or things and only in a few states are services taxed under the sales tax regime and then for only a limited number of services. For example, New Mexico has the next broadest-based sales tax because it taxes selected “luxuries” like haircuts and beauty salons.
As a result, the general excise tax is the epitome of what tax policy analysts believe is a good tax having a very broad base which allows a low tax rate to be applied. For years, observers, from both within the state as well as from other jurisdictions, have known that if Hawaii went to a retail sales tax structure like those found on the mainland, it would need a rate of somewhere between 10% and 11% to generate the same amount of revenue that the 4% general excise tax rate produces. And if food and drugs are exempt from the tax, like in California, the rate would have to soar to something like 16% or 17% to generate the same amount of revenue.
So upping the rate by a measly quarter or half percent carries greater implications than the nominal rate would seem to infer. While residents and visitors would have no choice but to pay the additional cost of the tax, customers of Hawaii’s goods and services in the global marketplace may or may not be willing to pay for the higher costs of goods and services produced in Hawaii. Even though exported goods and services are exempt from the tax if sold outside the state, the cost of the overhead of those businesses would have to be recovered in the cost of the products or services, making Hawaii less price competitive on the world market.
But readers should not focus solely on Hawaii’s general excise tax. Hawaii’s high tax burden also applies to the net income tax where lawmakers decided to impose some of the highest tax rates in the nation on higher income individuals and families. And let’s not forget that Hawaii has one of the lowest thresholds at the bottom end where the poor start paying the net income tax. More recently, the ability to take the state income tax and sales tax deduction was curtailed for higher-income individuals and families and a temporary ceiling was placed on the amount of itemized deductions higher-income individuals could claim.
Similarly, Hawaii’s real property tax burden appears to be surprisingly low by comparison to our mainland counterparts, but it must be remembered that the real property tax does not pay for education, health and welfare. So for what real property taxpayers receive in county services, the cost of the real property tax burden in Hawaii is relatively high. Of course, this doesn’t take into account the numerous fees imposed by county governments for such essential services as sewers and water.
At the state level, fees also abound although many times taxpayers don’t realize that they are paying those fees. For example, despite the implementation of the enhanced 9-1-1 system, the fee continues to be imposed on all cell phones as well as the 5% fee imposed on cable television for public access television and the department of commerce and consumer affairs. Then there is a six-cent deposit fee on all beverage containers which is being contemplated for another half-cent increase in the near future. And it does not stop there!
So before anyone thinks taxpayers can stand another jerk of higher fees and taxes, they should take a look at what is already being taken in taxes and fees. Instead, taxpayers should demand that elected officials find ways to reduce the programs and services which demand such a heavy tax burden.
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