Producers Already Enjoy Reduced Rate
by Lowell L. Kalapa, Tax Foundation of Hawaii
One of the measures introduced during the last session would have exempted from the general excise tax the sale of fresh farm produce that is intended for human consumption within the state. In order to claim the exemption, the farmer would have to register with the department of taxation and pay an annual fee.
Apparently the sponsors of the exemption intended the measure to encourage the sale of locally grown produce by exempting the sale of that produce from the 4% general excise tax. While it may have sounded like a good idea, the proposal did, in fact, reflect ignorance about the tax and how businesses operate in the state. Apparently the proposal made the assumption that such farm fresh produce is sold only at so-called “farmers’ markets” and the produce is sold to the final consumer and, therefore, is subject to the full retail rate of 4%. Contrary to the perception, it is more than likely that most locally grown produce is sold to wholesalers, retail markets, or food establishments.
The early drafters of the general excise tax recognized this and accorded farmers the lesser 0.5% rate as the bulk of the farm production would be resold either through supermarkets or food establishments. Only with the recent advent of “farmers’ markets” have many farmers sold their produce to final consumers and, therefore, must pay the 4% rate on those sales. Although some may argue that exempting these sales of produce by those who grow that produce will help the local industry, it should be remembered that the general excise tax is levied for the privilege of doing business in the state.
Thus, exempting the sales of locally grown produce sold by farmers puts retail grocers, who may also be selling locally grown produce together with imported produce, at a disadvantage as the grocer will continue to pay the 4% tax on sales made to customers of the grocery store.
It should be remembered that the use of the tax system for such purposes is an inefficient means to accomplish such goals. Generally, exemptions from the excise tax are granted in recognition that the imposition of the tax would impose an unusual burden or would otherwise cause the taxpayer to do business in an inefficient manner just to circumvent the tax. Exemptions from the general excise tax are also granted because the entity is a nonprofit organization or if the tax imposed would have a severe economic impact on the state’s economy. Thus, the proposal to exempt sales of locally grown produce by farmers meets none of these criteria and could not be justified.
When the farmer’s produce is sold to retailers, such as grocery stores or to wholesalers, the rate imposed is 0.5% or 50 cents on a $100 sale. Thus, it is not the cost of the tax that adds to the price of locally grown products as much as it is the external factors such as the cost of land, labor, and regulatory compliance. Granting a general excise tax exemption to the farmer will not significantly reduce the cost of the produce.
If the concern is that locally produced farm products are much more expensive than imported products, consumers and lawmakers need to recognize that it is not the cost of the tax which makes local produce more expensive as much as it is all of the other costs incurred by farmers from labor to regulations and compliance with various standards established by state laws. Instead of attempting to give away the state treasury with such myopic tax breaks, lawmakers need to pay more attention to the overall economic climate of the state which currently suffers from a continuing burden of taxes and regulations. Lawmakers should remember, giving a tax break to one type of activity comes at a cost to all other taxpayers not so favored unless they are willing to effect a commensurate decrease in state spending. So one has to ask what is the unusual burden of taxes borne by this particular industry or activity or is this proposal nothing more than pandering to the fad industry of the day which in the case of this particular proposal is support of the “farm to table” rage.
When the legislature convenes in the next few months, high on their agenda should be the question of how to improve the state’s business climate by reducing the cost of doing business in Hawaii. Indeed, Hawaii has earned the dubious honor of being at the bottom of the barrel when it comes to being a business-friendly state. The plethora of overly burdensome and complex regulations, the strangle of permits required to do business in the state, the numerous labor regulations and the threat of substantial hikes in the minimum wage all add to the cost of locally produced goods as well as to the cost of just surviving in the 50th State.
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