by Lowell L. Kalapa, Tax Foundation of Hawaii
Why, people often ask, does the general excise tax apply to necessities such as food and drugs or for that matter healthcare? In the latter case people argue that it is inhumane to tax people because they are sick.
But as readers have learned in the past few weeks, having a broad base as the general excise tax does allows a lower rate to be set, yet it produces a multitude of revenues for the state coffers. And as readers have also learned, the general excise tax is paid for the “privilege” of doing business in the state. But there is another more important reason why the general excise tax is imposed on the broad range of transactions and that is that it maintains accountability.
Because of its broad application, any attempt to raise the general excise tax rate alerts the entire population to that possibility. It is one of the reasons that lawmakers find any attempt to raise the general excise tax rate to be a challenge. Since everyone has to buy food, raising the tax rate that would apply to food raises the hackles of every family across the state. If, on the other hand, food was exempt, would the majority of the population care that lawmakers wanted to raise the tax rate?
As noted before, exemptions tend to erode the tax base and when fewer people are affected by a particular tax it makes it that much easier to raise the rates of that tax. That is why lawmakers have resorted to a slew of fees that are activity specific. For example, a couple of years ago lawmakers decided they needed more money from the insurance fees, but they wanted to avoid raising the insurance premiums tax rates as Hawaii’s rates are already amongst the highest in the nation. As a result, lawmakers turned to the fees imposed on insurance professionals and basically doubled those fees for the next two years.
Was there an outcry from the public? Of course not, because only the insurance professionals pay those fees, and in most cases, the increased cost can’t be passed on because the insurance premium rates are set by the state insurance commissioner.
At the county level, the parallel is the imposition of fees on sewer and water rates by the county. In Honolulu, the two are billed on the same statement, so if a household wants water, they also have to pay the sewer bill. As a result, county council members were able to adopt an annual increase in the sewer rate every year over the next ten years.
On the other hand, Kauai County is now only beginning to install a sewer system and has asked homeowners to connect to the sewer system. Knowing that it will cost them a monthly sewer bill, many homeowners are refusing to connect to the county sewer system. If too few homeowners buy into the sewer system, the fixed costs of the system will impose a tremendous cost on those who do connect. As a result, any increases in the fees charged will engage only the few homeowners who have been connected to the system.
Exemptions, thus, not only erode the tax base but they reduce the accountability relationship between those who impose the fee or tax and those who must pay the fee or tax. For those who enjoy an exemption, they feel free to ask whatever of the system, as they do not have to pay for the services provided. This causes a shift in the burden of taxes and fees and generally allows elected officials to hide the true cost of a service or fee from those who are exempt or bear a lesser cost.
This is also the case at the county level where local lawmakers have imposed higher real property tax rates on nonresidential property while lowering it on residential property. Because residential property has the largest number of constituents, local elected officials pander to this group by lowering real property tax rates on homeowners and other residential property while hiking the rates on commercial, industrial and agricultural property. Elected officials argue that businesses can pass on the cost of the higher taxes. Unfortunately, they forget that the very homeowners and renters they think they are protecting end up paying with higher costs at the checkout stand.
That’s why the ubiquitous general excise tax is, in a sense, a good tax as it maintains the accountability between consumers and businesses and the elected officials who like spending the revenues generated by this comprehensive tax. Because the general excise tax affects every single consumer in the state, raising the rate is very hard to do.
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