The other day, an advocate for a program state government has been trying to implement for nearly two decades asked why taxpayers couldn’t support a hike as small as a quarter of a percent in the general excise tax rate to support the 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 a retail sales tax like those found on the mainland. Unfortunately, Hawaii’s general excise tax is nowhere akin to mainland retail sales taxes since it applies to all transactions 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 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. In some states, retail sales tax is not applied on business-to-business transactions.
More importantly, Hawaii’s general excise tax applies to all services. On the mainland, the retail sales tax applies largely to the sale of goods or things and only in a few states are services taxed, and then, for a limited number of services. New Mexico, for example, has the next broadest-based sales tax because it taxes selected luxuries, such as haircuts.
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 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, it would need a rate of somewhere between 10 and 11 percent to generate the same amount of revenue the 4 percent 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 16 or 17 percent 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 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 products or services, making Hawaii less competitive on the world market.
However, readers should not focus solely on Hawaii’s general excise tax. The state’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. Remember, Hawaii also 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 and sales tax deductions 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. 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 they are paying those fees. For example, despite the implementation of the enhanced 911 system, the fee continues to be imposed on all cellphones as well as the 5 percent fee imposed on cable television for public access television and the Department of Commerce and Consumer Affairs. Then there is a 6-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. Taxpayers should demand elected officials find ways to reduce the programs and services that demand such a heavy tax burden.
Lowell Kalapa is president of the Tax Foundation of Hawaii.
