One of the measures introduced during the Legislature’s last session would have exempted the sale of fresh farm produce meant for human consumption within the state from the general excise tax. In order to claim the exemption, a farmer would
One of the measures introduced during the Legislature’s last session would have exempted the sale of fresh farm produce meant for human consumption within the state from the general excise tax. In order to claim the exemption, a farmer would have to register with the Department of Taxation and pay an annual fee.
The sponsors of the exemption intended the measure to encourage the sale of locally grown produce. While it may sound like a good idea, the proposal did, in fact, reflect ignorance about the tax and how businesses operate statewide. Sponsors assumed that local produce was sold to the final consumer only at farmers markets, when, in fact, 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 percent rate, as the bulk of the farm production would be resold through supermarkets or food establishments. Only with the advent of farmers markets have many growers sold their produce to final consumers and, therefore, must pay the 4 percent rate on sales. Some argue exempting these sales will help the local industry, it should be remembered that the excise tax is levied for the privilege of doing business in the state.
Exempting sales of locally grown produce sold by farmers puts retail grocers, who may sell locally grown produce together with imported produce, at a disadvantage, as the grocer will continue to pay the 4 percent tax on sales made to its customers.
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 to circumvent the tax. Exemptions from the 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. The proposal to exempt sales of locally grown produce by farmers meets none of these criteria.
When produce is sold to retailers, the rate imposed is 0.5 percent, 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. Granting an exemption to the farmer will not significantly reduce the cost of the produce.
Consumers and lawmakers must recognize it is not the cost of the tax that makes local produce more expensive as much as it is all of the other costs incurred by farmers, from land and labor costs 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, which currently suffers from a continuing burden of taxes and regulations. 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.
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 business-friendly. 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.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.
