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Can a Sales Tax Replace the General Excise?

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By Lowell L. Kalapa

It appears that the idea of a sales tax is being passed around the table of the economic summit as one of the “solutions” to get the economy going again.

Apparently some believe that the general excise tax is a major stumbling block to economic growth and that if it were replaced with a sales tax that is generally found on the mainland it would improve the overall business climate. While it is true that many find the general excise tax distasteful because its 4% off the top of any business’ income, moving to a retail sales tax structure is not going to make much of a difference if state government will still need the same amount of revenue that is currently realized from the general excise tax.

As readers have learned from past columns, a retail sales tax differs from the general excise tax in a number of ways, however, the major and most important difference is that the sales tax is largely levied only on the sales of goods or things. The tax base of the general excise tax includes not only goods but also services. In fact, services make up 60% of the general excise tax base. Thus, if policymakers want to adopt a retail sales tax like those found on the mainland and tax only goods, the rate would have to be 2.5 times the current 4% rate or something on the order of 10% in order to generate the same amount of dollars currently realized from the general excise tax.

If, on the other hand, the idea is to adopt a sales tax that would include services in the tax base, the question is how different would that sales tax then be from the general excise tax? Well, indeed the liability shifts from the business to the consumer as the sales tax is always considered a tax on the consumer. But would it resolve any of the problems that currently occur with the general excise tax?

One of the most often heard complaints is that businesses are now collecting the 4% tax on the 4% tax they pass on to their customers. It is the irritating 4.1666% that shoppers see on their receipts which is the amount of the 4% tax to be paid on the tax passed on. Certainly that problem would be solved as the amount of the tax passed on would not be considered income to the business. But then again, that problem could be solved under the general excise tax by merely exempting the amount of tax passed on from the gross receipts of the business.

However, the most onerous aspect of the general excise tax would still plague the sales tax and that is the problem of the tax pyramiding on services. Because services are always considered as sales for final consumption or use by the purchaser, the retail rate of 4% is nearly always imposed. With the sales tax, that would continue to occur unless sales of services for resale are taxed at the lesser 0.5% rate. But then again, that problem could be solved under the general excise tax if lawmakers so willed it.

While policymakers may think that moving to a sales tax would improve Hawaii’s economic and business climate, they could be asking for a whole lot more than they will bargain for if they attempt to include the sales of services within the sales tax concept. In fact, states which have sales tax structures have been trying to grapple with the issue for years. One example that is telling is the experience Florida had with the attempt to tax services with a retail sales tax structure. Besieged with potential litigation, Florida repealed their attempt no sooner than it became law.

Instead of trying to pull the wool over the eyes of the taxpayers with a new flim-flam, policymakers should look at what they have and try to fix it. The general excise is not all that bad, it is just that lawmakers have resisted fixing the problems because of the potential revenue loss. But not fixing the problems pales by comparison to the idea of moving to a retail sales tax that would require a double digit tax rate or engender substantial litigation should services be included in the base.

But then taxes are difficult to understand if the only thing one is used to is spending the revenues they generate.

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