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General Excise Increase is Hard Pill to Swallow

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By Lowell L. Kalapa

One of the major hurdles facing the recommendations of the Economic Revitalization Task Force is the component that proposes to raise the general excise tax rate from 4% to 5.35%.

     Although the proponents of the package argue that this element of the Task Force’s package is intended to shift the burden of taxes from residents to nonresidents, the idea has been met with cynicism and rejection. Why?

     Well, anyone who has had to deal with the general excise tax knows that this tax menace seems to have a mind of its own. While apparently simple to administer and with which to comply, the tax seems to have unique twists and turns that become hidden traps for taxpayers. Because it is so comprehensive, the cost of the tax seems to be built into everything that consumers purchase in Hawaii, thereby increasing the cost of all goods and services.

     Task Force supporters point out that these fears should be allayed because the phenomenon of pyramiding will be addressed and mitigated by reducing or eliminating the “tax on the tax” aspect of the general excise tax. However, when pressed on the issue, no one seems to know exactly what pyramiding entails. If the intent is to eliminate (or reduce to the lesser 0.5% rate) all taxation of sales made to businesses, then there is a potential administrative and compliance problem. A problem that may add to the cost of complying with the law which in turn will add to the cost of doing business.

     Assuming that pyramiding of the tax is addressed, then according to a 1985 study done for the first state Tax Review Commission, the effective tax rate of the general excise tax of somewhere between 5.3% and 5.4% would be imposed. Just coincidentally, the proposed 5.35% falls right between those two points. Thus, for the final consumer the true cost of the tax would be moved to the back end of the transaction chain and be borne by the person who actually uses the service or goods. The point of the matter is that prices will not go down but either stay the same or rise as the unknown application of the new rate may or may not apply to goods or services purchased by businesses.

     Thus, while Task Force proponents would like the public to believe that the cost of the increased general excise tax rate will be offset by the cuts in the net income tax rates, thereby benefiting residents and not visitors, the fact of the matter is that prices will continue to be as high as they are now. And that misses the point that the high cost of living in Hawaii must be reduced if this state is to be an attractive place to do business.

     Yes, addressing the pyramiding aspect of the general excise tax is a definite plus, but that salutary effect is more than offset by the increase in the retail rate. The idea of reducing the pyramiding effect is to reduce the shelf price of goods and services in Hawaii since the pyramiding is acknowledged to add to the cost of doing business which is eventually passed on to customers and ultimately to the final consumer. Thus, raising the tax rate defeats the purpose of correcting the pyramiding.

     Thus, instead of improving the prospects of attracting businesses to Hawaii by lowering the cost of living in Hawaii, the proposal to correct pyramiding and raise the general excise tax rate amounts to nothing more than a shell game of moving the pea from one shell to another.

     If the intent of raising the general excise tax rate is to “make-up” the revenues lost in reducing the net income tax rates, then why not leave the tax rate at 4% and not lower income tax rates as much. At least that approach would be a bit more honest – that the state is not willing to give up revenues and make the cuts in government spending necessary to set the economic ship on a revitalized course.

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