By Lowell L. Kalapa
Last week, we took a look at the general excise tax rate increase proposed by the Economic Revitalization Task Force that would hike the rate from 4% to 5.35% and noted that it was the “effective” tax rate that had been computed by a 1985 study done for the first Tax Review Commission.
That observation generated quite a few inquiries that wanted clarification about the 10% to 11% rate that has been referenced when discussing converting Hawaii’s tax to a pure retail sales tax found on the mainland. No, we are not being contradictory, but certainly the two rates deserve more discussion.
The 5.35% rate referenced in the 1985 study relates to what the cost of the general excise tax is to the final consumer when one adds up all the general excise taxes collected and divided by the true “retail” base of sales made to final consumers. Therefore, the cost of the tax borne by the final consumer was calculated by the study to be between 5.3% and 5.4% depending on whether those consumers were residents or visitors. This rate, therefore, takes into account the hidden cost of the tax imbedded in all the transactions prior to the sale to the person who will actually be consuming the goods or services.
On the other hand, when one asks what the rate would have to be if Hawaii converted its general excise tax to a retail sales tax found in some forty other states on the mainland, the calculation of that rate assumes that the base of the tax will shrink to only a tax on goods and then only on final consumers of those goods. Thus, a conversion of the general excise tax to a retail sales tax would see the base of the retail sales tax reduced to about 40% of the general excise tax base which is represented by the sales of goods. Further, because the sales of capital goods to businesses are generally exempt from the sales tax base, the rate would probably have to go higher than the estimated 10% to 11% tax rate necessary to generate the same amount of tax revenues that the current 4% general excise tax generates.
Again, the point of the matter is that with a service-based economy which accounts for 60% of the general excise tax base, the bulk of the transactions currently taxed would go tax-free under a retail sales tax scheme.
Thus, the 10%-11% rate represents the tax rate that would be necessary to generate the same amount of revenues as the 4% general excise tax does today if Hawaii adopted a retail sales tax structure similar to that found on the mainland. The big puka or missing part of the base would be the taxation (or non- taxation) of services.
Some proponents argue that their concept of a retail sales tax would be to retain services in the base. If that is the case and taxation of inter-business transactions were exempt, then yes, the rate could fall to as low as is being proposed by the Task Force, 5.35%. The question then is what does that conversion accomplish?
Under any scheme, if the conversion of the general excise tax is to mitigate the insidious aspects of the tax such as the pyramiding of the tax by taxing inter-business transactions, then any upward adjustment in the tax rate negates or nullifies the purpose of correcting the pyramiding, that is the lowering of the overall tax burden. This is, in short, what the Task Force’s recommendation does, correct the pyramiding but make up for the lost revenue.
Hopefully, this will clarify the differences in the rates that have been tossed about in the discussion of the general excise tax. The lesser 5.35% being proposed continues to tax all transactions, both goods and services, while the higher 10% to 11% applies if Hawaii adopts a retail sales tax structure that would tax only the sales of goods.
Although many states are moving in an attempt to tax services under their retail sales tax structure, it is proving to be a challenge. The state which comes closest to approximating Hawaii’s general excise tax base is the state of New Mexico where the tax base is about 60% of Hawaii’s tax base because it includes selected services.
The question with the Task Force recommendation is whether or not Hawaii’s taxpayers want to continue to pay as much, if not more, in general excise taxes.