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General Excise Tax Increase Still on the Agenda

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By Lowell L. Kalapa

     While the Governor’s revision of the tax package came as a surprise to some, for long-time observers of the legislative arena, it was almost expected. With a general excise tax increase of almost 34%, most seasoned observers believed that a tax increase in an election year would not fly.

However, that is not to say that the administration and some lawmakers still are not trying to raise the general excise tax rate. The revised plan now calls for a lesser rate increase from 4% to 4.75%. Somehow, it’s believed by supporters of the package that taxpayers won’t be as outraged because not only is the rate increase less this time around, but the package makers have added substantial income tax credits for the low- income and for the elderly – they can take twice the amount of the credit.

On the income tax scene, the revised plan calls for a higher top tax rate, but the 8.5% rate doesn’t kick in until $50,000 of taxable income for the single return and $100,000 for the joint return. This higher rate helps to make up some of the money that is lost under the original plan because the top rate was set at 7%. It addresses the criticism that those in the upper income categories will benefit the most from the net income tax cuts.

 

 

 
…what those [pyramiding] examples underscore is that if this tax package is supposed to spur economic activity, it fails to address the most fundamental complaint about living and doing business in Hawaii.
       On the corporate income tax side, the net corporate income tax and the financial institutions tax rates are cut by 30% instead of 50%. While the reduction in corporate and bank franchise tax rates are scaled back, it seems that the administration did not address the criticism that the bank franchise tax is a tax in lieu of the net corporate income and the general excise tax. The point that was raised by both critics as well as legislators is that while the plan raises the general excise tax rate, it cuts the bank tax which is paid in-lieu of the general excise tax.

Will the revised tax package fly? Well, if it is any indication, lawmakers are still wincing over the general excise tax increase. Although some UH professors are saying that the general excise tax increase could help move the economy forward, they believe that the increase is only acceptable if the net income tax reductions are also adopted. However, the problem that persists is highlighted in yet another Honolulu Sunday paper article which attempts to explain how the general excise tax works.

Accompanying that article are some examples of how the general excise tax is currently applied and how the increased tax rate would affect purchases is telling in itself. In every case, the amount of the tax, and therefore the selling price of all goods and services goes up. Each of those examples was reviewed by both the tax department and the Tax Foundation of Hawaii. So there is no dispute about the calculations.

But what those examples underscore is that if this tax package is supposed to spur economic activity, it fails to address the most fundamental complaint about living and doing business in Hawaii. In fact, it exacerbates the cost by increasing prices. Thus, rather than making it more attractive to live and do business in Hawaii, the tax plan, even with its net income tax cuts, makes it more difficult to survive in Hawaii.

 

 

  …an increase in the general excise tax no matter how “small” will only increase the cost of surviving in paradise.        So what the astute UH professors don’t seem to acknowledge is that while individuals and businesses will see reductions in their income taxes, it will cost more to put food on the table and buy toilet paper to put in the employee bathrooms. Perhaps what the professors should have asked is whether or not the income tax cuts would have an even more favorable effect if the general excise tax was not increased. But then again the increase in the general excise tax helps government avoid cutting spending and public programs from the prisons to the university. So perhaps there is some self-interest at play here.

Regardless, the general excise tax increase is still on the agenda. Apparently the governor and legislative leaders believe that a smaller increase won’t matter as much and therefore will be easier to sell. But if those examples are any indication, an increase in the general excise tax no matter how “small” will only increase the cost of surviving in paradise. And instead of moving the economy forward, that increase may be just the straw that breaks the economy’s back.

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