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Goal is to Encourage Business, Not Tax Production

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By Lowell L. Kalapa

     It has become increasingly apparent that the Economic Revitalization Task Force relied heavily upon the counsel of staff in coming up with their recommendations on how to reform the tax structure of Hawaii as the rationale has been reduced to the same clichés repeated over and over by the department of business, economic development and tourism..

One of the more emotional rationales is that the tax burden will be shifted from residents to tourists. With the decrease in the net income tax rates and broadening of the brackets, only residents will benefit from these tax cuts. However, because the general excise tax rate will be raised, the amount of dollars paid by tourists will rise as studies in the past have shown that about 21.94% of the general excise tax burden is paid by visitors.

 

 

  …while the general excise tax on individuals can be considered a tax on consumption, the general excise tax on goods and services purchased by business becomes a tax on production.        While that sounds like a good story, it seems no one raised the question at the task force level about the number of visitors that can be expected in the future nor whether or not they will continue to spend as much as they did in the past. In fact, the study that made the finding that visitors pay about 21.94% of the general excise tax burden was done in the late 1980’s when visitors, especially Japanese visitors, spent a whole lot more than they do today. Further, the current slump in the visitor industry raises the question of whether or not visitors will continue to come in the numbers that they did in the past..

Another cliché‚ perpetuated by the DBEDT people is that lowering the income tax rates will put money back into the pockets of residents so that they can save and invest, thereby expanding the amount of capital in the state so businesses can borrow that capital to expand and support their operations. On the other side, state officials argue that raising the general excise tax rate will discourage people from consuming, something that is viewed as a bad activity by economists. They go on to argue that studies show that 94% of the general excise tax is paid by consumers and thus, raising the tax will discourage consumption and encourage savings and investment..

For those who are in business or who understand business, this latter argument is a real “scratch your head” argument. First, it appears that state officials think that “consumers” are merely individuals. They don’t seem to recognize that businesses also “consume” products and services in the course of making or producing their own products or services. As a result, if an increase in the general excise tax rate increases the cost of goods and services that must be consumed by a business in order to produce its goods or services, then the shelf price of the goods or services produced must go up or else the business goes out of business..

Thus, while the general excise tax on individuals can be considered a tax on consumption, the general excise tax on goods and services purchased by business becomes a tax on production. Any good economist worth his salt will tell you that taxes on production work against a vibrant economy. And yet, that is what the general excise is, a tax on production.

Thus, any increase in the general excise tax rate increases the burden on the production of goods and services which increases the cost of goods and services produced in Hawaii. Thus, rather than bettering the business and economic climate, the general excise tax rate increase will merely exacerbate the high cost of living and doing business in Hawaii. If that is the case, rather than moving the economy forward, an increase in the general excise tax will set the state’s economy even farther from the consensus solution of bettering the business climate for everyone..

Thus, while the state officials and the economists may want to discuss the net overall benefit for Hawaii residents, they must ask the question about just what this tax proposal package will do to truly move the economy forward. Unfortunately, state officials have too much at stake and it is doubtful that they will admit that they are wrong. But that would be tragic as adoption of the generale excise tax rate may become a reality – and then we will be in real trouble.

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