Understating the True Cost of the General Excise Tax

The legislature recently approved the de-pyramiding of the general excise tax that will allow a lesser rate to be paid on the sale of services which were purchased for resale.

While this change is long overdue – by more than 30 years – it will not work miracles overnight. In fact, the change will not be fully realized for another seven years. That’s how long the phase-in of the lesser 0.5% rate will take. This is largely due to the fact that lawmakers could not find ways to cut spending to accommodate the roughly $150 million revenue loss the de-pyramiding will cost.

While the pyramiding of the tax is not completely eliminated, the harshest effects will be mitigated once the 0.5% rate is reached in seven years. Imposing the full 4% rate on the sales of services was roundly criticized by consultants back in the mid-1960’s. However, for whatever reason, lawmakers either failed to figure out just how to address it or out of fear of the unknown revenue loss did not want to adopt something that might bring down the house with a severe revenue impact.

Even with the de-pyramiding issue addressed, Hawaii’s general excise tax takes a toll on the cost of living in Hawaii for no other state imposes its transaction tax on as broad a base. In other states where there is a sales tax, the tax usually applies only to goods or things. Rarely are services taxed. In fact that is one reason why many other jurisdictions have a hotel room tax. That is because the retail sales tax is not imposed on services which hotel rentals are considered. Thus a separate room tax was devised and is imposed.

But the cost of the general excise tax extends far beyond what consumers see at the cash register. As has been stated many times before, if Hawaii were to impose a retail sales tax as found in other states on the mainland, our rate would have to be as much as 10% or 11% to generate the same amount of dollars as the 4% general excise tax rate does. If food were removed from the base, the rate would have to go as high as 16% or 17% to generate the same amount of dollars.

More importantly, the generous revenues that the general excise tax has produced over the years is a major reason why Hawaii is in the pinch that it is today. The “beautiful beast” of the general excise tax produced the revenues that grew the government we struggle with today. No one noticed the nominal 4% rate which by comparison to what is found in other states is “peanuts.” When times were good no one paid attention to the insidious effects of the tax that it has to be paid whether or not a business is selling its goods or services at a profit.

Indeed, throughout the first 25 years of statehood when Hawaii was a boom economy few, if any, complained about the general excise tax. Oh, everyone knew that the tax burden was high in Hawaii, but everyone accepted as fact that just because Hawaii was out in the middle of the Pacific things were going to cost a little more, including taxes. No one paid attention to the growing size of government. Even when Hawaii hit a bump in the road in 1973 with the possibility of a $200 million shortfall, the first reaction was to raise taxes. There wasn’t a second thought that perhaps government might be too big.

Now that the economic dice are turning up “sevens,” the wheels are beginning to squeak. No, taxpayers don’t want to pay any more in taxes, in fact, they want tax cuts. But the catch is that politicians don’t know how nor want to cut back on spending. If spending is not reduced, then taxes can’t be reduced. Instead, the political response is, yes, we will cut taxes, but we will have to raise other taxes to “make up” the lost revenues.

When will taxpayers and elected officials get the picture? Money taken out of the economy reduces consumption, reduces re-investment in equipment, and reduces the potential to create new jobs. If public policymakers want to turn this economy around, they must leave more money in the hands of consumers and businesses.

Look at Japan! Time and time again, the Japanese government attempted to cut taxes so people would spend and stimulate the economy. However, by the time Japanese officials got the picture, it was too late. People had lost confidence in their public leaders and instead of spending those tax cuts, they put the money into savings for fear of losing their jobs.

Elected officials should take a lesson from the Japanese experience. Don’t wait too long to cut taxes and government regulation. Waiting may only make things worse. Accelerating the de-pyramiding of the general excise tax would go a long way toward moving the economy forward.