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Overdoing the Exemption of Food and Drugs

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By Lowell L. Kalapa

Among the agenda items of several newly elected lawmakers as well as some of their more senior colleagues is the proposal to exempt the sale of food and medical services as well as over-the-counter drugs from the 4% general excise tax.

The arguments are time tested. No one likes the idea of being taxed on the basic necessities that we need to survive each day nor do people think that they should be taxed for being sick. The other argument is that many other states which have sales taxes do not tax food, drugs or medical services. Indeed, Hawaii adopted legislation years ago to exempt the sale of prescription drugs from the general excise tax.

But that is just the point, that what we have here in Hawaii is a general excise tax even though many refer to it as a “sales tax.” It is a tax “for the privilege” of doing business in the state and the liability falls on the business selling goods or services in Hawaii. And while businesses were allowed to show the amount of tax out separate years ago, in fact before Hawaii became a state, the general excise differs from a sales tax because the tax is, by law, not on the purchaser or consumer.

Also unlike many states or jurisdictions that have a true “sales tax,” the general excise tax is imposed on the services as well on things or goods. The imposition of sales taxes is largely restricted to the sale of things or goods and services are rarely, if ever, taxed. Thus, advocates of repealing the tax on food and medical services crow that medical services are exempt in other states where there is a sales tax. Well, that is true, but then neither are other services taxed in those states.

If advocates of the food/drug/medical services exemption would stop to think about the inequity that this exemption would create with other businesses that don’t sell these goods or services, then it would become abundantly clear that the exemption would create a preferred class of businesses depending on what products or services they sell. For example, where is the equity between and auto mechanic who works on a Porsche and the doctor who owns the Porsche?

One of the old arguments against the exemption highlighted the administrative difficulty of determining which items were exempt and which are not, advocates now argue that scanning machines have resolved that issue. While that may be true, it is still a matter of deciding what items will be taxed and which items will be exempt.

For example, in one state the debate raged back and forth as to whether chocolate should be exempt as it was a “candy” and not a nutritious food item. On the other hand, others argued that chocolate is used for baking purposes and was an essential ingredient for nutritious foods. Finally, that state’s legislature drew the line right down the middle and decided that baking chocolate would be exempt but chocolate candy bars were taxable.

While the argument can go on and on, there are some other considerations that should be given to the proposal. First, there is the fact of accountability. Because food and medical care is purchased by every taxpayer in the state, taxpayers remain keenly aware of how much they are being charged by the 4% generl excise tax. As a result, they want to know just how elected officials are spending that money.

For example, would there have been a community conversation about past proposals to raise the general excise tax rate if food had been exempt. Why should taxpayers care how high the rate goes if their basic everyday needs are not taxed?

The other point is that because food/drugs/medical services remain part of the base, those items lend some stability to the tax. In other words, those purchases are not discretionary and therefore form a part of the base that will always be there. If carved out of the base, then there probably would be greater fluctuations because what is left would tend to be discretionary items.

Also having food/drugs/medical services as part of the tax base allows a lower rate to be imposed. If these items were exempt and spending remains at the same level, the tax rate would probably have to be increased. Thus, those businesses which do not sell food, drugs or medical services would end up paying a higher tax rate. Would that be fair to those businesses?

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