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Giving Targeted Tax Breaks Puts Burden on Others

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By Lowell L. Kalapa

In this election season, taxpayers should listen to the campaign rhetoric with a grain of salt and a lot of cynicism. After all, when it comes to soliciting votes, good tax policy often takes a back seat to political promises.
Already there are promises of providing targeted tax incentives to attract certain types of businesses or to assist other types of activities which are supposed to help stimulate the state’s economy. On the other side, some candidates suggest providing tax relief by exempting certain activities or types of businesses. What those politicians don’t point out is that unless there is a concurrent reduction in state spending, taxes will have to go up on people or activities that are not the benefactors of these campaign promises.
What these politicians are recommending in their promise to exempt this or that person or activity is known as “eroding” the tax base that is making the tax base smaller than it used to be. So if the tax base gets smaller and the demand for revenues continues at the same or a higher level, it means that the tax rate will have to go up to produce the same amount of revenue that the larger tax base used to produce.
If you pick up any primer on good tax policy, it will tell you that a quality tax system is one where the tax base is as broad as possible which allows the tax rate to be a lot lower than a tax base which embodies only a few taxpayers. Such is the general excise tax where the base includes nearly every transaction that takes place in the state and as a result is able to do so with a low rate of 4%.
While a lot of people don’t like the tax, they can’t complain that they are the only ones paying the tax. On the whole, there are relatively few exemptions from the tax and what exemptions there are were adopted to avoid possibly imposing the tax twice on the same transaction or creating an added economic cost to the state such as the taxing of sugar benefit payments.
While many taxpayers often refer to the general excise tax as a sales tax, it is far from the sales taxes found on the mainland. In the first place, the tax is on the businesses charging the customer the tax. It is to the chagrin of some — a privilege tax; a tax for the privilege of doing business in the state. A person who wants to start up a business has to take out a license to do business in the state and pay for the “privilege” with a tax on all the gross income received for that business at the rate of 4%. This is the general excise tax.
A sales tax, on the other hand, is a tax on the customer and usually is imposed only on the sale of things or goods when those goods are going to be used or consumed by the customer. It is not imposed on sales of goods sold for resale like from a wholesaler to a retail store nor is it imposed on services. As a result, the base for most retail sales taxes found on the mainland is relatively small. As a result, sales tax rates tend to be much higher than Hawaii’s lowly 4%. Let’s look at some campaign promises about the general excise tax.
There is the perennial suggestion that Hawaii should not tax the sale of food because everyone has to buy food to survive. Well, that is true, but think about it. On whom does the burden of the 4% tax fall? It is a business called a grocer. With the exemption of food, what does the tax system look like? Consider that a grocer is just one type of business. There are businesses which sell clothes or shoes or for that matter health care products. So an exemption of food really singles out grocers at the expense of other types of businesses.
Similarly, people who provide services are also disadvantaged when one type of service is given a break from the 4% tax. In this case, some politicians have suggested that medical services be exempt from the 4% tax because it wrong to tax the sick. In this case, it is not the people who are sick as much as it is the professional who provides medical services who would get the tax break. So one must ask, why should doctors be exempt and not carpenters who come to repair your house or the plumber or electrician? And why should lawyers have to pay the tax because they help to keep people out of trouble with the law?
Though well-intended, these promises miss the point that such targeted exemptions come at the expense of all other taxpayers. So, if the base is eroded by exempting grocers and doctors, who will end up paying for our schools and prisons? Tax rates will go up on everything else as a result. Is this the kind of “good tax policy” we want as taxpayers in Hawaii?

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