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Is There Room for Improvement in the Tax System

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By Lowell L. Kalapa

Much as we all like to grouse about paying state taxes, the system that has been with us for the past 70 some odd years has stood the test of time.
On the whole, the balance among the various major sources of taxes is good. Between the general excise and the net income tax, the Hawaii tax system captures both the income and expenditures of its residents and visitors. It is not heavily reliant upon one tax over another. Its lesser dependence on the property tax reflects the allocation of responsibilities for public services between the state and the counties. Expensive programs such as education and welfare are responsibilities of the state where the income and general excise tax shoulder this burden.
At the county level, the property tax funds public safety like police and fire protection, solid waste disposal and waste water clean up. While county officials may dislike having to set real property tax rates each year, that process insures that taxpayers hold county officials accountable for how they spend the real property tax dollar.
Unlike other states where there is a heavy reliance on a specific type of tax, Hawaii has the envious situation where changing economic conditions produce different results for the three major tax resources. In the last year as workers lost their jobs, the impact was reflected in the net income tax. On the other hand, while the general excise tax did not out perform the previous year, it registered collections that nearly rivaled the previous year. So what was lost insofar as income taxes was stabilized by continued consumer confidence in the face of the September 11th attacks.
The general excise tax continues to maintain a broad base, taxing both goods and services alike. And unlike many sales tax states on the mainland, it retains its application to food and non-prescription drugs as well as so called other “essentials” like clothes. While any transaction tax is regressive because the poor as well as the rich have to pay the tax regardless of whether or not they can afford the tax, use of the state’s income tax system to return some of that tax to the poor with the use of low-income tax credits helps to mitigate the regressivity of the tax.
In Nevada, efforts are being made to broaden the application of the sales tax while attempting to avoid the regressivity of the tax. Because Nevada does not impose a personal income tax, they do not have a vehicle by which to offset the sales tax on food and clothing. As a result, blanket exemptions are provided for food and prescription drugs. Lawmakers are exploring ways they can avoid the regressivity aspect as the tax applies to clothing by exempting clothes under a certain price. The contortions through which they are going are amusing to say the least.
On the other hand, that does not assume that everything is ok with Hawaii’s tax system. In fact, the constitutionally mandated Tax Review Commission which is charged with looking at tax and revenue policy every five years is currently undertaking that task. Among the issues that they will be challenged with is whether or not something should be done to increase the floor for the personal income tax so the truly poor don’t have to contend with that tax. Another issue they will have to address is how income tax credits aimed at refunding the general excise tax on certain purchases has the indirect effect of eroding the tax base.
Given the many questions and proposals thrown into the legislative hopper in recent years, they will have to address the issue of whether or not Hawaii should dump its general excise tax in favor of the traditional sales tax. Will such a move be beneficial for Hawaii or will it create even more problems than the broad-base, low-rate general excise tax?
And as noted in an earlier commentary, the Tax Review Commission must begin the debate on whether or not “retirement income,” as it is now defined by all sorts of new approaches, will remain exempt or will the income tax be imposed on all retirement income no matter in what form it is received.
If you are interested in sharing your views on the state tax system, you might want to get in touch with the Tax Review Commission by way of your local tax office. The Commission’s report and recommendations will be submitted in time for the 2003 session of the legislature to consider.

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