By Lowell L. Kalapa
Last week we looked in more detail at the public service company tax which is imposed on public utilities in lieu of the general excise tax and the real property tax. This week we will look at the tax imposed on financial institutions and insurance companies in lieu of the general excise tax.
When you stop to think about it, it is only natural that the gross receipts tax, known as the general excise tax, should not be applied to income received by financial institutions. For banks and other types of financial institutions, such as savings and loans and finance companies, not all of the income they take in belongs to the bank or finance company. The money you deposit to your checking or savings account belongs to you, the customer, and not to the bank.
On the other hand, some of the interest income earned by a bank is then paid to you the customer while the income received from the interest charged to a customer for money loaned to that customer is income to the bank. Then again, income the bank receives for the rental of a safety deposit box is not bank unique and therefore is subject to the general excise tax. This is because there are businesses which are not banks that also rent secure storage areas that resemble bank deposit boxes. Thus, income from this activity is in direct competition with non banking businesses and therefore is subject to the general excise tax.
Hawaii’s bank or financial institutions franchise tax was substantially overhauled in the early 1990’s after a Tax Review Commission recommendation. The intent of the Commission’s recommendation was to update the bank tax law which had not be substantially changed since 1957. It noted that provisions affecting the taxation of banks at the federal level had evolved over the years as the world of financial institutions broadened beyond the borders of individual states. Interstate banking had become more the norm than the exception and in order for Hawaii’s banks to compete, they needed to have a tax law that recognized this evolution.
One of the amusing features about the prior bank tax law was that it allowed banks to deduct federal income taxes paid by the banks. This provision of the state law was added in 1957 at the very time the deduction for federal income taxes paid was being eliminated from the personal and corporate income tax. Allowing the deduction of federal income taxes has two major drawbacks. First, it allows the whims of the federal income tax law to influence how much a state can tax of the income of the taxpayer and second it shifts a portion of the federal tax burden to the state because it reduces the amount of taxable income which means higher state rates are necessary to generate the same amount of money.
While the reform of the bank tax in the early 1990’s attempted to sort out what was bank unique income and what should be subject to the general excise tax, the banks were persuasive enough to retain an exemption for leasing activities. Thus, the leasing of equipment by a bank is not subject to the 4% general excise tax but is included in the base of the income which is subject to the bank franchise tax. This exemption gives banks a distinct advantage over non-bank businesses which also lease equipment and must show the 4% tax as an additional cost of the lease.
As a result, while the Tax Review Commission had hoped that the bank franchise tax rate could have been brought into line with the corporate tax rates, the rate finally set up by the reform of the tax is 7.92%. This compares to the 6.4% rate under the corporate income tax imposed on businesses that also pay the 4% general excise tax.
The other in-lieu tax is the insurance premiums tax which is imposed on insurance companies on the premiums they charge for the insurance coverage they provide. Obviously not all of the premiums paid for a policy accrue to the company, but are invested in securities and other types of income producing products so that the company can have the resources to pay claims made against the policy.
The rates imposed under the insurance premiums tax range anywhere from 2.75% on life insurance to 4.7% of the premium charged for casualty and other types of insurance. Again, the tax is imposed in lieu of the general excise tax and the net income tax on the gross premiums received by insurance companies.
Thus, while in general one can say the general excise tax is paid by everyone doing business in Hawaii, there are some businesses which because of the types of income they receive are subject to taxes levied in lieu of the general excise tax and either the real property tax or the net income tax.