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Denigrating the Integrity of the Tax System

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By Lowell L. Kalapa

Granted lawmakers are supposed to respond to the needs of their constituents, but there comes a time when a constituent request is not informed or ill-informed and it is up to a lawmaker to advise his or her constituent that it might not be a good idea.
So when a measure was introduced to do away with the state’s general excise tax, net income tax and the state fuel tax and replace those taxes with a state sales tax, it appears that lawmakers were also ill-informed. When the measure did not even garner a hearing, a resolution was introduced to request the department of taxation to come up with a rate for a retail sales tax that would replace the three taxes.
If some homework had been done, lawmakers would have discovered that the most recent Tax Review Commission had contracted with Dr. William Fox of the University of Tennessee to evaluate the possibility of changing the Hawaii general excise tax into a retail sales tax such as those found on the mainland. Hawaii’s general excise tax differs from a retail sales tax in that it is a tax on the business for the “privilege” of doing business in Hawaii as opposed to a retail sales tax which is actually a tax on the consumer who is “consuming” the product being sold.
The other major distinction is that a retail sales tax is levied only on goods while the general excise tax is levied on both goods and services. As a result, the Hawaii general excise tax rate can remain relatively low yet produce a whole lot of money. And while there have been numerous attempts over the years to raise the tax rate, the 4% remains the same as it has been since 1965 when it was raised from 3.5% to 4%. And at that rate, the general excise tax generates roughly $1.7 billion a year or about half of the general fund tax collections.
According to the study done by Dr. Fox, Hawaii would need a rate of about 10.2% if it switched from a general excise tax to a retail sales tax. And that would be the rate without an exemption for food and proprietary drug sales.
The net income tax is the second largest source of income for the state general fund providing about 35% to 36% of tax collections for the fund. So between the general excise tax and the net income tax, the two provide roughly 80% of the general fund tax collections.
One of the more disturbing recitals in the resolution is one that characterizes the net income tax as being “regressive.” Regressive refers to a tax that takes a larger percentage of a family’s budget at the low-income end than it does of a high-income family’s budget. Thus, a regressive tax hurts low-income families more than it does higher-income families.
However, that definitely is not true. Net income taxes are designed to be progressive, that is where the percentage that is taken in taxes rises as the income level of the taxpayer rises. So in the case of Hawaii’s net income tax, the poor have to start paying at a rate of 1.4% if their taxable income isn’t over $2,000 while those at the top end pay a maximum of 8.45% on taxable income if over $40,000 for individuals and $80,000 if filing jointly.
The other disturbing issue is that repealing the general excise tax and the net income tax and replacing them with a retail sales tax ignores the fact that there are other taxpayers who pay taxes in place of these two taxes. In the case of the general excise tax, utilities pay the public service company tax. Similarly, insurance companies pay the insurance premiums tax in-lieu of the general excise and net income taxes. The same goes for banks and other financial institutions that pay the financial institutions tax in place of the general excise and net income taxes.
Finally, replacing the state fuel tax with a retail sales tax ignores the fact that there is direct relationship between the fuel we all purchase to run our automobiles on the state’s roads and the amount of asphalt our cars chew up on the state highways. Such a relationship between a retail sales tax would be dubious if not nonexistent.
Thus, what may sound like a great idea reflects the lack of information and knowledge that should have been gleaned with good research. Until recently when lawmakers decided that tax credits are the panacea to all our economic problems, Hawaii had a pretty high quality, well-balanced tax system. And perhaps it was all those tax incentives that drove lawmakers to ask for a wholesale overhaul.

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