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Quit Trying to Deny It Won’t Hurt Taxpayers

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By Lowell L. Kalapa

No sooner was the ink dry on the measure to allow the counties to raise the general excise tax rate up an additional 0.5% than did the Honolulu City Council introduce a measure to adopt the half percent rate for the imaginary rail transit project.
railbynight.gifImaginary? Well, that is what it is at this point as there are no plans on the table, no specifics as to where the stations will be and just where the route will run other than to say that first segment will run from Kapolei to Waipahu and then eventually to the University at Manoa. What is almost certain with the way the project is being described is that the 0.5% rate will probably not generate the amount of money that will be needed to build and operate it.
And that is why this action was based solely on the political pressure from the congressional delegation to get in line for federal funds. With no concrete plans on the table, lawmakers adopted the county option tax bill solely on the need to demonstrate a commitment to the federal government that Hawaii is serious about building the transit project even though there is no idea of how much it will cost.
So why did lawmakers adopt just a half percent rate rather than a full percentage point boost in the general excise tax rate? Well, senators got an earful when they tried to do just that by imposing a full percent rate increase across the board. Public outcry resulted in a swift shelving of that idea as not only would the rate have gone up a full percent, but also it would have applied in all counties and the counties would have realized only a portion of the collections with the state general fund being the other major beneficiary of the increase.
What is surprising is that it has become increasingly obvious that even those in the business community don’t appreciate the breadth of the general excise tax and how it is structured. In an e-mailed received from a businessperson, he writes:    

Even with compounding, Kalapa is implying that 100% of the cost of an item was previously subject to excise tax. Totally untrue. When you purchase an item that has been previously subject to excise tax, the amount you pay is the sum of the supplier’s cost of goods, the supplier’s expenses (labor, overhead, etc.), the supplier’s profit, and the vendor’s profit. The last three are not subject, or only partially subject to excise tax. In short, only a portion of the cost is attributable to excise tax pyramiding

     Let us all remember that the other name by which the general excise tax is known is the “gross income tax” which means just that, it is a tax on the gross income of the business. This means that all of the costs incurred by the “supplier” in the above scenario which is recouped in the selling price is subject to the general excise or gross income tax. It is a tax on every penny put into the cash register drawer. And, in fact, as many customers have learned, even the amount “visibly passed on” as the tax is subject to the general excise tax. That’s why many businesses have taken to the practice of collecting “4.166%” as the tax rate instead of a straight 4%.
This critic goes on to make the statement that in the case of janitorial services,

most of the charges are for labor and profit. Businesses don’t pay gross excise for employee’s wages or for their profit

     Again, the general excise tax is a tax on the gross receipts of the business, which in this case is a janitorial service, the cost of which is comprised of goods like soaps and mops or brooms, the labor of employees and, oh yes, a markup to insure the business realizes some margin of profit. This sum becomes the selling price of those services which is then the gross income of the janitorial service. As gross receipts, whatever goes into the cash register of the owner of the janitorial service to recover the cost of the supplies, labor and, oh yes, profit is subject to the general excise tax.
Probably what is most telling about the author of this e-mail response is that this businessperson sees the

cost of the excise . . . as the amount they (the business) pays out of their pocket, not the amount someone else pays out of their pocket

And true, that is why businesses add that 0.166 to the 4% rate because they want to take as much of the tax out the customer’s pocket.
The I don’t care about the customer attitude of this particular business is a mirror image of the attitude that lawmakers seem to take about raising the tax rate. They really don’t care how much of a burden this will place on families in Hawaii, families that we already know are struggling to make ends meet. That’s sad.

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