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Tax Hike Imbedded In Prices Will Affect Everyone

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By Lowell L. Kalapa

Proponents of the recently approved hike in the general excise tax rate for Honolulu continue to argue that it will be just half a cent more and it will only add another $245 to the family’s annual general excise tax burden.  In the latter case, they used more “realistic” family budgets than the highly touted $450 in family tax burden that this column has reported.

Again, those who believe it is only a half-cent more ignore the fact that the general excise tax is paid by everyone at all levels.  So while a grocery store may purchase the cereal or meat at wholesale and pay the lesser half percent rate on the purchases, goods and services purchased by the same store for consumption by the store are taxed at the full 4% rate.  When that retail rate rises to 4.5% on everything purchased by the store from the rent it pays for the store space to the mops and brooms to sweep the grocery store floors, that additional rate will have to be passed on to the customers of that store.

Even those taxpayers who are residents of the Neighbor Islands will be affected as the bulk of the goods and many of the services consumed by Neighbor Island taxpayers sooner or later pass through Honolulu.   So the box of cereal that is warehoused in Honolulu will be tapped with the increased general excise tax rate because the rent the warehouse owner pays will be subject to the higher rate.

Probably the most unsuspecting culprit is the cost of energy.  Many taxpayers don’t know that the fuel oil burned by Hawaiian Electric Company in Honolulu is subject to the 4% general excise tax even though the fuel oil is burned to produce electricity which is subsequently sold to consumers.  This is because the fuel oil is “consumed” by Hawaiian Electric and therefore is a sale for consumption and not for resale.  As a result, the cost of electricity on Oahu will also rise as a result of the increase in the general excise tax rate.

Given that nearly everything produced or stored on Oahu utilizes electricity, that increased cost of electricity will be embedded in the cost of all goods and services passing through Honolulu on the way to the Neighbor Islands.  Goods and services sold outside the state are exempt from paying the general excise tax when sold to someone outside the state, but the cost of the energy to produce those goods and services will be a part of the price charged to the customer outside the state.

The general excise tax is paid by a refinery at the 4% rate on the wholesale price of the gasoline.  Thus, when the tax rate rises to 4.5%, gasoline sold from the refiner to the dealer will be at the higher rate.  Given that the refiner is located in Honolulu, there will be some question of whether or not gasoline sold to a Neighbor Island dealer will be subject to the current 4% rate or the higher 4.5% rate as the refiner is licensed to do business in Honolulu.  Thus, Neighbor Island drivers may be picking up some of the tab for the higher Honolulu rate.

Regardless, because the 4% rate is imposed on all energy produced or used in Honolulu, the cost of the higher tax rate will be embedded in the shelf price of all goods and services either produced or passed through Honolulu.  While consumers will only see the added half penny on their grocery receipts, they won’t see the higher tax rate in the cost of the goods they purchase, they’ll just see higher prices.

So while consumers in Honolulu will see the higher rate shown out as the tax on their purchases, they, along with their counterparts on the Neighbor Islands, will not see the cost of the hidden tax increase in the shelf price of everything they buy. However, what they will notice is that their paycheck will be buying a lot less than it did before the tax rate went up.  Honolulu businesses selling goods and services outside the state will find that even though their sales are exempt from the general excise tax, what they have to charge to recover their costs will be less price competitive with goods and services produced in other states.

However, the one that will hit all consumers in the state is the higher cost of energy as it is impacted by the higher general excise tax rate.  From the lights that illuminate the workstation in an office or a garment factory to the delivery of the goods or services by truck or automobile, the general excise tax will only exacerbate what is already an intolerable cost for fuel.

So whether the family of four make $50,000 or $150,000, the hike in the general excise tax rate will insure that those families will be buying a lot less than before the rate increase.

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