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Villain Hidden In The Cost Of Doing Business

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By Lowell L. Kalapa

A couple of weeks ago the front page story of one of the Honolulu dailies screamed out that the rising cost of fuel will slow the island’s economy as businesses try to cope with the increased cost of electricity and gasoline.

The story reported how some businesses have tried to hold the line while others have had to pass the increased costs along in the price of their goods and services. From the carton of milk in the supermarket to the cost of a sightseeing tour, businesses have had no other choice than to contemplate, if not implement, price increases.

As consumers’ pocketbooks are squeezed with rising gasoline prices (thank you lawmakers for tying us to the roller coaster of mainland gas prices), what little is left in the family budget will have to cope with rising prices at the grocery store and the department store. So let’s see, the phenomenon being observed is that as businesses are afflicted with rising costs, they end up passing those rising costs on to their customers. Of course if they don’t pass those costs on, they soon go out of business as they are left with nothing to pay themselves because there is no “profit.”

It seems that the same can be said about the increase in the general excise tax rate from 4% to 4.5%. Since purchases made by businesses that are not for resale by the business are subject to the full “retail” rate, the increased 0.5% rate will apply to all those purchases. As with the rise in fuel and energy prices, the cost of the additional 0.5% rate hike will have to be recovered by businesses in the cost of the goods and services they sell to their customers.

And the business from whom the business buys those goods and services that will be used in the consumption of the business will also incur the increased general excise tax rate and will raise that cost of the goods and services sold to the business customer. This is the additional burden that accounts for the gap between the additional annual burden of $450 per family and the estimate arrived at by legislative staff. No effort to account for the added general excise tax burden incurred by businesses was made in the simplistic calculation made by lawmakers.  Instead, the added burden is calculated as if Hawaii’s general excise tax is a sales tax.

If lawmakers truly want to prove that they were right in the lesser estimate, they can fix the law so that prices to the final consumer will not be exacerbated by the costs incurred by businesses.

To begin to make Hawaii’s general excise tax look like and act like a sales tax, lawmakers need to consider either eliminating the general excise tax on business-to-business sales or reduce the rate to the lesser 0.5% rate. In this latter case, any purchases made by a business, whether for resale or for consumption, would be taxed at the 0.5% rate. The retail rate of 4%, or in the future 4.5%, would apply only to consumers.

Sure this will reduce the amount of revenue raised by the general excise tax, but then consumers would really know how much has been hidden in the cost of goods and services. They will better understand what contributes to the high cost of living and doing business in Hawaii. But will lawmakers admit that they knew this all along and will they be willing to live with less revenues if, in fact, it reduces the cost of living in Hawaii?

Based on their recent track record, taxpayers should know very well that lawmakers don’t like to give up all that money they like to spend. How can they prove to voters that they did anything during the past two or four years if they didn’t spend those taxpayer dollars on some worthy program that solved this or that problem?

Probably the most disingenuous are those lawmakers who like to proclaim that they are champions of the poor. Although those lawmakers have made efforts in the past few sessions to demonstrate that they are concerned about the plight of the poor, the poor have basically been left empty-handed.

Instead of helping the poor, lawmakers have heaped added burdens on those least capable of bearing additional costs from the most infamous increase in the general excise tax rate to the nickel per beverage container, to the cap on the price of gasoline which only sent prices artificially higher.

So if lawmakers truly want to be proven correct that their estimate of added burden on the family of four is $250 and not $450, they might want to eliminate the retail rate on all business-to-business purchases. As the current experience with higher fuel and energy costs has proven, businesses will have to pass the added costs on to their customers. Reducing or eliminating the general excise tax rate on business-to-business transactions will bring the general excise tax more in line with the legislative interpretation.

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