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Whether Or Not Hawaii Should Have A Sales Tax Instead

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By Lowell L. Kalapa

Whether or not you know it, another Tax Review Commission has been convened. Under the state constitution, a Tax Review Commission must be convened every five years and shall be comprised of seven members whose duty shall be to evaluate the state’s tax structure using standards such as equity and efficiency, and then make recommendations to the legislature with respect to revenue and tax policy.

This is the fifth such Commission since the first was convened in the early 1980’s and it has its task cut out for it as there have been numerous changes over the past few years. However, it appears that it is destined to answer the question of whether or not Hawaii’s general excise tax should look more like a retail sales tax found in many states on the mainland.

The primary difference would be to impose the tax only on the final consumer and exempt purchases made by businesses. However, it would seem from the discussions that services would continue to be taxed, but again only when utilized by the consumer. The Commission plans to put this issue out for independent study so that they can get a fresh perspective on the issue. 

What is coincidental is that some of the leading experts in the area of sales taxes did a study earlier this year for the Council on State Taxation or COST. This panel of experts, which included Robert Cline who is the national director of state and local tax policy economics for a major accounting firm and John Mikesell who is one the nation’s top professors of public finance and policy analysis specializing in state and local government finance and sales and property taxation, was asked to analyze the retail sales tax as it is imposed on business purchases and the economic impact that would occur if the sales tax was imposed on the purchase of services by businesses.

The panel of experts concluded that the current structure of the retail sales tax differs from a true sales tax that is imposed only on final consumption by households. Many states, they concluded, have expanded the application of the retail sales tax to business purchases of business inputs and investments to the tune of an estimated $100 billion in taxes.

This imposition of the sales tax on business inputs and investments has:


  •     “significant adverse state economic development implications”
  •     “exacerbates the current economic distortions from the sales tax on business inputs . . . which violates several tax policy principles including economic growth, efficiency, equity and simplicity”
  • caused what economists call “pyramiding” where the tax is imposed at multiple levels “such that the effective tax rate exceeds the [nominal] retail sales tax rate.”


Does this sound familiar? It is exactly what happens under Hawaii’s general excise tax law. Although lawmakers have mitigated some of the pyramiding by reducing the tax rate on goods and services purchased for resale, the purchase of goods and services by businesses NOT for resale is still subject to the retail rate of 4%.

As the panel of experts pointed out, the imposition of the sales tax on business purchases is merely an additional cost of doing business in the state, forcing companies to either attempt to pass the added costs on to their customers or reduce, if not eliminate, their presence in that state because it put those products and services at a competitive price disadvantage in international, national and regional markets.

The panel analyzed a proposal to impose the Texas sales tax on the purchase of services and found that 87% of the additional static tax revenues would come from the purchase of services by businesses, and companies would seek to provide some of these services internally rather than from more efficient providers outside their firms. Therefore, products and services sold by Texas businesses in the international, national and regional markets would be at a price disadvantage, leading to a reduction of investment and employment in Texas.

Thus, it is no wonder businesses struggle to stay in business in Hawaii, as long as the general excise tax is imposed on business purchases Hawaii produced products and services will always be much more expensive than competitors in other states. It should also come as no surprise why so many businesses fold their tents and go elsewhere.

If Hawaii longs for continued economic prosperity, this may the most crucial issue to be studied by the current Tax Review Commission.

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