Will Economic Commission Learn Tax Compliance?

Although the members of the Governor’s Economic Momentum Commission may be captains of industry, labor and government, it is quite obvious that they do not know or understand what businesses and individuals have to go through in order to comply with the myriad of tax laws.

One of the recommendations that they will take on the road for public hearings is the perennial idea of exempting food and non-prescription drugs from the general excise tax. Perennial idea because many taxpayers who have been to the mainland see other states with these purchases exempted from their sales tax. Those people note that if other states can do it, then why shouldn’t Hawaii exempt those types of purchases as well.

As it has been stated many times before, Hawaii does not have a retail sales tax, but a general excise tax. It is a tax that is levied on the business selling the goods or services and not on the consumer even though when it is shown out separately it appears similar to the retail sales taxes found on the mainland. It is some times referred to as a “privilege tax,” imposed for the “privilege of doing business in the state.” It is also the reason why when nonprofit groups, like a school parent-teacher association or an athletic booster club, sell chili or sausages as a fundraiser for their organization they must pay the general excise tax. It is because they are engaged in selling goods that a for-profit business is also selling and therefore are in direct competition with that business.

Proponents of the food and prescription drug exemption argue that these products are essential to the sustenance of life and therefore should not be taxed. The problem is that it applies to all types of food be it ground beef or lobster. If the argument is that poor people just cannot afford the additional burden of the 4% general excise tax, then a blanket exemption, as proposed, is not the most efficient means of granting relief to the poor for their purchases of food and non-prescription drugs.

More important, it appears that proponents do not understand the complexity of complying with or for that matter administering such a blanket exemption. First, let’s start with legislators who must decide what will qualify for the exemption. For example, in some states a candy bar doesn’t qualify as an exempt food while a bar of baking chocolate does. In other cases, soft drinks don’t qualify while fruit juices are designated as exempt from the retail sales tax. Generally, food items purchased in a grocery store will qualify for an exemption, but prepared foods would be taxable. Is that fair to the elderly who no longer cook for themselves and purchase their food prepared?

Some suggest using what qualifies for food stamps as being exempt, but that is only as good as what the federal officials decide will qualify for food stamps. In some cases there are ethnic foods that don’t even make the radar screen for food stamps. Others argue that with all the new computers stores use, all one has to do is to program the computer to recognize exempt items, that is if the software is programmed correctly.

As a policymaker, one has to look at the cost of administering such a provision of the law as well as for the business taxpayers for whom compliance may require additional work and maybe more employees. In the end, the administration and compliance duties become an added hidden cost.

Finally, if one remembers that the general excise tax is a tax for the privilege of doing business in the state, then an exemption of food and non-prescription drugs discriminates against all other businesses that don’t sell those products. From a revenue producing perspective, taking food out of the general excise tax base will erode the stability of revenues that the 4% tax produces. It will also mean that if expenditures are not reduced, the general excise tax rate will have to go up on all other businesses to make up the loss of revenue. And if that is the case, then food prices, as well as the cost of all other goods and services, will rise as the goods and services purchased by all businesses will also go up. So the tax will be hidden in the higher cost of all goods. If the Economic Momentum Commission – remember “economic” is their name – wants to do something to sustain economic growth, then just lower the general excise tax rate across the board. Doing so will benefit all businesses as well as all consumers regardless of what they purchase. It just that simple.