Jumping To Conclusions About Tax Relief

A couple of readers responded to last week’s column by pointing out that not only did the legislature provide tax relief as a result of the 1998 Economic Revitalization Task Force, but the legislature also adopted the long-sought after increase in the standard deduction and an adjustment in the income tax rates. 

However, not only does one have to take into account the legislature’s reluctance to effect those tax relief proposals – the 1998 income tax cut had to be phased-in over four years and this year’s increase in the standard deduction and bracket adjustments won’t take place until January of next year – but lawmakers have managed to nickel and dime taxpayers to death over the last decade with tax increases. For example, the increase in the motor vehicle registration fee cited last week added to the cost of business, registration fees for professionals and the not so subtle $3 per day car rental fee, when added up, amount to more than a hill of beans. 

Of course, the biggest tax increase has yet to kick in, the 0.5% county surcharge for Honolulu’s mass transit system will represent the largest tax increase since all tax rates were increased across the board in 1965. And while the state administration appears to be bending backward to make sure taxpayers and consumers on the Neighbor Islands won’t have to pay the county surcharge, like it or not, the cost of the surcharge will be embedded in the cost of goods and services consumed by Neighbor Island businesses and residents. 

This fact of life was recently noted by the current Tax Review Commission’s consultant hired to take a look at the state’s general excise tax. His charge was to look at both expanding the tax’s base and seeing if the base could be reduced. On expanding the tax base, the consultant looked at people who are currently exempt from the general excise tax like nonprofit organizations and repealing the exemption for prescription drugs as well as some other specific exemptions in the law. 

On the other side, the consultant looked at adding more exemptions from the general excise tax base. For example, one of the most often discussed proposals is to exempt food from the tax base. Another would be to exempt clothing or health care from the tax base. While the proposal to exempt such “necessities” from the base is touted because it would relieve the poor of the tax burden of the 4% general excise tax, the consultant’s report basically states that those in the bottom income levels continue to pay a much higher percentage of their income than those at the top end despite the exemption. 

What is more interesting is that adding food purchases as an exempt transaction actually reduces the number of jobs in the economy. One example would be the loss of jobs in restaurants, as the exemption would tend to encourage more food consumption at home as opposed to dining out in a restaurant where the purchase of prepared meals would not be exempt. 

But back to those tax increases that lawmakers have subtly levied on us as taxpayers. The largest charade is the hike in the conveyance tax which basically begins to ratchet up once properties cross the $600,000 price level. The tax goes up even more when residential property is purchased by a nonowner-occupant. In this latter case, it demonstrates the ignorance of policy makers who believe that such a harsh penalty will discourage speculators from purchasing residential property. Did someone not tell these public policy makers that it is investors who make those residential properties available for renters? 

And what is so magical about the number $600,000? The median price of a single-family home on Oahu has already passed that magic mark and it is not uncommon to find homes selling for more than $600,000 on the Neighbor Islands. But lawmakers felt they could get away with it because they earmarked the money for affordable rental housing and the legacy land fund, a fund that was created more than 35 years ago but was never funded. They also felt like in every other case, the people who would end up paying the conveyance tax were such a small part of the population that they wouldn’t complain. 

But that increase in the conveyance tax will affect everyone, as transactions in real property apply not only to residential property, but to commercial property including the grocery stores at which we shop for food and the department stores where we buy clothes and school supplies. In the case of commercial property, the sale or lease could run into the millions of dollars that would be subject to the highest conveyance tax rate. 

The long and short of it is, elected officials can preen their feathers in pride about tax relief, but they have taken much of it back in nickel and dime increases.