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Load Of Surcharge Will Hurt Economy

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By Lowell L. Kalapa

As the Honolulu City Council deliberated earlier this month over which route the proposed mass transit system will take through the core of urban Honolulu, the question arose of whether or not there will be enough money to cover the local share of the project’s cost. 

Of course, the half percent surcharge will provide the largest source of the local share although City Council members remain skeptical that it will be enough to pay for the entire project which is now forecast to top $5 billion as the tax will be good only for 15 years. While the consultants’ estimates professed being conservative in its forecast of revenues expected from the county surcharge, it assumed that there would be no bumps in the economic road. 

The problem is that it is obvious that the consultants do not understand the insidious nature of the general excise tax. The fact that the general excise tax is a tax on gross income for the privilege of doing business affects the cost of living and doing business in Hawaii. First, the tax is not a pass-on like the retail sales tax found on the mainland, rather it is a tax on all the gross income that goes into a business’ cash register including the amount that is sometimes visibly “passed on.” Thus, the tax is imposed on the amount called the tax and that is charged to the customer in addition to the shelf price of the goods or services purchased.

The consultants also didn’t seem to realize that unlike the retail sales tax found on the mainland, the general excise tax is imposed on all purchases including those made by businesses. Thus, all goods and services consumed by businesses in Honolulu will incur the additional cost of the county surcharge. That means everything from copying paper to brooms and mops to clean up a store or office will be taxed at the higher rate. Given that overhead costs must be recovered by a business if that business is to remain in business means that the goods or services sold by the business will cost more. If the business cannot pass on the additional cost of the tax in the goods and services it consumes in order to keep its doors open because of competition or its customer are not willing to pay the higher cost of the goods and services it produces, it will have to close its doors. 

This is the effect that the consultants did not take into account in forecasting how much in revenues will be collected from the surcharge. The consultants’ estimates provide for an initial amount generated by the surcharge in the neighborhood of $162 million to $172 million. By the end of the 15-year run, the estimate of revenue from the surcharge ranges from about $300 million to $400 million.

The estimate of revenues from the surcharge in the early years is probably too low as it is expected that most businesses will err on the side of prudence and collect the surcharge regardless of the rules, just to be sure that they are not in violation of the law. However, as businesses and their accountants become more familiar with the law, they will, no doubt, make every effort to avoid having to pay the surcharge. 

However, for the less sophisticated small businesses, they will pay the surcharge regardless of the rules and pass it on to their customers and clients. It is these small businesses that are least capable of coping with the additional burden created by the surcharge and what will happen in the first few years following the imposition of the surcharge is that many will simply go out of business because costs will out pace their ability to pass the added costs on to clients and customers. 

Since construction on this massive capital project is not expected to begin for several years, there will be little, if any, beneficial effect for the local economy while the surcharge is being collected. The result is that the county surcharge will probably have a negative effect on the economy as a whole as economic wealth is siphoned out of the economic well. 

So instead of expanding the economic base, it will shrink. Prices will rise as businesses try to recapture the cost of the surcharge on their overhead, and the surcharge will be added to the higher shelf prices. Thus initially, revenues from the surcharge will exceed the consultants’ forecast as businesses race to recover as much of the cost of the surcharge by increasing their prices, but in the long run, the impact of higher prices will send many businesses out of business. With less competition in the marketplace, the remaining businesses will have no trouble increasing prices to accommodate the tax. 

And despite the tax department’s efforts to save Neighbor Island businesses and families from paying the Honolulu surcharge, the higher cost of doing business will ultimately affect Neighbor Island taxpayers as well.

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