By Lowell L. Kalapa
(Released on 07/01/07)
Despite recent efforts to “de-pyramid” the general excise tax by allowing the lesser half-percent rate to apply whenever goods or services are purchased for resale, the fact of the matter is that the general excise tax still pyramids because it is embedded in the overhead cost of all businesses in Hawaii.
For example, in other states that impose a retail sales tax, purchases by businesses of supplies and equipment that will be used in the business are not subject to the sales tax. That’s not true in Hawaii where the general excise tax is imposed on all purchases for consumption by the buyer regardless of whether the buyer is a business or an individual. Thus, for a business the cost of the goods and the general excise tax imposed on that purchase will have to be recaptured in the selling prices of the goods or services produced by the business that when sold will also be imposed with the general excise tax at the full retail rate.
And unlike states with a retail sales tax structure, the general excise tax is imposed on rental income whether it be for an apartment or a warehouse. Thus, a part of the high cost of rentals can be attributable to the general excise tax on the amount a landlord receives as the rental income. For businesses, the cost of the general excise tax imposed on the rental of the warehouse or the retail store must also be recaptured in the cost of the goods and services sold from that site. Again, the cost of the tax on that rent is embedded in the selling price that again is imposed with the general excise tax on that sale.
Thus, as the cost of doing business rises affected by the cost of energy, and the cost of the goods and services consumed by a business, the amount paid by the business in the form of the general excise tax on those purchases or rentals also increases. In a never-ending dog-chasing-his-tail game, costs spiral and so does the price that the business must charge to his or her customers.
And that is what we are now witnessing with the increase in the general excise tax rate on Oahu for the purpose of funding mass transit. It is not just a matter that the tax rate went up, but the cost of that additional half cent is being worked into the base price of everything we buy at the store and everything that the store owners buy for the store. It would be one thing if it was just a matter of inflation, that the costs of goods and services were rising across the board, but based on what the Fed is doing – holding tight on interest rates – it is not a matter of inflation.
Those who must pay the tax know all too well how the general excise tax takes its due without regard to the profitability of the transaction or the business. One can have a going out of business sale or a fire sale where the merchandise is being sold at a fraction of what it cost to purchase, but the general excise tax will still be due on those sales.
Over the years, elected officials toyed with the idea of raising the general excise tax rate to provide additional revenue or replace other taxes, but in every case, until recently, the idea was rejected because those officials knew and understood the impact of raising the rate of this very tenacious, if not peculiar, tax. For example, a group of businessmen tried to secure promotional funding for the visitor industry and adopted the approach that they would raise the tax rate but rebate residents for what was thought to be paid by residents while keeping the rest to fund the visitors’ bureau. But more seasoned heads prevailed pointing out that the tax applied to business purchases as well as residents and that the cost of the additional tax would increase the cost of doing business for everyone.
Another year the chair of one of the money committees came up with the idea of replacing the real property tax with an increase in the general excise tax rate to 6%, but that too was soundly rejected when it was pointed out that not only would it affect businesses, but it would increase the cost of housing in Hawaii because that tax is imposed not only on rent but all construction of new homes and the maintenance of existing homes.
So when lawmakers adopted the proposal to fund mass transit with an increase in the general excise tax rate, it became a power play of one-ups-manship if not total ignorance of the impact of that increase. The result is that we all will pay very dearly not only at the cash register but in the cost to the future of the state’s economy. But is anyone watching and taking notice of the impact it is having on taxpayers?