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Utilizing Someone Else’s Money To Pay For Your Business

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By Lowell L. Kalapa
(Released on 09/02/07)

How ironic that readers of the two large Honolulu dailies are bemoaning the reports of old-time favorite hangouts having been closed because either the families don’t want to carry on the business or that it has just become too difficult to survive in Hawaii’s high cost-of-living environment.

While some of the hurdles faced by these time-honored establishments are the increasing amount of regulations with which they must comply, one has got to admit that Hawaii’s heavy tax burden has to be a major factor in finally breaking the camel’s back. Perhaps the most onerous of taxes faced by businesses in Hawaii is the state’s general excise tax. Often confused by recent arrivals as a sales tax, the general excise tax, unlike a sales tax, is not imposed on the customer or purchaser but on the business for the privilege of doing business in the state. The confusion arises over the fact that the tax is often “passed on” visibly to the customer, so the notion that it is a “sales” tax is given credence.

But the general excise tax must be paid whether or not the business makes a profit, coming off the top. For example, a store may have a going out of business sale in an effort to liquidate its stock before it closes its doors. The business sells the remaining goods at cost, what it paid for the goods. There is no profit to be had, but the general excise tax still has to be paid on those sales.

And unlike a sales tax structure, the general excise tax is also imposed on purchases made by the business for consumption in that business. With a sales tax, most purchases made by a business for use in its own operation are exempt from the sales tax as those purchases are viewed to be essential to the production of the goods or services that will be sold to customers of the purchasing business. Thus, the cost of the general excise tax exacerbates the challenge to survive as a business in Hawaii.

Add to that the plethora of fees and user charges that businesses must pay and it is no wonder that the old time mom and pop operations throw up their hands and close down their businesses.

But why unlike some 45 other states must Hawaii take so much in taxes and fees? Unfortunately, state government seems to want to be everything to everyone, providing a hoard of services and programs that a majority of the population probably never use. State and county government in Hawaii could probably be more efficient in the delivery of those services. For example, for local politicians tout the importance of high technology to the future of the state, but government in Hawaii is probably the least technologically enabled of all the states. Different departments have different information technology systems so that one system cannot “talk” to another, so children in care of the state get the same immunization three or four times in the same year, and the bureau of conveyances has had to rely on private companies to meet its technological needs.

Finally, lawmakers like to believe that they are economic soothsayers, knowing what is best for Hawaii’s economy by providing tax incentives to attract certain types of activities. From high technology to ethanol production to the production of films and television series, lawmakers have provided a slew of tax breaks without any knowledge or understanding of the cost benefits. However, one thing for certain is that these tax incentives reduce the amount of money that lawmakers like to spend on programs and services. That, in turn, means that the rest of the taxpayers who are not so favored must continue to struggle with the heavy burden of taxes that puts many out of business.

While lawmakers like to argue that these favored industries stimulate the economy and create hundreds, if not thousands of jobs, taxpayers need to ask the rhetorical question: “At what price?” For example, advocates of the film tax credit repeat the mantra that this or that production would not have come to Hawaii to shoot their film had it not been for the tax credit. It would be interesting to hear what they would say when told that it was because of that tax credit that Hawaii had to keep the general excise tax rate at 4% which eventually drove that old family restaurant out of business?

Even nationally such targeted business tax credits have come under fire, with experts describing the mentality as one of entitlement, that fledgling new businesses deserve a tax break regardless of the cost to other taxpayers. Wouldn’t it be nice to have other taxpayers subsidize your business? For that is what those tax incentives amount to, nothing more than a taxpayer subsidy of someone else’s business.

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