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General Excise Tax Relief Needed By Hawaii’s Families

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By Lowell L. Kalapa

(Released on 8/17/08)

Last week we noted how the general excise tax has a characteristic similar to a retail sales tax in that since it is imposed on transactions or sales, the tax tends to be regressive, taking more out of a low-income family’s budget than the percentage it takes out of a more affluent family’s budget.

However, the general excise tax differs from a sales tax in that it is imposed on a much broader base of transactions and therefore becomes a part of subsequent transactions. As a result, the cost of the tax becomes embedded in the shelf price of the goods in each subsequent transaction. The most noticeable difference between Hawaii’s general excise tax and the retail sales tax is that it is imposed on services.

It is also imposed on goods and services that are purchased by businesses from another business for consumption by the purchasing business. These transactions are usually exempt in states where there is a retail sales tax. If a business is to keep its doors open, it must recover the cost of all the goods and services it purchases for its own use which, of course, is increased by the amount of the general excise imposed on those goods and services. Each business in this supply chain is also paying the general excise tax on its purchases, thus increasing the effective rate of the general excise tax. This higher aggregated tax cost translates into a higher cost of the shelf price when the goods or services produced by the seller are subsequently sold to the customer.

As the cost of goods and services rise as a result of other factors such as energy, transportation, water, and fertilizer to name but a few of the components affecting the cost of goods and services, the amount of the tax will take a larger share of the family’s budget all the while purchasing fewer and fewer items. Those who are affected the most are the poor and those in lower-income brackets as they do not have the discretionary income to accommodate the rising costs as well as the growing amount of the general excise tax on those purchases.

In that sense, the general excise tax is not kind to families, let alone the economy, as the cost of doing business is magnified by a tax that tends to pyramid. The higher the rate the more likely the general excise tax is to kill not only economic vibrancy, but the very families that lawmakers think they are saving with all sorts of programs paid by the receipts of the tax.

Thus, it is more imperative than ever that lawmakers consider tax relief across the board as Hawaii residents try to cope with the rising cost of living and doing business in Hawaii. Of course a tax cut means that lawmakers and administration officials would have to cut spending, something they find very hard to do as it seems like they have a difficult time setting priorities for the state’s resources, your tax dollar.

This was very apparent when one lawmaker responded to a question on why Hawaii had not explored alternatives to fossil fuel energy before now. The response was that there just wasn’t any money to undertake the search for alternative fuels until now. As a result, this past session lawmakers attempted to adopt a dedicated source of funding for a new energy security special fund that would be used, in part, to fund a renewable energy facilitator and an energy research coordinator by hiking the nickel per barrel environmental response fee. While the hike in the tax failed to gain approval, lawmakers did manage to create the new special fund and the renewable energy facilitator position.

While the environmental response tax may not have been increased this year, just the creation of the new responsibilities of the environmental response tax guarantees that the rate will have to be increased in the future. If indeed the project to search for renewable energy sources for the state is of such a high priority, then funding should be with general funds of the state, as alternate sources of energy will benefit the public as a whole.

But this entails finding programs and projects for which general fund financing will have to be reduced or eliminated in order to fund this new initiative and this is something that lawmakers find hard to do. As a result, we have resorted to raising earmarked fees or taxes which are less visible to taxpayers, but in the end, as we all know, only people pay taxes as the cost of the fee or tax will be passed on to taxpayers/consumers.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

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