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Finessing The Tax Increase In An Election Year

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By Lowell L. Kalapa
(Released on 8/8/10)

In the past few weeks we have looked at how federal officials, both elected and administrative, have handled or mishandled our taxpayer dollars and how they have used slight of hand to mask the excessive spending and the mounting debt of our nation while stealing workers’ contributions to the Social Security system.

Perhaps it is how the political system has evolved in our country, but it seems that there are parallel efforts right in our own back yard. Although local politicians don’t have the advantage of federal lawmakers and officials to merely print more money, local officials have devised ways to mask the true cost of operating state and local government in Hawaii.

With the campaign season in full swing and with more offices up for grabs as incumbents vie for higher office and others attempt to fill those seats vacated, the noise level will rise to a deafening din. On one hand, local politicians will proclaim that they brought home the “bacon” for their district with this or that capital improvement to the local ball field or the neighborhood school, others will delicately tiptoe around the issue of raising taxes in what is, as every one knows by now, a depressed economy. Although a major tax increase was not approved during this past session, there were many attempts to put forth such an increase in the net income tax by increasing the tax rates on high-income earners or an across-the-board tax rate increase. Pushed primarily by the public employee unions and to some degree social service agencies, the House stood fast against any such increase while there was a handful of dissident majority members in the Senate that pushed to put the issue of raising the general excise tax on the table.

Those groups that pushed for the general excise tax increase revealed their lack of understanding and appreciation for the impact of the general excise tax on the community when they issued a “white paper” entitled “Let’s End the Vicious Cycle – Support a Temporary Modest GET.” Citing a well-known economist in the state, the paper implied that the general excise tax could be a given a modest increase without devastating the community like the spending cuts the legislature was contemplating at the time.

The white paper claimed that a 1% increase in the general excise tax rate, with appropriate exemptions, could raise as much as $500 million in revenues to offset the $1.2 billion shortfall in the state budget. The paper reported that economists agree that the tax increase would have a “small” impact on consumption. The paper noted that this would be good for Hawaii’s businesses and ultimately help generate tax revenues for the state.

This effort to cajole the public, and especially lawmakers, into supporting a “modest” increase in the general excise tax is a reflection of the ignorance of how the general excise tax affects the cost of living and doing business in Hawaii. Proponents of the general excise tax rate increase would like to have the public believe “it’s only a penny.” After all, that’s what the proponents of financing a mass transit system for Honolulu told taxpayers five years ago. But as Honolulu taxpayers have learned, despite a very low inflation rate for the past six or seven years, the cost of everything consumers purchase in Honolulu has gone up dramatically. It’s not just the amount of tax tacked on to the receipt, but the cost of all goods and services has risen dramatically.

This is because the increased tax rate is applied at every step of a production chain of goods and services purchased in Hawaii or produced in Hawaii and sold on the global markets. No, it is not that the additional rate is imposed on the goods or services themselves as it moves through the production chain, but everything that contributes to the production of that good or service is affected by the increased rate. For example, a box of cereal brought into the state is stored in a wholesaler’s facility, the cost of the rent for that warehouse is imposed with a higher general excise tax rate, the fuel that is used to deliver that box of cereal to the warehouse and then from the warehouse to the retail store is imposed with the higher general excise tax.

Because a gross receipts tax is imposed on all transactions, allowing a lower rate to be imposed because the base is so much larger than a retail sales tax base, any increase in the rate will have a substantial impact on the cost of all goods and services. Thus, unlike what the “white paper” professes, a modest increase in the general excise tax rate will have a devastating effect on all taxpayers and the economy as a whole.

So voters should examine the record or promises of candidates this fall and see if they are just as eager to raise the general excise tax rate. Advocating such an increase will be one test of a candidate’s knowledge and experience.

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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