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Opening Pandora’s Box Of Hidden Tax Increases

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By Lowell L. Kalapa
(Released on 5/8/11)

As the legislative session wound down last week, it became very apparent that there was no plan to get state government out of the deep financial hole in which lawmakers found it at the beginning of the session as there were few alternatives left on the table to balance the state budget.

Seniors were successful in beating back the administration’s attempt to tax pension income while the fear of adopting a broad across-the-board increase in the general excise tax rate reinforced the House position against such an increase, and the tenuous situation of the visitor industry apparently was enough to convince lawmakers that an increase in alcohol taxes would be fruitless if the visitor market continues to struggle and it certainly wasn’t worth the political heat.

So at the end of the session there were but few revenue enhancements left on the table, but what few there were will have a substantial impact on all taxpayers in Hawaii. So while seniors may be beaming with pride that they were able to kill the proposal to tax their pensions, they, along with all other consumers, will end up paying dearly to help balance the state’s two-year spending plan.

By far the largest and the most misunderstood increase will come in the form of the suspension of several general excise tax provisions mistakenly called exemptions. Almost all of these so-called “exemptions,” some of which were enacted over a half century ago, recognize the unique structure of the general excise tax and the fact that it may be imposed a number of times on the same transaction as goods or services move through the production chain. Then again, there is the tax as it is imposed at the front end of the chain as goods arrive in Hawaii.

While the measure addresses some of the pyramiding of stevedoring activities, such as services between related companies, nearly all of the goods coming over the state’s docks or through the state’s airports had been previously exempt from the 4% tax on the loading and unloading of those goods in recognition that the cost of the tax would be imbedded in those goods. They will now be taxed at the full 4% rate. This is one of the “special interests” that lawmakers have singled out to be suspended. That additional cost will work its way into the bag of rice or loaf of bread families need as food to put on the table. For manufacturers in Hawaii, that cost will be added to every bottle of jams and jellies or box of cookies shipped out of the state, putting Hawaii products at an even greater price disadvantage.

For Neighbor Island farmers having to ship their products to sell to the larger population in Honolulu, the cost of their products will also rise. It will also put local providers of products sold to interstate carriers like, cruise ships and airlines, at a price disadvantage as the 4% tax will be imposed on those sales even though the consumption of those goods will be outside the state.

Then there are those exemptions that are being suspended which challenge good tax policy, if not good common sense, and that is the suspension that will allow the general excise tax to be imposed on amounts that are taxed by other chapters of the law. This includes taxing the amount represented by liquor taxes on alcoholic beverages and on tobacco and cigarettes or on the fuel tax imposed by the state or county government. So you thought the price at the pump was high, just wait until the 4% tax is slapped on the seventeen cents of state fuel taxes.

The proposal also suspends the exemption of sales of products such as liquor and tobacco and other tangible personal property to the federal government and its instrumentalities, like credit unions. Sales to the federal government are preempted by superior law, in this case federal law, as state and localities cannot tax the federal government. Lawmakers may think that this a state exemption so that they can do as they please, but wait until the first business selling tangible personal property to the federal government tries to collect the general excise tax from the federal government. Another is the exemption for telecommunication home service providers where federal law specifically prohibits state and local governments from charging for those roaming charges.

While these latter situations may be grounds for litigation, other “exemptions” will merely add to the cost of living and doing business in Hawaii for the next two years, and they just may send the state’s economy into a tailspin.

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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