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Tax Experts Favor System With Broad Base, Low Rates

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By Lowell L. Kalapa
(Released on 10/30/11)

Tax experts, public finance gurus, and public administrators preach that a good tax system is one that has a broad base that will allow a low rate to be imposed.

It is not so much the idea of a low rate of tax, as much as that it applies to all taxpayers who earn or spend that income or own that asset. Such is the case of Hawaii’s general excise tax where the statewide rate is 4%, one of the lowest in the country. In this case, the tax applies to anyone who wants to do business in the state by selling goods or services. For those who are outside the state and sell goods and services to consumers in the state, that sale is subject to the complementary use tax and is imposed on the consumer when the goods or services are received.

Because there are so very few transactions that are exempt from the general excise tax, the base, or the amount against which the tax rate is applied, is broad or large. In fact, as also noted earlier, because the tax is imposed at all stages, the tax base is actually larger than the total wealth of the state as measured by personal income. However, where the general excise tax would exacerbate the cost of the goods or services, exemptions have been provided. But in their search for money to help fill in budget holes, the legislature did suspend several of those exemptions for the next two years. Time will only tell if the suspension of those exemptions will have a negative impact on the state’s economic recovery.

For example, stevedoring activities, that is the loading and unloading of cargo that comes over the islands’ docks or through the state’s airports, are now being taxed at the full 4% retail rate. There is, no doubt, that this added cost will show up on grocery store shelves in the form of higher prices and conversely, it will show up in the prices charged for goods sold on the world market.

Another exemption that was suspended is the deduction contractors take when a portion of the contract amount is paid to subcontractors working on the same project. In the absence of the exemption, the contractor will pay the 4% on the full amount received from the client and when the portion owed the subcontractor is turned over, the subcontractor will pay another 4% tax on the amount he or she receives. This, no doubt, will drive the cost of construction up at a time when the industry is hurting for work. Those who were planning on building may just end up waiting until the two-year period expires.

The broad base discussion is not only limited to the general excise tax as a study commissioned in Honolulu is looking at the possibility of broadening the tax base of the real property tax by eliminating many outdated exemptions. In many cases these exemptions were carried over from a time when the state legislature determined the policies governing the real property tax.

Probably the most controversial proposal is to eliminate the homeowner’s exemption. Commission members noted that the exemption discriminates against those whose shelter is rented and not owned. Since the home exemption is extended only to owners of residential property who actually occupy that property, the renter gets no such break as their landlords who own and rent the properties are not afforded a similar exemption even though the property is providing shelter.

Similarly, commissioners are considering eliminating other exemptions for homeowners where the homeowners are disabled or are veterans, noting that a disability or the fact that one was a veteran does not necessarily mean that particular homeowner is in need of additional relief from their real property tax. In this case, the amount of the exemption is also relatively small having not been increased in over thirty years and takes less than $100 off the these homeowners’ tax bills.

It is not that the commission has no compassion for homeowners, but instead believes that tax relief should be needs based. To that end, they recognize that Honolulu’s real property tax laws already provide tax relief to those low-income families who truly cannot afford to pay their share of the county’s costs. This relief comes in the form of the circuit breaker tax credit that takes into consideration the homeowner’s income.

The circuit breaker credit sets a percentage of homeowner’s income and should the tax bill exceed that percentage, the homeowner is excused from paying any amount that goes over that threshold. If county officials adopt this philosophy, they would be returning the real property to a broader base that could provide the opportunity to lower the rate for all real property taxpayers.

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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