By Tom Yamachika, President
(December 28, 2014)
Yet another 50-state study has come out, this one from the Small Business and Entrepreneurship Council of Washington, DC looking to compare the states on “policy measures and costs impacting small business and entrepreneurship.” In this study Hawaii ranks 47th, behind only California, New Jersey, and New York, citing the second highest personal income tax rate and the highest consumption-based taxes. (The states that came out best in this study were South Dakota, Nevada, Texas, Wyoming, and Florida, in that order.)
The Council’s comment on consumption-based taxes was interesting because other studies looked at Hawaii’s GET, saw that the rate was pretty low compared with that of other states’ sales taxes, and thought it wasn’t so bad. This particular study doesn’t measure rates; instead, the Council compared the amount of state and local sales, gross receipts and excise tax dollars paid with the amount of personal income earned, and found that the resulting proportion was highest among the fifty states.
Why this choice of measurement? The study doesn’t tell us explicitly, but we have a pretty good idea. Sales and excise taxes are paid to the government by businesses, but businesses pass on the tax to people through higher prices for the goods and services they offer. People generally are end users and, therefore, lack the ability to pass the tax to anyone else. They are the ones left holding the bag. So if you want a measure of the real impact of these kinds of taxes, you compare them against the income of the people who ultimately have to pay them.
When considered in that light, the ranking given to Hawaii as last on the list might not be entirely fair. We, in Hawaii, are heavily dependent on tourism, which means that our economy sees a lot of end users who come and go. It has been estimated that a third of the GET is borne by tourists when they spend money here on such things as food, lodging, tour activities, and souvenirs for the folks back home. We also impose a hefty transient accommodations tax on temporary lodging, most of which is most likely paid by people who don’t live here.
Even if the proportion in the Council’s study is discounted by a third to reflect tax borne by tourists, the result is 39th best in the nation as opposed to dead last. So, regardless of who pays the taxes, it’s still clear that our state hauls in a lot of money in excise taxes in proportion to the amount earned by its populace.
When the legislature opens for business early next year, there doubtless will be some folks who will want to increase our GET rate. The public employee unions, for example, have pushed for this in the past noting that the rate itself is low when compared to the sales tax rates around the country. That, however, oversimplifies the other side of the argument. Our nominal rate is low, but our tax base is the broadest in the country. We don’t just tax tangible personal property and a smattering of services like most states do. We tax property, services, interest, royalties, and almost everything else with a dollar sign on it, and we tax them whether or not the customer is a business or end user. So, while taxes in other states are designed to be applied only once in the economic chain between supply and demand, ours applies early and often.
Instead of blindly accepting the argument that the GET rate is low, our lawmakers should carefully consider how our taxes work and upon whom they ultimately fall. We should also be thinking very hard about the size of our government and whether it is the right size for our state and its needs.