Addressing the Tax Crisis in Health Care

by Tom Yamachika, President Tax Foundation Hawaii

It’s been obvious for some time that there is a physician crisis here in Hawaii.  Simply put, we don’t have enough doctors here.  The ones we do have are moving away, and most of the medical school graduates are opting to stay away from here. 

According to the Hawaii Physician Shortage Crisis Task Force, taxes are one of the reason for the shortage.  A petition attributed to the task force on change.org argues that Hawaii’s General Excise Tax (GET) taxes patients for getting sick or injured, and it penalizes physicians who serve Medicare, Medicaid, and TRICARE populations who are already accepting substantially lower reimbursement rates even before the GET is applied.

Health insurance and the GET don’t mix, that’s for sure.  According to the petition, Medicare doesn’t pay GET, and prevents physicians from passing it on to the patient.  The same is true for Medicaid/QUEST and TRICARE (the health care system for the federal uniformed services).  Some private insurers also don’t pay for GET, requiring medical care providers to bill patients for the tax separately.  No other state taxes health care in this way, the petition says. 

So, health care providers are caught between a rock and a hard place.  They are required to pay a tax that most states don’t impose on health care, and they can’t get economic relief by passing on the tax like most businesses do.

In the late 1970’s, insurance agents apparently had the same problem.  A study undertaken by the Legislative Reference Bureau at the time found that  there were three types of commissioned agents who were prevented from passing on the cost of the general excise tax to their customers. Taxi drivers were prohibited by county ordinance, travel agents were prohibited by federal law, and insurance agents were prohibited by state law.  State legislators weren’t willing to do anything about the taxi drivers and the travel agents, apparently because the problem was created by another government entity; but they figured they needed to give some relief to the insurance agents. 

Act 144 of 1978 recites, “The legislature finds that under present law insurance agents are prohibited from passing on the excise tax to their customers, while the other occupations which operate on a commission basis are allowed to pass on the tax. The direct result of this differential statutory treatment is that those occupations which can and do pass on the excise tax are subject to an actual burden of .15 per cent while insurance agents are subject to an actual tax burden of either 2 or 4 per cent.”  That law made insurance agents’ commissions subject to GET at 0.15%.  That rate is still in effect today, and the commissions are, moreover, exempt from the 0.5% county surcharge that is slapped on top of all 4% GET levies.

Arguably, doctors and medical practices are worse off than the insurance agents.  Commission agents are taxed only on their commissions, and not on every dollar that comes in the door.  Doctors and other service providers, however, are taxed on everything they earn from providing their services.  Hospitals found a way out of the problem by structuring as charitable organizations, and then qualifying for tax-exempt organization treatment in the GET section applicable to charities.  But individual doctors and small medical clinics can’t do that.  (And one recent hospital that didn’t structure itself in that way found itself in bankruptcy court.  Twice.)

Should medical services be given the 0.15% special rate like insurance agents are?  There does seem to be precedent for that solution.  Some lawmakers will think of doctors as wealthy fat cats who are there to be fleeced, not pitied.  I wonder what they are going to say when THEY need doctors and can’t find them here.