Everywhere...and Perversely Fair

by Tom Yamachika, President, Tax Foundation of Hawaii

Today we are talking about our General Excise Tax (GET). Our Hawaii Supreme Court said that it reaches "virtually every economic activity imaginable," much more so than in any other state. But is that a good thing?

From our perspective as taxpayers, the GET does have a few good points. The nominal rate, which you see on your receipt at the grocery store, is less than 5%. That looks low, especially when some Mainland states charge sales taxes of 6%, 7%, 8%, or even higher. But the problem with Mainland sales taxes is that they only hit certain things, such as tangible goods. Our GET taxes all forms of business income, including services, interest, contracting, and royalties. If you receive money for NOT doing work (a "covenant not to compete," for example), that's taxable as well. In that respect the GET is perversely fair. Its bite is not restricted to any particular industry, and, therefore, it seems to be an efficient system for spreading the cost of government among the taxpayers.

From our perspective, another desirable feature of the GET is that tourists also pay it and, therefore, contribute toward the cost of government. It's been estimated that about a third of this tax is "exported" in this fashion. Fine. The more they contribute, the less we have to pay.

People sometimes complain that the GET is "regressive," which means people have to pay the tax regardless of their ability to pay. Regressive taxes hurt the poor more than the wealthy because they represent a more significant portion of a poor person's income. This is no doubt true, and the same is said of all sales taxes and gross receipts taxes throughout the country. The answer is that you need to judge the tax system by looking at all of the taxes, not just one. Net income taxes, with their graduated rates, are supposed to supply the progressivity in our system (well, at least they could if our brackets get adjusted). So, yes, the GET is regressive, but that doesn’t necessarily make it bad.

When sales taxes hit they only hit once. They typically apply only on retail sales to end users. Our GET applies to transactions between businesses as well. That feature results in an increase in the cost of goods and services because businesses now have to bake the tax into their prices the same way they need to bake in all their other costs like salaries, rent, and power. So GET adds to our cost of living or to our cost of doing business. In that respect it's much sneakier than a retail sales tax. You see a sales tax once on your retail invoices, while our GET can be imposed many times during the economic chain of events that ends with a retail sale. In that respect there are winners and losers, as the tax favors the big business that handles more links in the supply chain itself instead of relying on others (who then get taxed). There has been lots of progress in this regard; beginning with relief for subleases in 1997 and then extending to wholesale services in 2000 and 2001, the tax code has done a much better job of confining the GET’s retail rate to sales to end users.

This goes to show that the GET, given the job it needs to do, has real benefits. It spreads the cost of government in a perversely fair manner that helps keep the rate down. A low tax rate is good in economic terms because generally you want your economy to be driven by market forces and not by tax. With tax a reality of life, we need to keep it as low as we can. So, despite how disgusted we may be with the GET at the moment, we need to keep in mind that it has some merits…and we shouldn’t expect it to be repealed any time soon.

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