General Excise Tax at 6%?

by Tom Yamachika, President, Tax Foundation Hawaii

Our Legislature is in full swing now and is actively considering a number of bills that will increase our cost of living in Hawaii.

One bill tacks on 0.5% to our general excise tax to fund a long-term care program that would give qualifying seniors a benefit of $70 a day for a year to help a little with the crushing expenses of long-term care for our seniors.

Another bill, championed by our teachers’ union, jacks up our GET by a full percentage point to fund needed improvements in our education system.

Both bills are alive, well, and moving forward.

If you add these up – the 4% we currently pay, plus the 0.5% Honolulu now pays for rail and which other counties might adopt, plus 0.5% for long-term care, and 1% for improvements to education, we come up with 6%.

By the way, it won’t just be 6%. Even now, retailers in Honolulu add 4.712% and Neighbor Islanders add 4.166% to their invoices. This is legal and commonplace because the amount passed through on the invoice is also taxable—a tax on the tax collected! As an example, if I sell something for $100 and charge my customer $104.50 thinking the tax is simply 4.5%, my tax turns out to be 4.5% of $104.50, which is more than the tax I charged. If I instead charged 4.712%, 4.5% of $104.71 is $4.71, so I receive after taxes the $100 I wanted to charge in the first place. If the tax goes up to 6%, the amount I would need to charge is 6.382%. This 6.382% rate is a more than 35% increase in Honolulu, and could be more than 50% increase in other counties (from 4.166% to 6.382%).

That 6% would apply to pretty much everything because our GET is so broad. As we testified before the Senate, the GET “is perhaps the worst tax to increase because of its broad-based application.  Increases in the cost of living, as well as the cost of doing business in the state will drive more and more businesses out of operation and with them the jobs Hawaii’s people need.  …[T] he cost of food, shelter, clothing, transportation and every other essential household item will increase making it harder for all families, including their own, to survive. …Not only will the general excise tax increase the cost of doing business, but it will affect the cost of all other non-food purchases, be it clothes, textbooks for university students, rent for those people who don’t own their shelter which are generally the poor and middle class, the price at the pump for gasoline – everything right down the line.”

Some alert readers might be thinking, “Hold on there. No GET is imposed when a university sells textbooks to students. The university is a tax exempt organization, dummy!” But wait! The university is indeed exempt when it sells textbooks to students, but it has to buy the books from somewhere. And when it does, the GET rate that must be paid is not the 0.5% wholesale rate; it is the retail rate of 4 or 4.5% now. Any increased GET will indeed go into the cost of those textbooks. The same is true of drugs you buy at the hospital. The hospital is tax-exempt, but the drug supplier isn’t.

As we can see, the GET is far-reaching and is baked into the cost of necessities. We have held off on raising the tax rate for a number of years, perhaps because we didn’t think it would be right to put such a major shock on our economy. Will this be the year that changes? Politicians beware—voters will be concerned about this, and will have an opportunity during this election season to react accordingly.