GE Tax Hike a Lose-Lose Proposition

From Grassroot Institute, March 8, 2019

The Hawaii Legislature seems to have learned the wrong lesson from last year’s constitutional amendment debate.

The Grassroot Institute of Hawaii was among those who objected to the proposed amendment to the state Constitution that would have allowed the Legislature to impose a tax on “investment real property” for the purpose of funding education. The vague wording of the ballot initiative provoked a legal challenge from the counties, and the Hawaii Supreme Court invalidated the ballot measure.

Ironically, the wording was the least of the problems with a tax plan that was ill-conceived, unlikely to achieve its goals, and detrimental to the state economy.

What our legislators learned was that wording of constitutional amendments should be clearer. That’s fine, as far as it goes. But now they are compounding last year’s mistake with a new bill that has all the same problems, plus a few more.

SB1474 would raise the general excise tax to 4.5 percent, with that extra half-point increase intended to provide a dedicated source of funding for the state Department of Education and the University of Hawaii. Among the fundamental problems that still exist:

• We are told this increase will translate to a raise for teachers. However, there is nothing in the law to support that belief. This is simply more money for the DOE to spend however it wishes.

• It is unclear how much more money the DOE would get from the tax hike. According to the state Department of Budget and Finance, combined general fund allocations for the DOE and UH in fiscal 2019 totaled $2.1 billion. But the proposed increase would net about $368 million at most. So would this money supplement the DOE budget? Or would that budget stay roughly the same, with the new tax providing more general fund revenues for lawmakers to spend?

• The use of a “dedicated fund” allows special interest groups to lobby for tax streams directed specifically to them. We’ve already been burned by a GET surcharge “dedicated” to the Honolulu rail. It’s not an example that fills one with confidence. What will the GET look like if an increase for education is added, then maybe another for homelessness, and another for kupuna care, or early childhood interventions, and so on? How long before the excise tax is at 8, 9 or 10 percent?

• The GET is not a simple sales tax. Instead, it is passed along and applies to nearly all goods and services. At the register, a 4 percent excise tax is passed on as a 4.16 percent tax to the consumer. In Honolulu, where residents already pay an additional half-percent surcharge for rail, an additional half-percent surcharge would increase the pass-on rate to 5.263 percent.

• Hawaii’s regressive general excise tax has been singled out as one of the most unfair tax schemes in the country, taking a larger proportion of income from the state’s poorest residents than anyone else. At least with the failed constitutional amendment we were assured it would affect only the very rich (not that we believed this was true). But this new proposed tax hike would actually be hardest on the very poor. At the same time, no one would be spared; everyone, including teachers, would have to spend a higher proportion of their income on taxes. It is illogical to promise teachers a raise, then make it more expensive for them to live here. In other words, this bill is a lose-lose proposition. There’s no guarantee it will work to improve education. And it would hurt teachers.

So what’s the solution? How can we address issues in public education without increasing Hawaii’s cost of living? Maybe the solution lies in learning how to do things better.

Grassroot Institute of Hawaii Vice President Joe Kent recently appeared on KHON-TV to discuss this bill. Instead of a tax hike, Joe recommended we take a hard look at the DOE’s current spending, to make sure our public school students are getting the best education they can for the taxpayer dollars already being spent.

Given that the DOE already receives a significant chunk of the state budget, a review of its current spending would be an excellent course of action to take before asking residents to again open their wallets and hand over even more of their hard-earned cash.

E hana kākou! (Let's work together!)

Keli'i Akina, Ph.D.
President/CEO