Instead of Exempting Wholesaling from GET, Reduce Rate on Business Inputs

by Lowell L. Kalapa, Tax Foundation of Hawaii

The recently released report of the Tax Review Commission balks at the criticism that the repeal of the lesser one-half percent general excise tax rate on wholesale sales was uninformed and instead criticized the opposition to the repeal of the lesser rate as merely perpetuating an inefficiency in the name of gathering information about transaction activity.

What the Commission’s report failed to note is that the repeal of the lesser half percent rate was made as a parry to the recommendation of their consultant that the overall rate imposed on all retail activities be increased to generate more revenues for the state. The cynical eye would call that suggestion the proverbial “sop to Cerberus” - a throw away, if you will, to keep the angry mob of taxpayers at bay. The push back by the Commission to the criticism also is a reflection of the lack of familiarity by both the Commission and its consultants with the importance of being able to monitor and enforce compliance with the tax.

In fact, anyone who has attempted to figure out just how much activity is occurring in the economy will tell you of the frustration of undertaking that evaluation when there are numerous exemptions from the general excise tax and other taxes which prevent one from truly evaluating the impact of the exempt transactions. Saying that the imposition of the half percent rate on transactions of goods and services perpetuates an inefficiency is indicative that the person has never had to enforce compliance with the law.

Continuing to impose the tax allows administrators to track how the goods or services will subsequently be handled. This is a major reason why years ago when lawmakers were entreated to exempt the purchases of capital goods from the 4% general excise tax as capital goods are essential to the production of income and the creation of jobs, they chose instead to grant an income tax credit of 4% as it allowed auditors to check and see if that purchase of capital goods was, in fact, placed into service for the purpose of producing income or if it was merely consumed with no intention that its use be for the production of income or the creation of a job. Critical to auditing the purchase of capital goods was that it had to be “placed in service” in order for the taxpayer to qualify for the refund of the 4% general excise tax amount through the capital goods excise tax credit.

If the Commission and their consultants truly wanted to alleviate the additional burden of a higher retail rate of the general excise tax as it affects businesses, then they should have suggested that purchases made by businesses for use in the production of income should be taxed at the lesser half percent rate or in the alternative to treat those purchases like the capital goods excise tax credit and allow businesses to claim a refund of the general excise tax imposed on purchases of goods and services used in the production of income. This treatment would help to alleviate the pyramiding of the general excise tax as it affects the cost of doing business by raising overhead costs by the cost of the tax.

That being said, the push back against the criticism that the wholesale rate be eliminated truly underestimates the understanding of the business community of how insidious the tax is when it comes to surviving in Hawaii, at least for most business people. Then again, there are those who think tax incentives, like those for the investment in high technology research and development, are more important. But then again, those businesses were probably making off like bandits with the windfall of tax credits to cover their losses created by the general excise tax.

Anyone who has had to comply with the general excise tax knows how the tax can decimate whatever kind of profit a business may have anticipated. It is paid regardless of whether or not a business makes a profit and is imposed even if the business sells the services or products below cost. It is imposed without any allowance for costs incurred in bringing the goods or services to the consumer. That goes for the cost of the rent of the space where the consumer purchases the product and also on the cost of transporting the goods or services to the storefront or to the consumer.

Unfortunately, this latest Tax Review Commission muddied the understanding of the general excise tax even more rather than bringing clarity to what is a simple, yet complex, tax in its drive to merely find ways to raise more tax revenue.

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