Hawaii's sales levy has a burdensome "pyramiding effect," a policy institute says

SA: Hawaii's statewide 4 percent GET, paired with an average 0.35 percent local tax rate, is the 46th lowest combined rate among the 50 states and the District of Columbia, the Tax Foundation officials said in the semi­annual report.

However, unlike most other states that charge a sales tax only when a consumer purchases merchandise from a retailer, Hawaii imposes the GET on a seller every time a good or service changes hands throughout the supply chain.

"Experts generally agree that Hawaii has the broadest sales tax in the United states, taxing many products multiple times," according to the report from the Washington, D.C.-based policy institute.

The resulting "pyramiding effect" adds to the cost of goods and services in Hawaii in a way that lacks transparency, said Scott Drenkard, a Tax Foundation economist.

"It's a process that consumers don't see. The GET is baked into the price of the product. It's better to have transparency so people know what they're paying in taxes," Drenkard said.

The Tax Foundation report cited a study by the publication State Tax Notes that estimated Hawaii's GET ultimately taxes 99.21 percent of the state's personal income. That compares with the national median where the sales tax based applies to 34.46 percent of personal income, according to the report.

"The general excise tax has the perverse outcome of forcing businesses to vertically integrate in a way that doesn't make sense," Drenkard said. "It's a disincentive to trading with other companies."

read ... GE Tax

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State and Local Sales Tax Rates Midyear 2013

by Scott Drenkard, The Tax Foundation, August 28, 2013

Introduction

Retail sales taxes are one of the more transparent ways to collect tax revenue. While graduated income tax rates and brackets are complex and confusing to many taxpayers, the sales tax is easier to understand: people can reach into their pocket and see the rate printed on a receipt.

Less known, however, are the local sales taxes collected in 38 states. These rates can be substantial, so a state with a moderate statewide sales tax rate could actually have a very high combined state-local rate compared to other states. This report provides a population-weighted average of local sales taxes in an attempt to give a sense of the statutory local rate for each state. See Table 1 at the end of this Fiscal Fact for the full state-by-state listing of state and local sales tax rates.

Combined Rates

Five states do not have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of these, Alaska and Montana allow localities to charge local sales taxes.[1]

In Alaska, high local rates in populous places like Juneau and Kodiak (5 and 6 percent, respectively) certainly increase the average local rate, but not enough to give Alaskans a higher combined rate than any state that charges a statewide rate.

The five states with the highest average combined rates are Tennessee (9.44 percent), Arkansas (9.18 percent), Louisiana (8.89 percent), Washington (8.87 percent), and Oklahoma (8.72 percent).

The five states with the lowest average combined rates are Alaska (1.69 percent), Hawaii (4.35 percent), Maine (5 percent), and Wisconsin (5.43 percent), Wyoming (5.50 percent).

The highest total sales tax rate in the United States is in Tuba City, Arizona, which has a combined rate of 12.725 percent. This rate is composed of a 5.6 percent state tax, a 1.125 percent Coconino county tax, and an additional 6 percent tribal tax levied by the To'Nanees'Dizi local government.[2]

State Rates

California, which raised its sales and income taxes through the initiative process in November of 2012, has the highest state-level rate at 7.5 percent.[3] Five states tie for the second-highest statewide rate with 7 percent each: Indiana, Mississippi, New Jersey, Rhode Island, and Tennessee.

The lowest non-zero statewide sales tax is in Colorado, with a rate of 2.9 percent. Seven states follow with 4 percent: Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota, and Wyoming.[4]

As a result of new transportation legislation, Virginia’s statewide sales tax rate increased on July 1, 2013 from 5 percent to 5.3 percent. Localities in Northern Virginia and Hampton Roads charge a 6 percent combined rate.[5] Also effective July 1, 2013, Arkansas raised its state sales tax rate from 6 percent to 6.5 percent.[6]

Arizona, by contrast, cut its rate from 6.5 percent to 5.5 percent as a temporary sales tax increase expired,[7] and Kansas moderately cut its statewide sales tax rate from 6.3 percent to 6.15 percent.[8]

The District of Columbia is scheduled to lower its sales tax from 6 percent to 5.75 percent on October 1, 2013.[9]

Local Rates

The five states with the highest average local sales tax rates are Louisiana (4.89 percent), Colorado (4.49 percent), Alabama (4.48 percent), New York (4.48 percent), and Oklahoma (4.22 percent).

Mississippi has the lowest non-zero average local rate of 0.004 percent, attributable to the state's only local sales tax: a 0.25 percent sales tax in Tupelo, the birthplace of Elvis Presley, with a current population of 35,490.[10]

The highest local rates are in Homer and Seldovia, Alaska, and Snowmass Village, Colorado (7.5 percent), Tuba City, Arizona (7.125 percent), and Seward and Wrangell, Alaska; Brookwood, Alabama; and Lake Providence, Louisiana (7 percent).

Salem County, New Jersey is exempt from collecting the 7 percent statewide sales tax and instead collects a 3.5 percent local tax. We represent this anomaly as a negative 0.03 percent statewide average local rate (adjusting for population as described in the methodology section below), and the combined rate reflects this subtraction. Despite the slightly favorable impact on the overall rate, this lower rate represents an implicit acknowledgement by New Jersey officials that their 7 percent statewide rate is uncompetitive with neighboring Delaware, which has no sales tax.

The Role of Competition in Setting Sales Tax Rates

Avoidance of sales tax is most likely to occur in areas where there is a significant difference between two jurisdictions' sales tax rates. Research indicates that consumers can and do leave high-tax areas to make major purchases in low-tax areas, such as from cities to suburbs.[11] For example, strong evidence exists that Chicago-area consumers make major purchases in surrounding suburbs or online to avoid Chicago's 9.25 percent sales tax rate.[12]

At the statewide level, businesses sometimes locate just outside the borders of high sales tax areas to avoid being subjected to their rates. The state of Delaware actually uses its state border welcome sign to remind motorists that Delaware is the "Home of Tax-Free Shopping."[13] State and local governments should be cautious about raising rates too high relative to their neighbors because doing so will amount to less revenue than expected, or in extreme cases, revenue losses despite the higher tax rate.

Sales Tax Bases: The Other Half of the Equation

This report ranks states and cities based on tax rates and does not account for differences in tax bases (e.g., the structure of sales taxes, defining what is taxable and non-taxable). States can vary greatly in this regard. For instance, most states exempt groceries from the sales tax, others tax groceries at a limited rate, and still others tax groceries at the same rate as all other products.[14]Some states exempt clothing or tax it at a reduced rate.[15]

The taxation of services and business-to-business transactions also vary widely by state.[16]Experts generally agree that Hawaii has the broadest sales tax in the United States, taxing many products multiple times and, by one estimate, ultimately taxing 99.21 percent of the state's personal income.[17] This base is far wider than the national median, where the sales tax base applies to 34.46 percent of personal income.[18]

Methodology

Sales Tax Clearinghouse publishes quarterly sales tax data at the state, county, and city level by ZIP code. We weight these numbers according to Census 2010 population figures in an attempt to give a sense of the prevalence of sales tax rates in a particular state.

It is worth noting that population numbers are only published at the ZIP code level every ten years by the Census Bureau, so the methodology in this version is slightly different than editions of this calculation published before July 1, 2011.

It should also be noted that while the Census Bureau reports population data using a five-digit identifier that looks much like a ZIP code; this is actually what is called a ZIP Code Tabulation Area (ZCTA), which attempts to create a geographical area associated with a given ZIP code. This is done because a surprisingly large number of ZIP codes do not actually have any residents. For example, the National Press Building in Washington, D.C., where the Tax Foundation is located, has its own ZIP code solely for postal reasons.

For our purposes, ZIP codes that do not have a corresponding ZCTA population figure are omitted from calculations. These omissions result in some amount of inexactitude but on the whole should not have a palpable effect on resultant averages, because proximate ZIP code areas which do have a ZCTA population number assigned to them capture the tax rate of whatever jurisdiction the area is located in.

Conclusion

Of course, sales taxes are just one part of an overall tax structure and should be considered in context. For example, Washington State has high sales taxes but no income tax; Oregon has no sales tax but high income taxes. While many factors influence business location and investment decisions, sales taxes are something within policymakers' control that can have immediate impacts.

Table 1. State and Local Sales Tax Rates, As of January 1, 2013

(a) City, county, and municipal rates vary. These rates are weighted by population to compute an average local tax rate.
(b) Three states collect a separate, uniform "local" add-on sales tax: California (1%), Utah (1.25%), Virginia (1%). We include these in their state sales tax.
(c) The sales taxes in Hawaii, New Mexico, and South Dakota have broad bases that include many services, so their rates are not strictly comparable to other states.
(d) Due to data limitations, table does not include sales taxes in local resort areas in Montana.
(e) Some counties in New Jersey are not subject to the statewide sales tax rate and collect a local rate of 3.5%. Their average local score is represented as a negative.

Sources: Sales Tax Clearinghouse, Tax Foundation calculations, state revenue department websites

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H247: Hawaii: Second lowest state-local sales tax

SA: General excise tax called 'broadest' -- Hawaii's sales levy has a burdensome "pyramiding effect," a policy institute says