Internet tax ban could offer relief for Hawaii businesses

by Josh Peterson, Watchdog.org, December 14, 2015 

HONOLULU — Hawaii’s tax on Internet access, as well as those of six other states and their localities, will end by mid-year of 2020 if a congressional plan to permanently ban taxes on Internet access makes its way to the president’s desk.

Favored by telcos and free market groups as a pro-consumer move, the Permanent Internet Tax Freedom Act (PITFA), would solidify a temporary moratorium already in place in many states across the nation since 1998.

The House of Representatives passed the ban, attached to the Trade Facilitation and Trade Enforcement Act of 2015, on Friday. The Senate is expected to pass the bill, which would also ban “multiple and discriminatory taxes on electronic commerce,” on Monday before sending it on to President Barack Obama.

Whereas most states have had a version of the temporary ban in place since its inception, Internet access taxes for seven states and their localities — Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin — were grandfathered in under the 1998 moratorium, and continue to collect about $500 million every year in Internet access taxes to pay for public services.

But according to Mallory C. Fujitani, public information officer for the State of Hawaii’s Department of Taxation, the tax agency doesn’t have an estimate of how much in tax dollars the state raises every year through internet access taxes.

“Generally, the companies that provide internet access would be subject to Hawaii’s Public Service Company tax, which is paid in lieu of, among other taxes, our general excise and real property tax and which could be preempted under the federal ban,“ Fujitani told Watchdog.org.

Hawaii’s public service company tax on telecommunications services is 5.885 percent.

Fujitani said that the agency has not done a full legal review and analysis on this issue, but suggested that Hawaii’s general excise tax might be considered an exception to the ban and “possibly could survive a preemption challenge” by the federal government.

“However, to be safe, we would prefer to have the grandfather clause remain in place,” said Fujitani.

A 2014 study by the progressive Center on Budget and Policy Priorities, which opposes the permanent ban, estimated that Hawaii’s taxpayers would save about $20 million in tax revenue when the tax is finally phased out, basing its estimate on figures from 2012.

Based on the CBPP’s own estimates, taxpayers living in states already under the moratorium collectively save $6.5 billion in taxes every year.

In Hawaii, for example, the Internet access tax only applies to businesses. And as Speaker of the House Paul Ryan (R-Wisc.) recently noted, the federal tax rate on the nation’s small businesses is already 44.6 percent.

The ban also comes as Hawaii’s teacher’s union is lobbying for to raise the general excise tax on local businesses from 4 percent to 5 percent in order to pay for more funding. On Oahu, the general excise tax is 4.5 percent.

A survey conducted on December 11, 2015 by the Honolulu Star Advertiser found that 82 percent of readers polled opposed the tax hike, saying the funds wouldn’t go to where they were needed.

In June 2015, CNBC ranked Hawaii as the worst state in the union for business.

Dr. Keli`i Akina, president and CEO of the Grassroot Institute of Hawaii, an independent free market oriented think tank, told Watchdog.org that the $20 million that the state collects in Internet access taxes every year creates ”yet another drag on the state’s economy, restricting opportunity, and deepening the digital divide.“

The digital divide is the gap between those who have access to modern communications technologies and those whose access is limited or restricted.

A 2013 study by the Pew Research Center for Internet, Science & Tech found, for example, that for the approximately 36 million U.S. adults 18 and older that were non-Internet users, 6.8 million thought that it was too expensive to own a computer or pay for Internet access.

BroadbandNow.com, as of Sept. 2015, ranked Hawaii as the state with the 5th highest percentage of the population (97 percent) with access to speeds greater than 25 Mbps. But 28,000 of the state’s residents “don’t have any wired internet providers available where they live.”

“As a state that should be encouraging investment and entrepreneurship, Hawaii’s business climate would benefit from the PITFA, as would the millions of citizens in the state who depend upon internet access,” said Akina.

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