General Excise Exemptions to be Shut Off for Two Years?
by Tom Yamachika, President Tax Foundation Hawaii
House Bill 58, the “Frankenbill” that we wrote about before, has cleared the Legislature and is on the Governor’s desk waiting to become law. It suspends some General Excise Tax (GET) exemptions in calendar years 2022 to 2023. In this article we’ll explain some of them and who is likely to be affected.
Back in 2011, to address the economic situation in the aftermath of the Great Recession of 2008, lawmakers enacted Act 105, Session Laws of Hawaii 2011, which suspended 31 different GET exemptions for two years. In the middle of 2020, the State Auditor’s office issued Report 2020-05, which tried to quantify the effects of the exemption suspensions using 2018 numbers, then the latest data available, in case the Legislature wanted to consider suspending exemptions again in response to the COVID-19 crisis.
This year, however, lobbyists were ready to fight for exemptions their clients were interested in and were successful in whittling the list of suspended exemptions from 31 (which were in the original list in Senate Bill 56) to a mere 11. Some of the exemptions left will have little financial impact. For others, the financial impact won’t be visible to the public because only a handful of taxpayers qualify for the exemption and the Department of Taxation won’t release information about those exemptions to preserve taxpayer confidentiality. We consider the following two as significant exemption suspensions.
Sales to the Federal Government. Because the federal government can import whatever they need free of Hawaii use tax and/or GET, local sellers seeking to sell to the federal government (including military exchanges and commissaries) would be at a disadvantage if they had to pay 4% on their sales while their out-of-state competitors didn’t. That’s part of the science behind why the exemption was enacted. So, the big losers here are local companies trying to get Uncle Sam to buy their products or stock them for resale in the commissaries and exchanges.
In 2018, the amount of business to which this exemption applied was nearly $1.4 billion, leading to a GET exemption of a little more than $49 million.
Sublease deduction. In Hawaii, lots of land is leased. Large landowners in the days of the Kingdom of Hawaii carried their holdings over to the State of Hawaii, and because they didn’t want to part with their land, they leased it instead. Lessees, especially of larger tracts of land developed into shopping malls, for example, subleased their land to stores. Larger stores could sublease part of their space to smaller stores, and so forth. The problem is that 4% GET was payable on every lease and sublease, which started to add up quickly if there were more than a couple of lease tiers. So, in 1997 our lawmakers enacted the sublease deduction, which allowed a person who both received and paid lease rent to deduct 87.5% of rent paid. This deduction was meant to mimic the wholesale-retail rate economics where wholesalers were allowed a 0.5% rate when their customers resold their products and paid 4% retail rate GET when they did.
The Auditor estimated that this deduction caused an annual revenue loss of about $6.8 million based on 2018 numbers.
The big losers would be the smaller stores who rent from larger stores who rent from people up the food chain. There will be lots more tax payable up and down the chain, and the tax is usually passed on down to the lessees who are occupying the space. Look for retail prices of the goods sold by those stores to increase as a result.
These are the two biggest exemption suspensions, in our estimation. Our Governor now gets the first crack at deciding whether these suspensions are going in effect.