Testimony on HB1919: Yes to GET exemptions

from Grassroot Institute of Hawaii, February 3, 2022

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration on Feb. 4, 2022, by the House Committee on Economic Development.
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To: House Committee on Economic Development
      Rep. Sean Quinlan, Chair
      Rep. Daniel Holt, Vice Chair

From: Grassroot Institute of Hawaii
          Joe Kent, Executive Vice President

RE: HB 1919 — RELATING TO GENERAL EXCISE TAX EXEMPTIONS

Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on HB1919, which would provide a general excise tax exemption for food, medical services and feminine hygiene products.

With this bill, the Legislature addresses one of the reasons for Hawaii’s high cost of living: the regressive general excise tax. The excise tax reaches into nearly every part of daily life in Hawaii and is especially burdensome for those in lower income brackets.

By creating an exemption for necessities like food, feminine products and medical services, this bill is a much more direct and effective way to help the poor than through complex programs or tax credits. 

What’s more, it would have the added benefit of making Hawaii more affordable for everyone, at every income level. After all, people from all income levels are leaving Hawaii due to its high taxes and high cost of living.

There is an added benefit to this exemption, which may have the additional effect of easing the state’s doctor shortage, so long as the exemption is clearly written to include the state’s private practice doctors, nurses and physician assistants.

It is well established that Hawaii is suffering from a doctor shortage. One study estimated that Hawaii is currently “short” by approximately 732 physicians, with the most severe shortages occurring in Maui and Hawaii counties.

The COVID-19 emergency helped emphasize the importance of improving healthcare access in Hawaii and demonstrated that we must pursue multiple strategies to address the shortage of healthcare professionals in the state.

Luring new doctors to Hawaii — and keeping those who are already here — is a complicated proposition. Many proposals would take years to demonstrate success in addressing the issue. In the meantime, Hawaii residents will continue to suffer from the shortage of available medical professionals and the high cost of healthcare in our state.

This bill contemplates a more immediate way to make Hawaii more attractive to physicians: Create a general excise tax exemption for medical services.

Hawaii is one of the few states to levy a form of sales tax on medical services, and the form of that tax — the general excise tax — eats into the margin of the typical Hawaii physician’s office. 

If the doctor chooses not to pass on any of that tax burden to his patients, he or she risks running an unprofitable practice. If the tax is passed on, then the doctor is contributing to higher medical costs. Under the circumstances, it is no surprise that some doctors choose not to practice in the state at all.

According to a study commissioned by the Grassroot Institute of Hawaii, exempting medical services from the excise tax would help make medicine more affordable in the state for both doctors and residents.

Healthcare spending for medical services in Hawaii totals about $9 billion, of which the for-profit private sector accounts for $5 billion. An exemption from the state’s 4% GET would save private, for-profit medical providers approximately $200 million. Waiving the GET surcharges imposed by the counties would save an additional $22 million more.

This represents substantial savings for individual practices. According to the Grassroot Institute study, the savings from that base 4% GET exemption would be about $5,275 each for the approximately 38,000 full-time workers in the medical industry. That’s the equivalent to 6.7% of the average medical service worker’s wage and 5.8% of current GET collections.

Even if the exemption were applied selectively to only areas deemed to have acute shortages, the savings would be $72 million, or about $1,920 per for-profit medical service worker in the state. Exempting only private practice doctors would still result in a savings of $78.9 million for physicians and patients.

The savings for doctors and patients from a GET exemption is just the beginning. By bringing down the cost of practicing in Hawaii, we would also make the state more attractive to those looking to start a new medical practice. That will help address our doctor shortage while simultaneously bringing in new tax revenue — even with the GET exemption. 

For example, if the GET exemption led an additional 820 physicians to set up shop in the state, it would result in an increase of almost 4,000 full-time positions in the industry, 4,000 additional supplier and induced jobs, $1.4 billion in additional economic activity and about $67.3 million in taxes — more than one-third of the cost of the tax cut.

It is common practice for the state to use GET exemptions to encourage or aid certain industries. Already, Hawaii exempts petroleum refining, aircraft maintenance and leasing, and orchards from the GET. 

As we point out in our report, “This means that the state of Hawaii uses its tax code to encourage the development of orchards, but discourage the provision of medical care.”

State policymakers are rightly concerned with both making healthcare more affordable and addressing the shortage of medical professionals in Hawaii. By creating a general excise tax exemption for medical services, there is an opportunity to help both patients and doctors by making Hawaii a more attractive — and less expensive — place to practice medicine.

Thank you for the opportunity to submit our comments.

Sincerely,

Joe Kent
Executive Vice President, Grassroot Institute of Hawaii