GET on Health Care, Revisited

by Tom Yamachika, President Tax Foundation Hawaii

We’ve passed the halfway point in this year’s legislative session.  The mood at the Capitol is kind of somber, as there is a growing realization that the amount of state resources that wildfire recoveries are going to consume has destroyed even the most pessimistic projections.  “There’s not a whole lot of extra money this year, folks, so deal with it,” is what they are saying.

As a result of this bleak fiscal picture, many of the proposals made at the beginning of the session for a general excise tax (GET) exemption here, or an income tax credit there, have already fallen to the cutting room floor.  This week we’ll be discussing one of the survivors.

The bill is HB 1675.  As introduced, it would provide an exemption to the GET for doctors and nurses in primary care practice.  As it reads now, it would provide a GET exemption for medical services paid for by Medicare, Medicaid, and TRICARE.  The current version is similar to a bill that was in play in last year’s Legislature, which we wrote about here.

Why is this bill worthy in our current time of financial need?  To start, there is a fairness issue. As we explained in our previous article, individual or small group physician practices are subject to the GET while hospitals organized as nonprofits (and all of them are) do not pay GET on medical services.  The medical practitioners who are taxed can’t do much about it because insurance companies and government parties like Medicare will pay the same amount to either the doctor or the hospital for the same service, and then the government providers, and perhaps some of the insurance companies, forbid the doctors from billing the extra tax, to the patients or anyone else.  So, the individual or small group practitioners, which are the only practitioners that rural areas have, are at a significant disadvantage. Either they absorb the additional tax themselves, or they get the heck out of Hawaii and move their practice to a place where they can make ends meet.  Studies show that the doctors have been doing the latter, plunging our state into a continually deepening shortage of health care professionals.

Maybe you have no sympathy for health care professionals who are getting paid lots more than you are.  But look — if there are no doctors around, who are you going to call if you’re sick?

Typically, the free market takes care of this kind of problem. Prices go up and the tax is taken care of.  That’s what happens with most other businesses here.  But with the dominance of insurers and government payers in the medical services market, the rules are different.

Even the State Health Planning and Development Agency (SHPDA), the agency that regulates how many health care facilities can be set up and where, weighed in.  Its testimony presented to the Senate Health and Human Services and Commerce and Consumer Protection Committees, said:  “Hawai’i must exempt independent clinical practices for [GET] or face increasing shortages and serious health consequences for our population, and particularly our neighbor islands.  This is not exaggerated.”  SHPDA further observed that only two States tax healthcare services, Hawaii and New Mexico; it concluded its testimony by saying those two states “have yet to recognize this is ineffective public policy and a detriment to public health.”

Now let’s see if the Legislature can get its act together and agree upon the contours of a GET exemption for health care.