Let’s end embarrassing tax on medical services

by Keli'i Akina, Ph.D., President/CEO Grassroot Institute, April 20, 2024

Testimony at this year’s Hawaii State Legislature has made it pretty clear why medical services in Hawaii should be exempted from the state general excise tax.

At a recent legislative hearing on a bill that would do just that, dozens of doctors and healthcare advocates explained how the GET makes practicing in Hawaii so financially challenging, causing many Hawaii doctors to retire or move away, or dissuade mainland doctors from moving here in the first place.

For instance, Maui resident Josie Mallott testified that she has been trying for years to find some doctors who can take over her husband’s medical practice in North Kihei once he’s ready to retire. But potential recruits decline to move here after they find out about Hawaii’s tax on medical services, its low medical reimbursement rates and its high cost of living.

The bill that could help change that is SB1035, which proposes lifting the state’s 4% general excise tax that doctors have to pay on reimbursements from the Medicare, Mediaid and TRICARE programs.

Hawaii doctors still would have to pay the GET on income received from other sources, but exempting care covered by government insurance programs would be better than nothing.

It’s actually kind of embarrassing that Hawaii is the only state left in the country that taxes patient copayments and deductibles, as well as the only state that taxes Medicare, Medicaid and TRICARE reimbursements.

Until recently, Hawaii was joined by New Mexico in taxing medical services — but that state apparently thought better of the practice, and now it’s just us.

Hawaii does exempt nonprofit facilities such as hospitals from the GET. So extending that exemption to private practice providers would not only help mitigate Hawaii’s doctor shortage, but also simply be the fair thing to do.

Some people might say this is the wrong time to ask for a tax exemption because the state needs every penny it can get to help rebuild Lahaina. But a medical services exemption to the GET would not be expensive.

The Hawaii Department of Taxation estimated last year that enacting SB1035 would cost only $50 million to $65 million in tax revenues. Given how much our lawmakers like to spend money, perhaps they could think of the exemption as a $50 million spending program to keep more doctors in Hawaii. It seems to me like that would be money well spent.

In addition, a 2020 study commissioned by the Grassroot Institue of Hawaii found that more doctors would generate more employment and thus more taxes, so in the end it could be close to a wash.

So what happens next?

Currently, SB1035 is heading to conference committee. And if legislators can agree on the details of the bill and the governor signs it, Hawaii would join the rest of the nation in exempting Medicare, Medicaid and TRICARE payments from sales and excise taxes.

But anything can happen between now and the end of this year’s legislative session, which is just a couple of weeks away.

If you want to make your voice heard on this issue, be sure to visit Grassroot’s action page, where you can easily send a message about the bill to your legislators.

Reducing the tax burden on our physicians would improve healthcare access in our state. Need I say more?
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This commentary was Keli‘i Akina’s weekly “President’s Corner” column for April 20, 2024. If you would like to have his columns emailed to you on a regular basis, please call 808-864-1776 or email info@grassrootinstitute.org.