Candy Crush

by Tom Yamachika, President, Tax Foundation Hawaii

This week I will be writing about a very interesting bill moving through our Legislature, House Bill 959 / Senate Bill 1043.  I call it “Candy Crush” because it’s being pushed very hard as a sweet deal, but it has the potential to really stomp our economy.

So, what does Candy Crush do?  First, here are the sweet parts.  It eliminates individual income tax for folks making less than $100,000 (single or joint).  It exempts unemployment benefits from income tax.  It eliminates general excise taxes on groceries and nonprescription drugs (prescription drugs are already exempt).

Then, here are the crushing parts.  The GET retail rate will be raised by 50%, to 6%, phased in over four years.  The standard deduction will be doubled from 2023 levels, but all future increases to the standard deduction that were enacted last year would be cancelled.  Likewise, the individual income tax rate cuts enacted last year would be cancelled.

The construction trade unions, among other labor groups, are solidly behind this bill.  At the hearing on House Bill 959 recently held by the House Economic Development Committee, bruddah after bruddah, union leader after union leader, the Ironworkers, the Operating Engineers, the Plasterers and Cement Masons, the Theatrical Stage Employees, the Teachers, and others came out in strong support.  Although, I must say, some progressive organizations like the Appleseed Center for Law and Economic Justice were more equivocal and were very wary of the GET hike.

When it was my turn to speak, I tried to remind lawmakers that many folks have complained that our tax system overall is regressive, meaning that it hits harder when people have less income.  I said that the primary driver of this regressivity was the GET, as studies have shown, so hoisting the GET is likely to make the problem worse, not better. 

Even though the bill would remove GET from non-prescription drugs and from groceries, there are still going to be lots of things that will be made more expensive by the GET increase.  For example:  Rent.  Costs of power, like electricity and gas, and connectivity of all kinds, including Internet and TV, except for public utility charges (those are subject to Public Service Company Tax from 5.885% to 8.2%, considering state and county shares).  Everyday expendables, like toilet tissue, toothpaste, towels.  Furniture.  Maintenance.  Costs of housing (everything except the land). 

In addition, retail rate GET is embedded in the costs of many, many other products and services.  Let’s consider, for example, the grocery store that’s supposed to be selling these exempt groceries.  If the store premises is rented, GET applies to the rent.  When it services its air conditioning or refrigeration equipment, GET applies to that.  When it buys software or cash registers to keep track of the sales, GET applies to those.  When it uses an accounting firm to help audit the books or prepare tax returns, GET applies to that.  The GET wholesale rate doesn’t apply to any of these costs.

Lawmakers, before you try to implement a massive tax hike like this, you really should think through the repercussions, because there will be lots of them.  And for our friends in the unions, we urge you to think about these as well.  And you don’t have to listen to me.  Look at the testimony of some of the progressive organizations who have been dealing with tax effects for a long time.  When they sound wary, you ought to be also.  As should we all.