Hawaii’s GE tax mark-up

by Rachelle Chang, Better Hawaii, June 11, 2013

I recently read two succinct essays by professor of economics William F. Fox that supported Hawaii’s general excise tax (GET). The essays addressed the questions, “Is it true that Hawaii would need a 20% sales tax to generate the same revenue it gets from a 4% excise tax?” and “Why should people have to pay a 4% excise tax on groceries and medical care?”

The essays were included in “The Price of Paradise: Lucky We Live Hawaii?” (1992), a collection of 38 short essays discussing Hawaii’s underlying problems and challenges, edited by law professor and author Randall W. Roth. These questions are as relevant today as they were over 20 years ago.

According to the Hawaii Department of Taxation’s Tax Facts, “The general excise tax is a tax imposed on income from most types of business activities in the State of Hawaii. This tax is often called a gross income tax because the tax is computed based on the business’ total receipts derived from doing business in Hawaii and not on the business’ net profit. It includes any cost passed on to the customer and represented to be the general excise tax. The general excise tax, unlike a sales tax found in most other states, is levied on the seller but is commonly passed on to the customer.”

I am a strong proponent of repealing Hawaii’s GET and replacing it with a reasonable sales tax. I’ve contacted our legislators, but this doesn’t seem to be a priority or controversy with anyone, not even taxpayers.

Fox offered 5 arguments in support of the GET, concluding that “Even with its flaws, Hawaii’s excise tax is a good tax, in need of nothing more than fine-tuning” (page 109).

1. The GET has a broad base. It taxes business income, whether wholesale or retail.

2. The GET has a low rate. It can raise more revenue from a relatively modest tax rate.

3. The GET is fair. People with the same level of consumption pay the same tax.

4. The GET exports the tax burden. About 30% of the GET is paid by non-residents.

5. GET tax credits offset the burden of the tax, targeted only to residents and the poor.

I remain unconvinced. I still think we should repeal the GET and replace it with a reasonable state sales tax on retail-level goods. Here’s why:

1. A sales tax would have a broad base. It would tax all retail sales in Hawaii. And it would simplify paperwork and record-keeping, as producers, wholesalers, distributors, and value-added resellers would not be forced to act as tax collectors.

2. A sales tax could have a low rate. We could still have a relatively modest tax rate.

3. A sales tax would be even more fair than the GET. It would remove the unfair pyramid taxation at every level of production, from wholesale to retail. It would also remove the unfair double taxation of paying a tax on the GE tax we already pay (that extra .212% of the 4.71% we pay on Oahu and that extra .166% of the 4.166% we pay on the neighbor islands).

4. A sales tax would export the tax burden. A sales tax would still be paid by non-residents.

5. Sales tax credits could offset the burden of the tax, if the credits are targeted only to residents and the poor.

Here are a few more benefits of a reasonable sales tax in Hawaii:

* A sales tax would save taxpayers money. For example, if you bought a $30,000 car on Oahu, you would pay $1,413 with the 4.712% GET or $1,350 with a 4.5% sales tax. That’s $63 that you shouldn’t have to pay.

* A sales tax would reduce business tax payments. Businesses already pay corporate income taxes, either directly or by passing it on to owners, partners, and shareholders. It doesn’t make sense to tax business income twice.

* A sales tax would give us more accurate reporting of business activity in Hawaii. Business activity is inflated, because it includes the tax that is paid on a portion of the GET.

Is Hawaii’s general excise tax fair? Can we continue to afford the GET? What do you think?