Recent efforts by Hawaii lawmakers to “de-pyramid” Hawaii’s state General Excise Tax have failed. In the past, Hawaii’s unique GE tax was charged at every level of transaction for goods and services at the 4 percent rate. Lawmakers lowered the tax to 0.5 percent when goods or services are purchased for resale. But the GE tax essentially still pyramids, because it’s embedded in Hawaii’s overhead cost for all businesses.
In other states, which impose a retail sales tax, supplies and equipment purchases for the business are not subject to sales tax. That’s not true in Hawaii where the GE tax (Hawaii has no sales tax) is imposed on the buyer for all ‘consumption’ purchases regardless of whether the buyer is a business or an individual.
Thus, for a Hawaii business, the cost of goods and the GE tax imposed on their purchases are passed to the consumer and that is reflected in the selling prices.
And unlike states with a retail sales tax structure, the GE tax is also charged on rental income, whether for an apartment or a warehouse.
Part of the sky-high cost of home rentals in Hawaii is attributable to this policy because the landlord must pay the GE tax on rental income.
For businesses, the GE tax imposed on warehouse rentals or retail store space must be recaptured in the cost of the goods and services sold from that site.
To add to that, as the price of energy rises, so does the cost of goods and services consumed by a business, and as a result, the GE tax costs go up too. In a never-ending dog-chasing-his-tail game, costs spiral upward, and so does the price charged to customers.
In Hawaii, that is what we are now witnessing.
The January 1, 2007, 12.5 percent increase on the 4 percent GE tax on Oahu, which will be used to fund mass transit, also hurt businesses, renters and consumers. It is not just a matter that the tax rate went up. But the cost of that additional half-cent is being worked into the base price of everything we buy at the store, and everything that the store owners buy for the store.
Inflation is not a factor in the price increases, because the federal government is holding tight on interest rates.
Those who must pay the tax know all too well how the GE tax takes its toll.
Even those businesses that give up and hold a “going out of business sale” selling merchandise at a fraction of the price, the GE tax still applies.
Over the years, elected officials toyed with the idea of raising the GE tax rate to provide additional revenue or replace other taxes, but in every case, until recently, the idea was rejected because those officials knew and understood the impact of raising the rate of this tenacious, unique and peculiar tax.
For example, a group of businessmen trying to secure promotional funding for the visitor industry proposed raising the GE tax for everyone, and then rebating residents somehow. But more seasoned heads prevailed. Critics pointed out that the tax increase applied to businesses and residents so the cost of the additional tax would increase the cost of doing business for everyone.
Another year, the chair of one of the money committees came up with the idea of replacing the county’s real property tax with a GE tax rate increase up to 6%. But that too was soundly rejected when critics said that not only would it negatively impact businesses, but also increase the cost of housing, because the GE tax is imposed not only on rent, but on new home construction and existing home maintenance.
So the GE Tax increase passed by the Legislature, the governor, the Honolulu City Council and the Mayor in 2005 and collected in 2007 to fund mass transit, came because of total disregard or ignorance of the statewide impact.
Now we will all pay dearly at the cash register and in terms of negative impact on our state’s economy.
Lowell L. Kalapa is the president of the Tax Foundation of Hawaii, a private, non-profit educational organization. For more information, please call 536-4587 or log on to http://www.tfhawaii.org
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