Can We Sack the GET?

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Every so often a question comes up from some alert readers.  “The Hawaii General Excise Tax (GET) is regressive, meaning it falls hardest on the poor.  Hardly anyone understands it, because it is so unlike the sales taxes, and even the gross receipts taxes, in any of the other States.  It taxes basic necessities, like food, medical care, and electricity.  So why don’t we just get rid of it?”

It seems to me that there are several reasons why our lawmakers are going to keep it around for a very long time, if not forever.  Are they good reasons?  That’s up to you to decide.

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First, the tax produces money.  A LOT of money.  As seen in Chart 1.2 of the Department of Taxation’s annual report for fiscal 2020-2021, the GET brings in more than $3 billion per year, and normally produces 40%-45% of all tax dollars collected.  (In a typical year the individual income tax produces roughly 30% of all tax dollars collected, and all other taxes combined produce the other 30%.)  Lawmakers who know this fact will understandably be reluctant to mess with this goose, because it’s been consistently laying lots and lots of golden eggs, even when our economy was in the dumps because of the COVID-19 pandemic.

Second, the tax produces money with a relatively low nominal rate.  Four percent doesn’t seem like a lot compared to 7-8% in Nevada, 7-10% in California, 6-11% in Arizona, and so forth.  So it’s tough to tell lawmakers that 4% is outlandishly large compared with other States.

Third, there is rarely a constituency that rises up to oppose an increase in the GET.  Many businesses on which the GET is imposed pass on the tax to consumers, so they would have a hard time arguing that an increase in the GET hurts them.  Consumers get pinched, but typically in small amounts so they are unlikely to put up a fuss.  There have been notable exceptions, however, such as when dozens of angry taxpayers showed up at a Senate Ways and Means committee hearing in 2011 and saw that committee kill the bill in a 10-4 vote (then-Ways and Means chair David Ige was one of the four voting to raise the tax).

Fourth, a good part of the tax is well hidden from constituents.  Unlike sales taxes, our GET applies to business-to-business transactions such as when a farm sells vegetables to a distributor, who then sells the vegetables to a supermarket, which then sells them to a consumer.  The farm and the distributor have to pay 0.5% tax each, and the supermarket pays 4.0% or 4.5% (which it passes on to the consumer).  The consumer only sees 4.712% on the retail receipt (the extra 21 basis points is a “tax on tax,” because the tax is imposed on not only the retail price of the vegetables but also the amount of tax passed on to the consumer).  The two earlier 0.5% layers are not shown on the receipt but simply factor into the sales price.  Furthermore, businesses pay full retail tax when they are end users, such as when they pay for power, rent, and office supplies.  Those get factored into the prices of their goods and services as well.

Fifth, the GET lets us offload some of the tax burden to tourists.  They don’t pay income tax, but they do need to pay GET like the rest of us.  The Tax Foundation of Hawaii estimated that tourists bear between 15% and 20% of the tax bite.  Other studies have put the export percentage as high as 38%.  Even 20% of $3 billion annually is not small potatoes.  If we aren’t able to collect that $600 million the rest of us are going to have to make up for it somehow – or rely on state government to tighten its belt by that much (fat chance of that happening).

For better or worse, there are reasons why we have our GET and probably won’t be sacking it any time soon.  If you think you have a better way of funding our state government, great!  Our lawmakers need to hear from you. 

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