Hawaii's Broad Base Allows Lower Tax Rate

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During the 1990s debate over how the state was going to “kickstart” the economy, one of the proposals made to the Economic Revitalization Task Force of 1998 was to offset the revenues that would be lost in reducing income tax rates and broadening the income tax brackets with a hike in the general excise tax rate.

In fact, the state economist proudly pointed to the fact that Hawaii’s 4 percent general excise tax rate was the lowest “sales tax” rate in the country and that Hawaii could afford to raise its rate a couple of notches. The point that she tried to cover up is just that — Hawaii does not have a sales tax but a tax on the gross receipts of a business.


Further, because nearly every transaction is taxed, be it at the full retail rate of 4 percent or at the lesser half percent rate imposed on the wholesale sale of goods and services, the base is very broad. In other words, because nearly all transactions are taxed, there are more transactions subject to the tax than in a sales tax state where the tax is usually imposed only on goods or tangible personal property.

The result is that the tax rate can be lower since there are few broad exemptions such as the exemption for food and drugs found in other states like California. Exemptions tend to erode the tax base which means eventually the rate applied to all the other not so favored transactions will have to go up if lawmakers expect to get the same amount of revenues from the general excise tax.

And perhaps because the surplus looms so large this year that lawmakers are off and running trying to exempt this or that from the general excise tax from the purchase of food to medical services to care homes to fundraising income of nonprofits. No doubt those proposals will please the intended taxpayers, but unless lawmakers cut spending, sooner or later there will be no money for them to spend. And, if that is the case, the only alternative they will have is to raise the general excise tax rate to make up for all of these exemptions.

Another problem is that blanket exemptions like those proposed to exempt food from the tax base benefit everyone who purchases food whether they are rich or poor. So the elderly person on a fixed income buying a can of tuna for dinner benefits as well as the rich person buying caviar and lobster for his dinner. Thus, blanket
exemptions waste the resource because they are available to both the poor as well as to the rich family for whom the 4 percent is but pocket change.

A similar situation faces county officials as they grapple with the real property tax. With valuations soaring due to the hot real estate market, officials are struggling to find ways to alleviate the potential burden on their voting constituents, the homeowner. The natural tendency would be to hike the amount of the home exemption; after all, it is already available to homeowners.

The other question that then arises is how much should the exemption be raised? For some homeowners, the valuation of their property might have gone up $50,000 while another homeowner may have experienced a jump of more than $100,000. If the County Council raises the home exemption by $40,000, the first homeowner will see 80 percent of the increase in his value erased. But for the second homeowner, only 40 percent of the increase will be wiped away by the increase in the home exemption.

But like the general excise tax, a hike in the home exemption benefits the rich and poor alike. So while a hike in the home exemption might address the cries that the property tax bill will drive some out of their homes, it will mean a little more pocket change for the truly affluent homeowner.

Thus, a hike in the home exemption will be a waste of resources as the wealthy homeowners really don’t need the home exemption but will get it anyway because the basic criteria is that the home has to be owner occupied.

And the more the home exemption erodes the tax base, the less of the base there is to tax. As a result, the tax rate will have to go up if county officials are going to raise the revenues needed to run county government.

So no matter how much the valuation of the home increased in the past year, the higher tax rate might make an increase in the home exemption meaningless because the county still has to raise the money to pay for all of the county services.

Proposing exemptions from the tax may make good political hay, but in the long run those exemptions create many more problems that obviate whatever benefit it may have bestowed on the lucky few who qualified for the exemption.

”’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”’ https://www.tfhawaii.org

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