To switch, or not to switch, from GET to a sales tax
There's no gain in trading GET for a sales tax unless it puts more money into the family bank account
By David PendletonBenjamin Franklin once said, "In this world nothing can be said to be certain, except death and taxes." No doubt he was correct. There is little we can do to eliminate either, but there is surely much we can do to reform or reduce the burden of taxation.
One of the recent suggestions is that Hawaii transform the general excise tax (GET) into a sales tax.
I believe our tax system is in need of an overhaul. But I am concerned with the suggestion by some that our ailing economy would be helped by merely switching from a GET to a sales tax, with no simultaneous reduction in real rates.
Some claim that merely altering the tax structure while maintaining revenue neutrality would in and of itself jumpstart business growth and contribute to the availability of capital in the private sector.
This can only be true if the burden of our present system is solely attributable to an ineffective tax structure, which is simply not the situation.
Tax analysts often consider general excise taxes to be an extremely efficient method of revenue collection, due to their simplicity. The problem is not the manner of collection but the extent of collection.
Accordingly, any revenue neutral tax reform proposal - that is, a new tax system which ultimately raises the same number of dollars in revenue - may be called a proposal but is certainly not worthy of being called a reform.
What Hawaii needs is not more innovative ways of raising the same amount of tax revenue. What Hawaii needs is an infusion into the private sector of capital, preferably by permitting the private sector to retain a greater share of its revenues.
Capital is more efficient and effective in private hands. Hawaii's own studies, conducted by the often unfairly maligned Department of Business, Economic Development and Tourism (DBEDT), support the notion that every dollar in revenue taken in by the state would actually have had the value of a $1.50 if left in the private sector.
That is, every dollar not collected in tax revenue generates a net $1.50 when spent in the private sector.
This statistic is no secret. It was shared with the Hawaii House of Representatives by DBEDT economist Pearl Iboshi on Jan. 7 of this year.
Hawaii deserves more than a revenue neutral tax plan. Hawaii needs tax reform that genuinely reduces taxes and thereby serves as a catalyst for systemic government change - streamlining, consolidation, rightsizing and privatization. Sales tax is simple, but...
But what of the sales tax? If highly educated professionals are toying with the idea, how bad can it be?
A sales tax taxes consumption. In its purest or most conventional form, it taxes the sale of goods. But in some states the sales tax has been modified to reach certain services.
In Hawaii, the GET applies to virtually all goods and services at every level of exchange or transaction. This has resulted in the infamous pyramiding effect that local businesses rightly decry.
Hence, according to tax experts such as Lowell Kalapa, Hawaii's tax base is in excess of 100 percent, a truly extraordinary number in comparison with other states.
Not all states impose a sales tax on sales of goods. Delaware, New Hampshire and Oregon have found other ways to raise revenue.
Sales taxes have been adopted in the vast majority of states because they raise huge amounts of revenue and require very little effort on the part of the state in terms of monitoring tax compliance.
Because the tax is collected at the time of purchase, the vendor has been effectively deputized as a tax man and will collect the dollar figure right there on the spot. Tax avoidance is minimized, because the only sure way to avoid the sales tax is not to purchase the goods in the first place.
Given the revenue requirements of the state, a sales tax would have to be double-digit to raise the same amount as the GET, because a sales tax would have a smaller base (sales only) while the GET reaches both sales and services. We're talking double-digit tax
Politicians are instinctively uncomfortable with a double-digit sales tax. Citizens might think they are "paying too much."
Are there any benefits from the present GET that make it worthwhile?
First, the GET is so comprehensive that the present revenue can be captured with an apparently low rate. (I say apparently because of the "hidden" pyramiding effect and general lack of citizen awareness of the service aspect of the tax.)
Second, the present GET conceptually is very low-cost to administer.
Finally, the GET increases revenues automatically with increases in the economy.
While the theory is for the most part true, the unsupportable assumption is that tax rates do not affect the rate of economic growth. To the contrary, a significant number of economists believe that tax rates can be so high that they impair the rate of economic growth. If that is so, and I would concur, then it is possible that fewer dollars in revenue are actually generated when rates are increased.
If we recognize that economic growth is adversely affected by excessively high rates of taxation, we should also recognize that economic growth is promoted by reducing rates of taxation.
This brings us back to my contention that revenue neutrality is the problem. I must admit that I am partial when it comes to tax neutrality. I would support a sales tax if, and only if, it were a genuine tax cut and not a revenue neutral ploy. However, the switch would be of little benefit to our economy unless it resulted in a net reduction in revenue.
A sales tax should be crafted to leave more hard-earned dollars in the hands of families. The consequence would be that government officials would have to prioritize the services government provides and focus on providing those things - and only those things - which government can provide more efficiently and more cost-effectively than the private sector.
This will no doubt involve some pain and require the courage to change. Streamlining, consolidation, rightsizing and privatization are easy words to say but tough words to sell in this state, which has grown accustomed to the present size of government. Waiting will increase the pain
Psychologists say that change occurs only in two situations. First, people change when the pain of the status quo in fact exceeds the pain entailed by a change. Second, people change when the facts irrefutably demonstrate that disaster is imminent.
Let us hope that Hawaii will not wait that long. The longer we wait to change, the more expensive and painful any change will be.
After all, as Ben Franklin once said, "Time is money."
David A. Pendleton, an attorney, represents the 50th District (Kailua, Maunawili, Kaneohe) in the state House of Representatives.