Rob Perez

Raising Cane

By Rob Perez

Sunday, December 16, 2001

Hawaii health care
is a taxing matter

Only one state in the country taxes government-funded medical services for the poor.

Only one state taxes government-funded medical services for the elderly.

Which one?

Try Hawaii.

With a very broad-based general excise tax that is the envy of many mainland bureaucrats, Hawaii has the dubious distinction of being the only state in the nation to tax medical services for Medicaid and Medicare, the government-financed health insurance for the poor and elderly, respectively.

While Hawaii's 4 percent excise tax technically is imposed on the provider of goods or services, it is almost always passed on to the consumer at the rate of 4.167 percent.

In the medical arena, that means the tax usually boosts the cost of providing care to the poor and elderly -- and to all other patients, for that matter.

Most states don't tax services of any kind. But even those that do have exempted medical services, according to Neil Allen of CCH Inc., a Riverwoods, Ill.-based provider of tax and business law information.

And New Mexico, the only other state besides Hawaii that taxes medical services on a wide-scale basis, has specifically exempted Medicaid and Medicare.

Doing otherwise just isn't right, according to state Rep. Charles Djou, R-Kaneohe.

"This is nothing more than profiting off the sick and elderly," Djou said of Hawaii's practice. "I think it's extremely offensive, I think it's wrong, it's bad public policy, and I think it should be changed."

Toward that end, the lawmaker plans to introduce a bill during the upcoming legislative session that would exempt Medicaid and Medicare services from the excise tax.

Such a measure would have a more realistic chance of passing, Djou figures, than a more encompassing proposal, which he supports, exempting all medical services.

Efforts to pass the broader exemption have failed repeatedly at the Legislature, most recently during this year's regular session.

Opponents of such legislation, including Gov. Ben Cayetano's tax administration, say the medical exemption would cost the state too much in lost revenue, especially in these tough economic times.

If all medical services were exempted, the state would lose out on roughly $70 million to $80 million annually in excise taxes, according to the Department of Taxation. No estimates were available on how much a more limited Medicaid and Medicare exemption would cost the state.

Besides the bottom-line argument, state officials say they don't like to fiddle with the broad application of the excise tax, something that many states with far narrower and more complicated tax systems see as desirable.

The general excise tax is by far the state government's largest source of revenue, bringing in roughly $1.6 billion a year -- or about half the total general fund. It is imposed on goods and services at all levels of business transactions.

Having such a broadly-based source of revenue provides a measure of stability to government budgeting and helps fund an array of services. Any time someone chips away at that base the government has less money to deliver services and pay its workers.

"We try not to reduce that base," said Dean Seki, the tax department's deputy director.

A broadly based excise tax also treats businesses equally, bringing more fairness to the system, its proponents say.

But over the years legislators have approved dozens of special exemptions, fueling criticism over who gets preferential treatment.

Among the numerous exemptions: Revenue earned from aircraft maintenance or from repairing ships engaged in interstate or international trade.

If companies that work on ships or planes are entitled to exemptions, why not doctors who treat the poor and elderly? If we have exemptions at all, why not give providers for the elderly and poor a break?

State tax department officials say the agency likely would oppose any proposal to exempt Medicaid and Medicare services for the same reasons it has historically resisted granting other exemptions.

"We're almost always going to oppose that kind of thing," Seki said. "Everyone kind of calls us a kill-joy."

Beyond the fairness issue, the practice of taxing Medicare and Medicaid services has raised questions about whether the state is, in effect, taxing the U.S. government, something that isn't allowed. Uncle Sam underwrites Medicare and helps pay for Medicaid.

A federal review determined that because the Hawaii tax technically is imposed on the provider, not the government, the practice is legal, according to Ted Meeker, assistant U.S. attorney in Hawaii.

Just because it's legal, though, doesn't mean it's right.

Star-Bulletin columnist Rob Perez writes on issues
and events affecting Hawaii. Fax 529-4750, or write to
Honolulu Star-Bulletin, 500 Ala Moana Blvd., No. 7-210,
Honolulu 96813. He can also be reached
by e-mail at:

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