Why does Hawaii have a general excise tax like none other in the nation? Isle excise tax
is tricky businessA 1/2 percent hike to the
general excise tax works out
to a 12.5 percent increaseBy Bruce Dunford
Associated Press
Because it can.
Being separated by 2,500 miles of ocean, one can't just drive across the state line to avoid what critics say is a ravenous, omnivorous tax.
How does it work? The axiom is: If it moves, it gets taxed.
"It taxes everything except the cackle out of the rooster," said Lowell Kalapa, president of the Tax Foundation of Hawaii.
As lawmakers debate raising the tax, known by its appropriate acronym GET, to 4.5 percent from 4 percent for the next 10 years to shore up funding for public education, the public remains generally confused about the tax and how it's applied.
Supporters of the increase will brush it off as merely a half-percent increase. You know, only a half penny more for every dollar you spend. Some lawmakers are floating the idea, although Republican Gov. Linda Lingle campaigned on a platform opposing any increase in state taxes or fees.
Debbie Shimizu, executive director of the National Association of Social Workers, told lawmakers she supported the " 1/2 percent tax increase" for education and wanted another " 1/2 percent tax increase for health and human services."
Mathematically, however, the proposed increase works out to a 12.5 percent hike. That means the $1.612 billion collected from the GET and related use taxes in the last fiscal year would jump to $1.813 billion -- a $200 million increase.
A corresponding 12.5 percent increase in the average amount a Hawaii resident pays in the GET each year adds up to nearly $200.
The GET sounds simple enough. If you buy something for $100, most merchants will ask you to pay $104, noting on the sales receipt that the additional $4 was for tax.
Now here's where it gets tricky. Some merchants will sell you the $100 item, and add on a tax of $4.16.
The reason is that the excise tax is the seller's tax, not the buyer's tax as it would be in most states, counties and cities across the nation that charge a "sales tax" on the final retail sale of an item.
At the close of the business day, the Hawaii merchant adds up his gross receipts, including the amount he added onto the sales ticket as "tax," and then multiplies his total by 4 percent to determine how much he owes the state.
That means the $100 he got for the item, plus the $4 tax he added to total $104 times 4 percent to equal $4.16 he owes the state.
In 1995, then state Consumer Protector Russell Blair told lawmakers he believed listing the tax amount on the sales receipt with the actual sale price of the item violated the state law making it illegal to advertise goods or services "with intent not to sell them as advertised."
He said he would leave it to lawmakers to clarify whether consumers were being deceived by the practice of adding the merchant's excise tax amount to the advertised price. They never did.
Then state Sen. Donna Ikeda first raised the issue in 1987.
Is that the worst thing you can say about Hawaii's excise tax? Not according to critics who note that the $100 sales price of an item may hide other hits from the tax. They call it pyramiding or cascading.
"Unlike most state sales taxes, our unique GET is an extremely pervasive tax that is levied on all types of economic activity, including services which are exempt in most other states," said Ronald Heller, a CPA and attorney.
"In most states, rents, royalties and interest are not covered by the sales tax. In many states, wholesale transactions are completely exempt from the sales tax," Heller said. "In Hawaii, however, services, rents, royalties, interest and wholesale transactions are all subject to the GET."
By the time an item or service gets sold, the pyramiding effect of the GET, at 0.5 percent on wholesale transactions and 4 percent on the final transaction, collects as much revenue as a 13 to 15 percent sales tax, he said.
Kalapa said to collect the same revenue that the excise tax brings in, a Hawaii sales tax would have to be 10 or 11 percent, and if it exempted food, it would have to be 16 to 17 percent.
Democratic leaders in the state House are emphatic and stumble over each other to report that it's the best and fairest of all taxes to have.
"Yes, people may say it's regressive, but it is the most fairest way in financing state government," said House Speaker Calvin Say (D, St. Louis Heights-Wilhelmina Rise). "Forty-five of the other 49 states are envious of the state of Hawaii. In their states they are stuck with the sales tax of 12, 13 or 14 percent."
The beauty of Hawaii's excise tax is that it exports one-third of the burden to the 6 million annual visitors to the islands, Say said.
Rep. Blake Oshiro (D, Aiea-Halawa) said economists say "the best way to have a tax is to have it broad and low and that way you get it from everybody across the board rather than a high income tax rate which really hits certain pockets of people."
The excise tax provides nearly half of the state's general fund revenues. The individual income tax, which generates about one-third of the total revenue, is now capped at 8.25 after a four-year phase-in of a reduction started in 1998 from the 10 percent top rate that applied to all but the poorest families.
To take out some of the sting in the GET, lawmakers in 1999 approved a six-year plan to depyramid the tax on intermediate services, dropping the rate on intermediate services to 0.5 percent from 4 percent.
Kalapa said of the total GET revenues, 40 percent comes from goods and 60 percent comes from services. Services include such things as a haircut, visit to the doctor's office and almost everything associated with Hawaii's tourist industry.
State Department of Taxation
Tax Foundation of Hawaii