A recent Tax Review Commission report took issue with criticism that the repeal of the lesser 0.5 percent general excise tax rate on wholesale sales was uninformed. Instead, it criticizes opposition as merely perpetuating an inefficiency in the name of gathering information about transaction activity.
What the report fails to note is the repeal of the 0.5 percent rate was made as a parry to the recommendation by its consultant that the overall rate imposed on all retail activities be increased to generate more revenue for the state. The cynical eye would call that suggestion the proverbial “sop to Cerberus” — a throwaway to keep the angry mob of taxpayers at bay. The commission’s push back to criticism reflects the lack of familiarity by both the commission and its consultants with the importance of being able to monitor and enforce compliance with the tax.
Anyone who has attempted to figure out how much activity is occurring in the economy will tell you about the frustration of undertaking that evaluation when there are numerous exemptions from the GET and other taxes that prevent one from truly evaluating the impact of transactions. Saying the imposition of the 0.5 percent rate on transactions of goods and services perpetuates an inefficiency shows the person has never had to enforce compliance with the law.
Continuing to impose the tax allows administrators to track how the goods or services will subsequently be handled. This is a major reason why years ago when lawmakers were entreated to exempt the purchases of capital goods from the 4 percent GET — since capital goods are essential to the production of income and the creation of jobs — they instead chose to grant an income tax credit of 4 percent. This credit allowed auditors to see if capital goods purchases were actually used to produce income or merely consumed with no intention of income or job creation. Capital goods had to be placed in service for the taxpayer to qualify for the 4 percent GET refund.
If the commission and its consultants truly wanted to alleviate the burden of a higher retail rate of the GET as it affects businesses, they should have suggested that purchases made by businesses for use in the production of income should be taxed at the lesser rate or to allow businesses to claim a refund of the tax imposed on goods and services used to produce income. This treatment would help to alleviate the pyramiding of the GET since the tax raises overhead costs.
That being said, the push back against the criticism that the wholesale rate be eliminated truly underestimates the understanding of the business community of how insidious the tax is when it comes to surviving in Hawaii, at least for most business people. Then again, there are those who think tax incentives, like those for the investment in high technology research and development, are more important. But those businesses were probably making out like bandits with the windfall of tax credits to cover their losses created by the GET.
Anyone who has had to comply with the GET knows how it can decimate whatever profit a business may have anticipated. It is paid regardless of whether or not a business makes a profit and is imposed even if the business sells services or products below cost. It is imposed without any allowance for costs incurred in bringing goods or services to the consumer. That goes for the cost of the rent of the space where the consumer purchases the product and also on the cost of transporting goods or services to the storefront or consumer.
Unfortunately, this latest Tax Review Commission report muddied the understanding of the GET even more, rather than bringing clarity to what should be a simple tax, in its drive to raise more tax revenue.
Lowell L. Kalapa is the president of the Tax Foundation of Hawaii.