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From Governing’s
Technically, Hawaii doesn’t have a sales tax. What it has is a general excise tax (also known as a gross receipts tax), levied on businesses, not consumers. Since its inception, this 4 percent tax has been applied to almost every good and service offered in the state, including food, utilities and most forms of medical care. Altogether, services make up 60 percent of the general excise tax base. “It taxes everything except the cackle out of the rooster,” says Lowell Kalapa, president of the Tax Foundation of Hawaii. “But it meets the standard of a broad base and low rates.”
What about the regressive nature of sales taxes? Don’t they fall disproportionately on the poor? They do, and that’s an issue in Hawaii. But the burden has been softened considerably for those least able to pay through a graduated individual income tax and a low-income tax credit. It all sounds extremely fair at first blush, and in general it is. But there are criticisms. One of the common ones involves the concept of cascading. Since taxes are applied to so many transactions, Hawaii residents actually pay many of them more than once: the first time when materials are bought wholesale, for example, and again upon final acquisition. The state has dealt with this issue by limiting the tax on wholesale goods to just 0.5 percent and is now applying a similar approach to services. The change is expected to cost the treasury about $150 million a year, but supporters say it’s a trade-off for a fairer system. However equitable the system may be, it’s still dependent on tourism, which has suffered from the combination of weak economies in Japan and on the U.S. mainland, and the aftereffects of terrorism. State revenues grew 6.2 percent in fiscal year 2001 — almost exactly as forecast, but after September 11, estimates had to be revised to reflect a 0.7 percent drop in tax dollars from the previous year. Even that wasn’t pessimistic enough — actual revenues declined about 3.5 percent. For the current year, analysts predicted 4 percent growth, but that hasn’t come to pass. Nearly every department has had to cut 2 percent to balance the budget. Over the course of the past several years, Hawaii’s legislature enacted a multitude of tax exemptions and credits to stimulate economic development and construction. Among them were a 10 percent state credit for hotel construction and a high-tech tax credit that has been used primarily by the film industry. Debate continues about the real benefits of these policies. Supporters of a $75 million tax break for an aquarium project claimed it would generate $186 million in new revenue. But then-Governor Ben Cayetano vetoed the bill that included this break, saying it would be unfair to target tax credits to a specific group of developers. Unfortunately, the state doesn’t prepare a tax expenditure report showing the costs of exemptions and credits, nor does it require them to expire after a fixed period. “It’s a good time to review their impact and see how we can improve them,” says Brian Taniguchi, chairman of the Senate Ways and Means Committee. “We should see what the benefits have been and take a look at cutting back on some of them if we need to.” Hawaii could benefit from this sort of fiscal introspection. According to the state constitution, the entire tax system is supposed to receive a once-over every five years from a commission that reports to both the governor and the legislature. In reality, the group doesn’t recommend many significant changes, and the ones it does recommend rarely become law. “I don’t know that they have the political clout to get it through,” says a legislator. “They have a tough time getting momentum.” Where the state has picked up steam is in hunting down tax evaders. A bill passed last year created additional authority to prosecute non-filers criminally. Republican Senator Sam Slom says the message is getting across: “If you don’t pay your taxes, you will go to jail.” One side effect of the criminal prosecution law has been that more people are stepping forward voluntarily to file overdue returns. Hawaii’s Department of Taxation also has seen improvements in the more routine chores of tax administration. The first main module of the state’s integrated tax information system went live last November. Officials hope to recoup its cost through improved collections and auditing. Web filing of income tax returns has existed for several years, but its popularity lagged until 2002. This is a state where many citizens are in the habit of visiting tax offices in person; nearly 10 percent of them are estimated to do so at least once a year. “People here really like personal contact,” says Marie Okamura, the state’s former director of the Taxation Department. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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here’s a perfectly good reason many states don’t tax services — a reason that goes beyond the political clout of doctors, lawyers and accountants. It’s the fear that citizens will simply cross the border and do business in neighboring states that don’t impose the same charges on them. If New York were to place a sales tax on legal fees, there’d be a mass exodus of attorneys to the welcoming arms of Connecticut and New Jersey. Hawaii, however, faces no such problem. Nobody’s going to travel 2,500 miles to save 4 percent drawing up a will.