Cliff Slater is a Honolulu businessman who represents the Reason Foundation in Hawaii.























Second Opinion, op/ed page, Honolulu Advertiser, 2/8/98


Please don't hike Hawaii's 12% sales tax;

it's high enough

There are only ten states in the U.S. that have a 4% sales tax; the other states have different percentages.

Hawaii is unique in that it has a General Excise Tax (GE tax). A 1987 study showed that Hawaii's 4% GE tax collected three times more tax per capita than did the average of the ten states with a 4% sales tax.

In other words, Hawaii's 4% GE tax yielded the same amount as other states would have with a 12% sales tax. Why is this?

First, in Hawaii we apply our 4% tax to ALL sales, including rent, medical care and other services, items that other states do not tax. In rough terms, Hawaii's extremely broad application of the tax doubles the amount of tax collected compared to other states.

Second, we apply the tax not merely to the final transaction but also to the in-between transactions—what is called pyramiding.

For example, in the process of supplying you with food a supermarket must buy goods and services, such as rent and cleaning supplies and computing services, on which it must pay the 4% tax. The supermarket then passes these costs (including the tax) along to you in the price of the food you buy—and then adds the 4% tax to the final price.

In this way the state taxes these goods and services twice. In rough terms, this pyramiding process, which impacts all businesses, adds about half again as much to excise tax collections than if the state only taxed the final transactions.

Thus, we may divide the general excise tax the state collects into approximately thirds:

  • One third is what the state would collect if we had another state's typical 4% sales tax.
  • Another third is what the state collects by applying the tax to the sale of products and services which most states do not tax.
  • The last third comes from the state pyramiding the taxes.

What is seemingly a 4% tax is therefore, in reality, a 12% tax. It is a hidden, but major, contributor to our high cost of living.

The Governor now proposes to raise this GE tax nearly 20% from the current 4% to 4.75% (yielding additional taxes of about $270 million) while reducing income taxes by a similar amount.

Our income taxes certainly need lowering. California has a top income tax rate of 9.3% while Hawaii is 10%, a seemingly trifling difference. Yet, according to the Hawaii Tax Foundation, Hawaii families with $50,000 in taxable income pay more than twice as much in state taxes than California families. Again, it is how the state applies the tax that helps make Hawaii's taxpayers the fourth most highly taxed in the nation.

The Economic Revitalization Task Force's own Taxation Work Group did not recommend any GE tax increase nor do we need it. The $270 million proposed income tax cut amounts to less than 5% of our $7 billion annual state and county operating budgets. We can cut that much and more. Consider this: Hawaii's state and county tax collections in 1984 amounted to $1.7 billion.

Ten years later in 1994, comparable tax collections, allowing for the 14% population increase and the 59% increase in prices, would have been $3.1 billion. Instead, they were actually $3.7 billion—$600 million more.

Even if we were only to halve the 1984-1994 increase in both taxes and government, it would allow us to make the proposed income tax cuts.