January 17, 2014

Honolulu Civil Beat: It’s Time to Revamp Hawaii’s GET

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(Original Post)

By Victor Geminiani  01/16/2014
Hawaii taxes our residents in poverty more heavily than all but three other states in the nation.
Most of this regressivity is caused by our heavy reliance on the General Excise Tax (GET), which generates half of all revenues collected by the state. Sales and excise taxes are the most regressive form of taxation. Unlike wealthier households, who can save or invest their income, lower-income households must spend all or most of their income on necessities such as food, shelter, and transportation. As a result, low and moderate-income residents end up taxed on a far greater percentage of their income than higher-income households.
The excise tax system was created in the early 1930s when the Big 5 owned most real property in our state. Rather than taxing real estate, powerful landowners successfully advocated for a broad tax on all business activity that would support public needs and shield property from significant taxation. Today, we have the lowest property tax rates in the nation.
Hawaii’s GET tax system goes far beyond a conventional sales tax. Unlike most states that charge a one-time tax on goods at the point of retail sale, the GET is imposed on gross business receipts for almost every kind of transaction. Initially set at 1.25 percent for the general public, the GET has gradually increased and been modified as Hawaii’s economy has evolved.
Today, the GET is set at 4 percent statewide for nearly all consumer goods and services, with a 0.5 percent county surcharge on Oahu for rail. Agricultural production, manufacturing, and wholesalers pay a significantly reduced GET rate of 0.5 percent. In addition to goods, the GET is levied on nearly all services, including essentials such as doctors’ visits or childcare. While many states provide exemptions, exclusions, or reduced tax rates for necessities such as groceries, Hawaii taxes virtually all consumer goods and services at the regular rate.
Unfortunately, the GET’s success as a revenue-raising measure comes at a significant social cost. It results in a highly regressive tax system, with the tax burden falling most heavily on our lowest-income households.
According to the Institute on Taxation and Economic Policy, the bottom 40 percent of households in Hawaii pay almost 13 cents out of every dollar of their income in state and local taxes, while the top 1 percent pay around 8 cents per dollar.
Compounding the high regressivity of the GET is our income tax structure, in which many of Hawaii’s low-income residents, including some living below the poverty guidelines, actually have state income tax liability. These and other factors led the Institute to rank Hawaii as fourth worst in the country for taxing its residents living in poverty.
The actual structure of Hawaii’s GET plays a major role in the regressivity of our state tax system. While our statewide rate of 4 percent is one of the lowest in the nation, our tax structure hides most of what residents actually pay. Because the GET is levied at several points along the supply chain — production, wholesale, and retail — we actually pay taxes well over the 4 percent rate visible at the point of final sale.
Taxing goods multiple times results in tax “pyramiding” and increases the final cost to consumers. As a result of this pyramiding, Hawaii residents are estimated to pay an effective statewide sales tax rate of around 11 percent. Instead of having one of the lowest statewide sales tax rates, Hawaii actually has the highest statewide taxes on general goods and services: residents of only three cities in the country pay a higher percentage. Because lower-income families must spend a larger share of their income on basic necessities, this 11 percent effective tax rate hits them hardest.
In response to the regressivity of Hawaii’s GET the state has created a refundable food/excise tax credit that helps compensate low-income households for the disproportional share of their income paid toward the GET. The state also has created a low-income household renters credit to compensate for the high cost of shelter throughout the islands. The renters credit increases tax equity by providing tax relief to low-income renters, who cannot benefit from tax breaks such as the mortgage interest deduction available to wealthier households that own homes. Landlords normally pass along the cost of property taxes and the GET to tenants through higher rents. Refundable credits reduce a filer’s tax liability, and when the amount of the credit is larger than the amount of income tax that the filer owes, the filer will receive a refund in that amount from the state.
These credits are critical to reducing the disproportionate share of taxes paid by low and moderate-income households, but they have failed to keep pace with inflation, let alone the staggering cost of living in Hawaii. The value of the renters credit has not been adjusted for inflation since 1981, and the food/excise tax credit since 2007.
Merely adjusting both existing credits for inflation would significantly improve tax equity throughout our state. It’s time we do this and begin restore equity to the tax system. 
About the author: Victor Geminiani is the Executive Director of the Hawaii Appleseed Center for Law and Economic Justice.

By Victor Geminiani  01/16/2014

Hawaii taxes our residents in poverty more heavily than all but three other states in the nation.

Most of this regressivity is caused by our heavy reliance on the General Excise Tax (GET), which generates half of all revenues collected by the state. Sales and excise taxes are the most regressive form of taxation. Unlike wealthier households, who can save or invest their income, lower-income households must spend all or most of their income on necessities such as food, shelter, and transportation. As a result, low and moderate-income residents end up taxed on a far greater percentage of their income than higher-income households.

The excise tax system was created in the early 1930s when the Big 5 owned most real property in our state. Rather than taxing real estate, powerful landowners successfully advocated for a broad tax on all business activity that would support public needs and shield property from significant taxation. Today, we have the lowest property tax rates in the nation.

Hawaii’s GET tax system goes far beyond a conventional sales tax. Unlike most states that charge a one-time tax on goods at the point of retail sale, the GET is imposed on gross business receipts for almost every kind of transaction. Initially set at 1.25 percent for the general public, the GET has gradually increased and been modified as Hawaii’s economy has evolved.

Today, the GET is set at 4 percent statewide for nearly all consumer goods and services, with a 0.5 percent county surcharge on Oahu for rail. Agricultural production, manufacturing, and wholesalers pay a significantly reduced GET rate of 0.5 percent. In addition to goods, the GET is levied on nearly all services, including essentials such as doctors’ visits or childcare. While many states provide exemptions, exclusions, or reduced tax rates for necessities such as groceries, Hawaii taxes virtually all consumer goods and services at the regular rate.

Unfortunately, the GET’s success as a revenue-raising measure comes at a significant social cost. It results in a highly regressive tax system, with the tax burden falling most heavily on our lowest-income households.

According to the Institute on Taxation and Economic Policy, the bottom 40 percent of households in Hawaii pay almost 13 cents out of every dollar of their income in state and local taxes, while the top 1 percent pay around 8 cents per dollar.

Compounding the high regressivity of the GET is our income tax structure, in which many of Hawaii’s low-income residents, including some living below the poverty guidelines, actually have state income tax liability. These and other factors led the Institute to rank Hawaii as fourth worst in the country for taxing its residents living in poverty.

The actual structure of Hawaii’s GET plays a major role in the regressivity of our state tax system. While our statewide rate of 4 percent is one of the lowest in the nation, our tax structure hides most of what residents actually pay. Because the GET is levied at several points along the supply chain — production, wholesale, and retail — we actually pay taxes well over the 4 percent rate visible at the point of final sale.

Taxing goods multiple times results in tax “pyramiding” and increases the final cost to consumers. As a result of this pyramiding, Hawaii residents are estimated to pay an effective statewide sales tax rate of around 11 percent. Instead of having one of the lowest statewide sales tax rates, Hawaii actually has the highest statewide taxes on general goods and services: residents of only three cities in the country pay a higher percentage. Because lower-income families must spend a larger share of their income on basic necessities, this 11 percent effective tax rate hits them hardest.

In response to the regressivity of Hawaii’s GET the state has created a refundable food/excise tax credit that helps compensate low-income households for the disproportional share of their income paid toward the GET. The state also has created a low-income household renters credit to compensate for the high cost of shelter throughout the islands. The renters credit increases tax equity by providing tax relief to low-income renters, who cannot benefit from tax breaks such as the mortgage interest deduction available to wealthier households that own homes. Landlords normally pass along the cost of property taxes and the GET to tenants through higher rents. Refundable credits reduce a filer’s tax liability, and when the amount of the credit is larger than the amount of income tax that the filer owes, the filer will receive a refund in that amount from the state.

These credits are critical to reducing the disproportionate share of taxes paid by low and moderate-income households, but they have failed to keep pace with inflation, let alone the staggering cost of living in Hawaii. The value of the renters credit has not been adjusted for inflation since 1981, and the food/excise tax credit since 2007.

Merely adjusting both existing credits for inflation would significantly improve tax equity throughout our state. It’s time we do this and begin restore equity to the tax system. 

About the author: Victor Geminiani is the Executive Director of the Hawaii Appleseed Center for Law and Economic Justice.

 

 

 


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