One of the options lawmakers may be considering is a proposal to temporarily suspend existing exemptions from the general excise tax and imposing the general excise tax rate on those transactions. Although it is unknown how much money this would
One of the options lawmakers may be considering is a proposal to temporarily suspend existing exemptions from the general excise tax and imposing the general excise tax rate on those transactions.
Although it is unknown how much money this would generate as many of these exemptions have been on the books for years, imposing a tax on those exempt transactions will not only create an added tax burden, but it will add to the cost of living and doing business in Hawai‘i.
It should be remembered that many of the exemptions exist because if the general excise tax were imposed on these entities or transactions it would impose an undue burden or cause businesses to structure transactions in an inefficient manner. Some of these exemptions were adopted to ensure that transactions, such as reimbursements or amounts disbursed as employee compensation and/or benefits, are not subject to taxation.
Finally, there are those exemptions that exist because to tax the transaction would be a violation of superior law. Other deductions, exclusions and exemptions exist because they help to reduce the pyramiding effect of the general excise tax. It should be remembered that any imposition of tax will not only result in an increase in the cost of doing business in Hawai‘i, but may create inequitable taxing situations.
Of the listed exemptions and exclusions that could be considered for suspension are for convention center operators, certain exemptions for financial institutions, and petroleum refiners. The former exemption for convention center operators was to reduce the cost for the company contracted to run the state’s convention center. And perhaps it is an exemption that can be suspended as who else would operate the convention center?
On the other hand, the exemption for financial institutions was adopted because the banks pay the bank franchise tax in lieu of the general excise and corporate net income taxes. While there are specific exemptions for certain activities or services the banks provide that are taxed to others under the general excise tax, lawmakers could consider carving these activities out for a temporary imposition of the general excise tax.
As far as the exemption for petroleum refiners, suspension of that exemption probably will not produce any additional revenue. That exemption was adopted back in the early 1950s before the establishment of what is known as Foreign Trade Zones which permits the importation of goods into a designated area of the state but still considers that area as technically not being in the United States and, therefore, not subject to taxes.
While business after business rose during a recent hearing on the bill, when it came time for questions and answers, the point made by the Speaker of the House is that while all of these “special interests” ask that their exemptions not be suspended or taxed, none of the “special interests” offered alternatives to help lawmakers address the more than $850 million shortfall. This left many of those witnesses speechless.
No doubt the witnesses were focused solely on the exemption that would affect their business and not on the bigger picture of the looming budget shortfall. And who can blame them, that shortfall is what lawmakers are elected to deal with and they do have a choice of options that can be employed to deal with the shortfall. And while suspending general excise tax exemptions and imposing the tax is an option, it is by no means the only option. Indeed if the reaction from the private sector or the “special interests” there that evening was to suggest cutting spending, lawmakers would, no doubt, have fired back with the question, “where?”
Again the problem of spending really takes its genesis in the fact that lawmakers love to spend tax dollars to keep their constituents happy and now cutting that spending is one option to balance the budget, but they don’t want to offend their constituents. So the option to raise taxes, albeit through the back door so their constituents won’t notice their “taxes” going up, is under consideration. But in the long run, absent many of these exemptions, the cost of living and doing business in Hawai‘i will go up.
Again, raising taxes is not the only viable option. Bills heard earlier this session to collapse many special funds back into the general fund would not only make more than a half billion dollars of cash balances in these funds available to underwrite other general fund programs, but it would return fiscal control to lawmakers who currently are not able to utilize these special fund surpluses to fund general fund programs.
How would you like paying more taxes while some agencies sit on over a half billion dollars in idle funds?
• Lowell Kalapa is president of the Tax Foundation of Hawai‘i, a private, nonprofit, non-partisan, educational organization established to research issues confronting governments in the area of public finance, taxation, and public administration. It is supported entirely by private contributions. Visit www.tfhawaii.org for more information.
