Guest Viewpoint for Monday — August 25, 2003

• Tax increase disguised as county funding aid

Tax increase disguised as county funding aid

By LOWELL L. KALAPA

Late last month the Senate Tourism Committee took up HB 1554, HD 1, SD 27 which would allow the counties to impose a sales tax of 1% and not a piggyback on the state’s general excise tax.

As we learned in the past few weeks, the state’s general excise tax is a unique creature, taxing both goods and services. It is a tax on people who want the privilege of doing business in the state and not a tax on the customer even though businesses show the tax out as a separate charge much like a sales tax would be shown on a receipt in a sales tax state on the mainland.

The lure for the counties is that they would have another source of revenue to fund their spending and in the case of Honolulu, lawmakers would get their hands on the TAT revenues that are currently shared with that county. For the Neighbor Island counties, they would be able to keep one half of the current TAT revenues, but the other half would go back to the state.

Surprisingly, the measure garnered quite a bit of support during the past session but fell just short of full approval. Even the governor supported the proposal initially, citing the measure as instrumental in homerule . And, of course, some taxpayers looked upon the proposal as a way to avoid raising real property taxes.

That assumption is pure fantasy as there is nothing in the proposal that would require the counties to reduce other taxes. If nothing else, the counties would view the sales tax proposal as a way to raise more taxes. Would the counties leap for joy if there were a requirement in the bill that for each dollar of sales tax collected real property taxes had to be reduced by one dollar?

Then there is the naive Honolulu official who pronounced that the proposed county sales tax was the same as the general excise tax so why not have the state tax department collect and administer the tax. Obviously that official has not been reading these columns. It was also obvious that there is a lack of understanding of the sales tax when one official quoted that the tax would raise $120 million for the City & County of Honolulu.

Without knowing what the sales tax will look like and what would be taxed, it is anyones guess how much the one percent sales tax would raise. While one can make assumptions that the proposed sales tax would look much like the sales taxes found on the mainland, one cannot say for sure until the bill is drafted and defines what the base of the sales tax would be.

Making the assumption that it will look like other sales taxes, one can assume that it will not apply to services. Under political pressure will county officials exempt food from the sales tax base? Will the sales tax apply to amusements which otherwise could be considered a service?

And given that it is a vastly different tax from the general excise tax, why should the tax department be saddled with administering another new tax? It would seem far more accountable to have each county administer their own sales taxes. And what if each county puts its own spin on what is taxable in that county? Or for that matter what if only some of the counties adopt the sales tax? Who then will determine whether or not a particular purchase is taxable? For example, if someone from Hilo, where the optional tax is not adopted, orders a coffee pot from a store in Honolulu, where the sales tax is imposed, should that Hilo customer have to pay the Honolulu sales tax? And if the customer does have to pay the sales tax, what benefit does the customer receive from having paid the Honolulu sales tax?

Elected officials both at the state and the county levels should be ashamed of trying to lay yet another tax on the beleaguered taxpayer. The governor should recognize this proposal for what it is, a tax increase, nothing more.

Given the differences between a sales tax and the general excise tax, who is going to compensate the businesses for having to deal with yet another tax that looks nothing like the tax which they are already collecting? And will the tax department count the amount collected as the county sales tax as part of the gross income of the business so the business will have to pay the 4% general excise tax on that amount collected? And if not, who is going to do the extra work of keeping track of what amount collected is not subject to the general excise tax?

The county sales tax proposal may be very tempting for elected officials, but for the taxpayer it is a lose lose situation with less money left for the taxpayer and the economy.

Lowell L. Kalapa is president of the Tax Foundation of Hawai‘i.