Hawaii's version of sales tax hides costs

AP News
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Posted: Dec 14, 2009 10:33 AM

From riding a tour bus to buying sunscreen, the cost of living or visiting already-pricey Hawaii could soon get higher.

Lawmakers are considering a hike in Hawaii's version of the sales tax, a move that would generate millions of dollars for the state's ailing education system and help balance the budget in the midst of the economic downturn. But the proposal has drawn the ire of businesses and consumers.

"We cannot tax ourselves out of this economic situation," said Carol Pregill, president of Retail Merchants of Hawaii. "When you increase costs to a retailer, the costs have to be passed on to the consumer."

Hawaii's general excise tax looks small on its surface, at about 4.71 percent in Honolulu and 4.16 percent on the neighbor islands. The average sales tax nationally is about 6 percent.

But the true cost of the tax is little known here because it and other taxes must be paid on goods and services every time they change hands, from the cargo ship to a Waikiki retail store. By the time a product reaches a consumer, those taxes have accumulated at each step and passed on in the price tag.

It would take a sales tax rate of at least 11 percent and as high as 17 percent if food and medicine were exempted to generate an equivalent amount of revenue, according to the Tax Foundation of Hawaii, an organization that researches how Hawaii's heavy tax burden hinders the state's prosperity.

That sales tax would easily be the highest in the nation, said Lowell Kalapa, the foundation's president. Illinois' maximum sales tax rate is currently the highest, at 11.5 percent.

"If people knew what they were paying, they would not be happy," Kalapa said.

Hawaii's general excise tax works similarly to a sales tax, in that most merchants add the tax to the cost of a product at the point of sale.

The official tax rate in Honolulu is 4.5 percent, but businesses are allowed to charge customers up to 4.712 percent. The reason is that the excise tax is a seller's tax, not a buyer's tax as it would be in most states. So when a merchant adds up his gross receipts at the end of the business day, he multiplies his total _ including the tax he charged _ by 4.5 percent to determine how much he owes.

For example, on a $100 product, a business would charge $104.712, and 4.5 percent of that is the $4.71 the business owes to the state.

Hawaii lawmakers will consider legislation in January that would increase the general excise tax by 1 percentage point and exempt food and medicine. Currently, food and non-prescription medicine are among the items that are taxed.

The bill, which was estimated to raise $200 million annually for education, passed the state Senate this year and is now pending before the House. It faces hurdles because of business opposition and politicians' fear of raising taxes in an election year.

The excise tax pays for nearly half the state's budget, and tourist spending accounts for about one-fifth of total excise tax collections.

The Aloha State is already one of the most taxed states in the nation, but labor union leaders have said a tax increase could save government jobs and help students, whose school year was cut by 17 days annually due to budget cuts.

"People have this perception that we have only a 4 percent tax, and they don't realize we're already on an apples-to-apples basis one of the highest tax states," said Ronald Heller, a tax attorney and former member of the state Tax Review Commission.

Although Hawaii's excise tax exacerbates the state's high cost of living, some experts praise its ability to raise so much money with a single-digit rate.

"All things considered, Hawaii is in a much better condition than most other states. As a result, Hawaii has been able to keep its tax rate pretty low," said Bill Fox, director of the University of Tennessee Center for Business & Economic Research.

Besides the excise tax, Hawaii also increased its top state income tax rate to the highest in the nation earlier this year. Hawaii's wealthiest residents _ individuals earning more than $150,000 and joint filers making more than $300,000 _ pay an 11 percent income tax rate, higher than California's maximum of 10.3 percent.