The likelihood of lawmakers raising the state’s 4 percent general excise tax anytime soon is lower than the half-percent to 1 percent increases that proponents have been emboldened into pushing this legislative session.
Especially in an election year, the word “sacred” comes to mind during discussions on the GET, the 4 percent — or 4.5 percent on Oahu — added to the cost of goods and services statewide. The GET, imposed on the gross income of businesses, is considered a far-reaching, regressive tax — and that’s largely why efforts to raise it almost always fail.
After 40 years with a 4 percent GET, it was a major feat to convince lawmakers to back a half-percent GET surcharge that enabled funding of Oahu’s rail project — not just once, but twice — the second time in 2015 to extend the surcharge to 2027. Not so surprisingly, other groups tried to ride that momentum.
“It was one of the things debated” when GET surcharge bills made their way through the state Legislature, said Tom Yamachika, president of the Tax Foundation of Hawaii. “That if you let one constituency or group get this, then others will be running through the door not too long afterwards asking, ‘Can’t I get the same thing?’ That’s always a concern.”
This session, one measure sought a half-percent GET increase to provide a dedicated source of funding for long-term care benefits for isle residents. The other, backed by the Hawaii State Teachers Association, sought a 1 percent GET increase, which would have brought in an estimated $750-$850 million solely for educational initiatives. Both initiatives appear dead for the session.
And even if those measures had passed, Gov. David Ige told the Star- Advertiser that he would not support increasing the GET at this time.
“I know there are a lot of unmet needs today,” Ige said. “I’m just really focused on making sure we can collect the taxes already owed. As we do a better job with that then we can make decisions on whether we can increase other taxes.”
Rather than raise the GET to cover those unmet needs, the state is focusing on modernizing the Department of Taxation so that it can do a better job of collecting what is owed, Ige said.
Yamachika warned that raising the GET would increase the cost of living and hurt businesses.
“It will have a ripple effect across the economy,” he said.
“Increases in the cost of living, as well as the cost of doing business in the state, will drive more and more businesses out of operation and with them the jobs Hawaii’s people need.”
The GET was initially set at a rate of 1.5 percent when it was created to capture proceeds of the pineapple canning and sugar processing industries, then rose to 2 percent during the war years, and just prior to statehood in 1959, increased to 3.5 percent, according to the Tax Foundation of Hawaii.
It was bumped up to 4 percent in 1965 to produce the needed resources to modernize Hawaii, the foundation said.
The tax remained at 4 percent for four decades, until lawmakers in 2005 passed the measure allowing the counties to tack on a half-percent GET surcharge for transportation needs. Oahu has exercised its surcharge option to generate revenue to build the rail transit system, and so far has collected $1 billion-plus.
The other counties face a July 1 deadline to approve any GET surcharge measures (see story above).
Because the GET’s base includes nearly every transaction that takes place in the state, even at the rate of 4 percent it’s a money maker, producing at least half the general fund tax revenues for the state, tax collection reports show.
Proponents of adding a half-percent here or 1 percent there argue the tax does not target a certain sector of the population, but is spread among residents and tourists. It’s the quickest and most effective way to generate revenue, they say.
Former Honolulu Mayor Mufi Hannemann, who championed the GET county surcharge, believes there will always be efforts to raise the GET. But any successful effort, he said, must include the three Cs: cause, champions and a coalition.
Hannemann, who now heads the Hawaii Lodging and Tourism Association, said the cause attached to the increase has to resonate with a broad audience, its supporters need to identify champions inside and outside the state Legislature, and they have to build a strong coalition. To generate support for the GET surcharge for rail, for instance, it was important that every county was given the surcharge opportunity for their own transportation needs, Hannemann said.
A GET increase is “absolutely the last resort,” Hannemann said, noting that all other options should be exhausted before lobbying to raise the GET. The timing of any effort also is key, he said.
State Sen. Rosalyn Baker (D, West Maui-South Maui), who conceded the long-term care measure she introduced has scant chance of being resurrected this session, is poised to reintroduce the bill next year. The half-percent GET increase under the measure would have funded benefits of $70 a day for residents in need of long-term care.
“People don’t like to increase taxes and I understand that,” Baker said, noting Oahu lawmakers are likely more hesitant because of the half-percent GET surcharge that was just extended last session.
In 2017, Baker said, she and other advocates will return with a stronger case.
“It’s trying to educate so that people understand what’s at stake if we don’t do it … (so they) understand that there are ways we can mitigate some of the regressive nature of the general excise tax.”
There was a suggestion that the funds could be generated by a surcharge tacked on to health plans, but that would be unfair to employers, Baker said.
“In terms of the funding mechanism, the best mechanism to keep it low and affordable is the general excise tax. Everybody pays in. We’ve got to be really smart about this and make sure it’s done in the least impactful way, but gets the most bang.”
Senate Ways and Means Chairwoman Jill Tokuda has suggested that rather than raise the GET, the state needs to take a hard look at existing tax exemptions, exclusions and credits to determine how much revenue is being lost as a result.
“We need to know how much is leaving the pot,” Tokuda said. “Let’s start getting a better handle of these credits, exemptions and deductions … this is money that leaves even before we can spend it on schools and long-term care.”
The state can’t remedy problems by “just raising our way toward funding … the taxpayer will crumble under that weight,” she said. Tokuda said the state Tax Review Commission should assess all current exemptions and credits, and once those hard numbers are available, lawmakers can determine whether certain tax breaks are still feasible.
However, no one currently sits on the Tax Review Commission, which is supposed to conduct a systematic review of the state’s tax structure every five years. The last report to the Legislature was done in 2012.
Ige plans to appoint seven members to the commission, which will need Senate approval, before the end of session, according to a spokeswoman.
Public Utilities Commission Chairman Randy Iwase headed the last Tax Review Commission that prepared the 2012 report, with the help of a consulting firm.
While the consultants recommended raising the GET by a half-percentage point and other measures to address unfunded liabilities, the tax commission did not adopt that hike in its final report, Iwase said.
The tax commission could address only revenue generation, not reducing expenditures. So it recommended the Legislature establish an independent panel that could take a more holistic approach — reviewing both raising revenues and cutting expenditures.
Lawmakers, however, did not adopt that recommendation, Iwase said.
“It would be better to look at everything at one time,” he said.
“When you look at raising the revenues we shouldn’t be focused on one area, we need to look at the totality.”
