It is disappointing to read articles on the regressivity of general excise taxes and how our policy makers are somehow hurting the less fortunate.
I have been working on Hawaii state tax policies in one form or another for more than 30 years. I have served as a tax practitioner, a state legislator, chairman of Hawaii’s Tax Review Commission, and now state director of taxation. I have seen a lot during my multidecade tenure and certain patterns have emerged.
One critique that I have heard time and time again is how awful it is that Hawaii levies a tax on food and medicine. Every year, a freshman legislator or public policy advocate claims in the press that the state’s tax system unfairly penalizes low-income taxpayers because the general excise tax (GET) applies to groceries and medicine.
Critics say that lower-income households spend more of their income on food, so more of their income goes to paying the GET tax on food. This makes the policy regressive. While this argument may make sense intuitively, it displays a shallow understanding of the state’s tax system.
For one, Hawaii does not currently tax prescription medicine. Prescription medicine is exempt from GET. The complaint that the state taxes medicine is just wrong.
What about the accusation that taxing groceries disproportionately hurts low-income households? This idea also falls apart upon closer scrutiny for several reasons.
First, the state exempts SNAP purchases (commonly known as food stamps) from GET. SNAP funding usually covers most, if not all, of grocery expenses for low-income families. In 2021, the state exempted SNAP purchases worth $499 million. Half a billion dollars can buy a lot of groceries.
Second, the Legislature has been aware of the burden that GET places on low-income households and created targeted tax credits like the Refundable Food/Excise Tax Credit to mitigate those effects. In 2020, the last year for which data is available, the state issued $28.3 million in credits for this purpose. In effect, the government gave low-income taxpayers nearly $30 million dollars to cover the cost of the GET.
One should be careful to make bold claims about regressivity of only one specific tax type. Hawaii does not just have one single tax, but rather a tax system made of several tax types that interact with one another. The system should be evaluated in its entirety.
The truth of the matter is that when all taxes are considered, low-income households bear almost no sales tax burden at all. The income tax credits (payments from the state) offset all GET tax payments (not just groceries) for households in the bottom 20% of income.
If low-income households pay very little GET on groceries, who would benefit from a GET exemption on groceries? The answer is that the exemption would mostly benefit tourists and well-off households, as they represent most grocery spending in the state. The proposal to exempt groceries is expensive, estimated to be worth $268 million in lost revenue. Nearly all that money would go to tourists and higher-income families.
The irony is that people who want to create an exemption for food and medicine think they are helping the disadvantaged classes, but in reality, they would be disproportionately helping the more well-to-do.
When considering policies intended to improve the livelihood of lower-income households, targeted income-based interventions are more effective than broad-based exemptions. The good news is the state Legislature understands this and created important tax credits to address the issue.
Isaac W. Choy, CPA, is director of taxation for the state of Hawaii.
