Almost annually a recommendation is made to end Hawaii’s general excise tax (GET) on food and/or medical care. Among the justifications is that the tax on these items is regressive — that is, it falls hardest on those who can least afford it. I am sympathetic to that argument, however, there are other aspects to consider.
First, Hawaii’s GET is not a sales tax; rather it is a gross business income tax. A conventional sales tax is levied only on the exchange of physical goods (such as clothing, prepared foods, etc.) while our GET taxes these types of transactions but also services (such as entertainment, rents, medical care, etc.). As a result, Hawaii’s GET tax base is broader than that of any other state.
Second, having a broad base allows us to have a low tax rate. Hawaii’s GET state rate is a modest 4% (plus 0.5% for the counties). This is the lowest rate among all the states that have a sales tax. In 14 states, state and local sales taxes are above 8%.
Third, even with our modest tax rate, the GET generates a large amount of revenue, and is the state’s biggest tax revenue producer. For the fiscal year ending June 30, 2022, the GET yielded $3.98 billion for the state general fund, while the state’s individual income tax collected $3.76 billion.
Fourth, a significant portion of the GET is paid by tourists when they purchase goods and services here. The State Tax Review Commission estimates that about 20% of the GET is paid by Hawaii nonresidents; a further 9% is paid by active-duty military.
Fifth, many low-income households’ food purchases are already exempt from the GET if they are made with SNAP or WIC benefits.
So, we should keep the GET as it is. Exempting all food and medical care from the GET narrows the tax base. There is an inevitable trade-off between the broadness of the tax base and the tax rate. We can opt for a broad base with a low rate, or a narrow base with a high rate. High rates encourage tax avoidance because such avoidance has a higher payoff. This creates inefficiencies in the economy. Our present GET is not problem-free, but a higher rate only makes those problems worse.
Narrowing the base is a slippery slope. Once certain goods or services are excluded there will be pressure to add more exemptions. Why not exempt rents? Certainly, housing is a necessity.
At present, the GET is generally a simple tax to comply with. Defining the specific goods and services to exempt adds complexity and is rife with issues. For example, when a shopper (local or tourist) purchases a bowl of pre-cut fruit, is that a taxable transaction or not? What portion of nursing home fees would be exempt for kupuna?
If we do reduce the GET by narrowing the base and not raising the rate, we will have to make up the revenues elsewhere. At present, our state treasury is flush, thanks to federal COVID-19 monies. That will not continue. If we reduce the GET, we will likely have to generate revenues from other sources, such as the individual income tax.
Eliminating food and medical care from the GET is an inefficient way to deal with regressivity of the GET; such exemptions benefit everyone (the poor, the rich, the tourists). At present we use refundable income tax credits to offset the regressivity of the tax on targeted low-income and resident taxpayers only. In 2020 these targeted credits amounted to $29.6 million paid to households with adjusted gross income below $50,000. If policymakers are concerned about GET regressivity, increasing these credits is the most efficient way.
In sum, the GET has warts, but so do its alternatives. Resist the temptation to narrow the base by exempting food and medical care. If we do succumb, you can expect a higher GET rate not long thereafter.
Jack P. Suyderhoud, Ph.D., is an emeritus professor of business economics in the Shidler College of Business, University of Hawaii-Manoa; the views expressed here are his own.
