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Given the budget problems that our state is facing, some people are saying that we should add a half percent, or even a whole percentage point, to the general excise tax rate. With a rate of “only four percent,” they say, we are well below most other states in terms of sales tax. That comparison is misleading, however, because it’s an apples-to-oranges comparison – our Hawaii general excise tax is very different from the typical sales tax found in other states.

In most states, the sales tax covers only the final retail sale of goods – it does not apply at the wholesale level, nor does it apply to services, rents, interest, commissions or other forms of income. In contrast, the Hawaii general excise tax applies, in the words of the Hawaii Supreme Court, to “virtually every economic activity imaginable.” Unlike the typical mainland sales tax, our GE tax does apply at the wholesale level, does apply to services, and does apply to rents, interest, commissions, and other forms of income.

Our 4% rate may appear low, but a big chunk of the tax burden is hidden in the prices of goods and services. For example, suppose you buy a loaf of bread for $3.00. The store adds 4% tax and charges you $3.12, so the “visible” tax is twelve cents. In reality, however, the State is collecting a lot more than that. The $3.00 price has to cover the store’s costs, which include the GE tax added on by the bakery when the store bought the bread at wholesale, the GE tax added on by the landlord when the store paid its rent, the GE tax added on by the seller when the store bought its shelves and display cases, and the GE tax paid by the store to a number of service providers, ranging from repair and building maintenance to accounting services. When you add it all up, the State is eventually going to end up with a lot more than twelve cents out of the $3.12 you paid.

In fact, our “four percent” GE tax is equivalent to approximately an 11% sales tax – if we actually had a sales tax that worked like the typical mainland sales tax, the rate would have to be about 11% in order to generate the same tax revenue that our “four percent” GE tax produces now. (This is based on a study done for the 2005-2007 Tax Review Commission of the State of Hawaii.) If you compare apples to apples – instead of apples to oranges – then we effectively already have an 11% sales tax (and that’s before considering the extra tax on Oahu). A “one percentage point” increase could put us at the equivalent of about a fourteen to fifteen percent sales tax rate, measured on an apples-to-apples basis.

To put this in perspective, if we compare sales and excise taxes across all 50 states, on a dollars-per-capita basis Hawaii is number two – second highest out of all 50 states (based on US Census Bureau statistics from 2005, before the rate on Oahu went from 4.0% to 4.5%). The only state ahead of us was Washington State, where they have no state income tax.

Looking at our total tax burden, instead of just focusing on the general excise tax, doesn’t make the picture look any better. We have the highest personal income tax rate in the country, relatively high corporate income tax rates, and a substantial hotel room tax. Overall, considering all state taxes, we are still in second place among all 50 states in terms of dollars per capita — second highest among all 50 states whether we look at just sales and excise taxes, or all state taxes combined. (This is also based on US Census Bureau statistics.)

The fact is that Hawaii is already a high-tax state. There are different ways to look at the statistics: dollars per capita, percentage of total personal income paid in taxes, percentage of gross state product, etc., but no matter which approach you use, our state taxes already put us very near the top among all 50 states. Anyone who says our taxes are low compared with other states is just ignoring the facts.

Raising already-high taxes would hurt our economy and result in the loss of jobs. Increasing the general excise tax is particularly dangerous, because it is a tax on gross receipts, not net income. A business that is making little or no profit pays little or no income tax. In contrast, the general excise tax is imposed on every dollar that the business takes in, even if there is no net profit after expenses are paid. Therefore, if we increase the general excise tax, even businesses that are losing money, and struggling to keep their doors open, would have to pay substantially higher taxes. Businesses that are barely surviving now — and there are a lot of them in Hawaii — may be pushed over the edge into bankruptcy.

In addition, the GE tax is regressive, with a proportionately higher burden on lower-income individuals and families. When a family spends all of its income to pay rent or buy necessities such as food and clothing, the general excise tax applies to all of that spending. If a family can afford to save some of its income, and not spend all of it, there is no immediate general excise tax on the portion that goes into savings. Thus, lower-income families pay a larger percentage of their total income in general excise tax than rich families do. Increasing the tax would magnify this effect.

Last but not least, the idea that we can “export” part of the tax burden by collecting more general excise tax from tourists is a myth. Although tourists pay general excise taxes, those taxes are part of the total cost of Hawaii as a destination. If we increase the price of a visit to Hawaii, that will inevitably affect our ability to attract visitors. There is no free lunch — we can’t solve our problems by asking people from the rest of the world to come here and pay more. They will simply choose some other destination instead (or stay home), hurting our economy even further.

We need to stimulate economic growth and create jobs in Hawaii. An increase in the general excise tax would do just the opposite — it would force many small businesses to cut back, lay off employees, or even close their doors.