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Some folks ask me if I have any radical ideas to change the tax system in Hawaii. Here’s one: Stop taxing transportation of goods and people.

Before you stop laughing uproariously, though, consider this.

First, we can’t tax air transportation. There are federal laws prohibiting us from applying a gross receipts tax (like our general excise tax) to transportation charges.

Back in the late 1970s and early 1980s, we tried to tax air carriers by imposing our Public Service Company Tax, which applies to public utilities in lieu of GET.

We were very creative.

The Hawaii Supreme Court held, and our state told the U.S. Supreme Court, that our tax was actually a tax on real and personal property (which was allowed), but because it was so difficult to value the kinds of property that utilities had, like airspace rights, rights-of-way for power and cable lines, or easements for water pipes, the tax used the gross income of an airline as a proxy for valuing its property.

The U.S. Supreme Court didn’t buy the argument.

“It’s still a tax measured by gross receipts, which is a gross receipts tax under federal law, and we get to interpret that federal law,” they said, in effect, in a unanimous 8-0 decision in 1983.

Despite this ruling, zealous tax auditors still tried to go after helicopter tour companies and those companies pushed back, leading the Department of Taxation to rule, in Tax Information Release 89-10, that those gross receipts were immune both from the Public Service Company Tax and the GET.

There are also federal restrictions on taxing transportation by water. Federal law prohibits anyone other than the federal government to tax a vessel, its passengers, or its crew while the vessel is operating on navigable waters.

In 2010, our Intermediate Court of Appeals ruled that the GET as applied to charges for chartering a sport fishing boat was valid because it was a tax on the business and not on the vessel, passengers, or crew. The court reasoned that the federal law was meant to prohibit fees and taxes on a vessel simply because the vessel sails through a given jurisdiction and didn’t mean to affect whether sales or income taxes can apply in general.

The Hawaii Supreme Court declined to review the case, as did the U.S. Supreme Court. So, GET can be applied to transportation by water, at least for now.

Complexity And Disparity

In the meantime, fine distinctions are already being made. In cases involving UPS and Lynden Air Freight, the Hawaii Supreme Court held that when a shipper pays for a shipment to go from your office to your counterpart on the mainland, GET can apply only to the transportation by ground between your office and the airport.

In short, the landscape here is filled with complexity and disparities between transportation industries.

Are there good reasons why, as a matter of tax policy, we should tax water and ground transportation when air transportation can’t be taxed? (Other than, “Because we can.”) We’re an island state.

One of the reasons often given to explain our astronomical cost of living is that goods and people need to be shipped in and out, and that isn’t done for free. So, what would happen if the tax goes away?

The industries would compete on a more level playing field, residents would feel some relief in the cost of living department (or at least sellers wouldn’t be able to use the tax as an excuse), and the government revenues might not go down because fewer costs may lead to more buying, and thus more total revenue subject to GET taxation.

Good idea, or the ravings of a madman? Let the debate begin!