In September, the Institute on Taxation and Economic Policy (ITEP) released its “Who Pays?” report, and we used the research within that report to compare Hawaiʻi’s tax system on an equity scale. Based on this framework, a good tax system is not just about revenue. It should also be simple for taxpayers to understand and comply with; should not play favorites among industries or geographic areas; should be able to collect fees from non-residents who benefit from public services (e.g., visitors); and should be equitable in how it treats taxpayers at different income levels.
Taxes Per Capita
In Fiscal Year (FY) 2015, Hawai‘i ranked third highest in per person state tax collections, with an average per person collection amount of $4,530.57. However, it should be noted that states with large numbers of tourists, like Hawai‘i, have a portion of their state’s total revenue generated by taxes paid by visitors. Various studies estimate that tourists pay up to 25 percent of the state’s General Excise Tax (GET).
While Hawai‘i ranks high in tax collections per capita, it falls closer to the average on overall tax as a percentage of income, a measure of the impact of tax policy upon residents. According to the Tax Foundation, Hawai‘i residents paid the 14th highest share of their income to state and local taxes in 2012. In Hawai‘i, 10.2 percent of income went to state and local taxes, which is only slightly higher than the U.S. average of 9.9 percent.
Although the percentage of income paid in taxes is close to national averages, taxes on the poor in Hawai‘i are much higher. The bottom 20 percent of Hawai‘i families pay approximately twice the state and local tax rate as the top one percent, the second heaviest tax burden in the nation for those in poverty (Fig 4.2).
The main reason for this high tax burden is the GET, which takes a much larger portion of income from low-earners than it does from the wealthy, greatly contributing to that second-highest-in-the-nation tax burden on lowest-income earners. At the same time, compared to other states, Hawai‘i’s tax structure relies heavily on income and consumption taxes and less on other fees and taxes, which presents a problem when thinking about how to lessen that burden.
Changes in tax revenue collection, as shown in Figure 4.1, resulted from the combined effects of recession and recovery, inflation, population increases and tax policy changes. In fiscal year 2017, Hawai‘i collected $7.3 billion in taxes, including:
- Net general excise and use tax collections of $3.2 billion (44 percent of total)
- Net individual income tax collections of $2.2 billion (30 percent of total)
- Other state taxes, including the transient accommodation tax, fuel tax, and motor vehicle tax of $1.9 billion (26 percent of total)
General Excise and Use Taxes In-Depth
The general excise/use tax is Hawaiʻi’s largest source of public revenue (Fig 4.3) and was singled out to be the source of “catch-up” contributions to fund post-employment public worker benefits (unfunded liabilities).
In 2017, GET revenue amounted to $3.2 billion. The GET is imposed on business activity that takes place in Hawai‘i while the use tax is applied to services or goods acquired from an unlicensed seller located outside of Hawai‘i. The use tax is primarily imposed to reduce the price advantage that out-of-state sellers would otherwise have over Hawai‘i sellers.
The GET assessment is 4 percent on most activities but 0.15 percent on insurance commissions and 0.5 percent on wholesaling. Since 2007, O‘ahu transactions at the 4 percent rate have also been subject to a surcharge of 0.5 percent to pay for the development of a commuter rail system.
Hawai‘i relies on the GET for close to half of its tax revenue, and Hawai‘i’s GET is uncommonly high. The state GET of 4 percent appears modest when compared to other state sales tax rates. However, equating sales taxes and the general excise tax misrepresents the true impact of the GET. It has been estimated that the income generated by the GET is equivalent to a sales tax of 10–11 percent. Currently, Louisiana has the highest sales tax rate at 9.98 percent.
While sales tax is usually imposed only on the end-user of a good, Hawai‘i’s GET extends to services and is applied even when the good or service purchased will be later sold to someone else. This means the same good can be subject to the GET several times. The GET is also unique in that it is based on the gross revenue received by the person engaging in the business activity, where most sales taxes are based on the gross retail sales of tangible goods. In addition, the tax inflates costs because sellers of goods and services typically add on to their charges the amount of the tax plus an additional amount to cover the tax on such additional charge. For example, on O‘ahu, the taxes added by vendors for goods or services is 4.712 percent (including the rail surcharge).
The top one percent of families in Hawai‘i spend 1 percent of their income on excise taxes, while the lowest 20 percent of residents spend 11 percent of their income on excise taxes. This phenomenon occurs because poorer people must spend a higher proportion of their money on goods, thus paying proportionally more in general excise taxes. Hawai‘i’s excise tax structure is more regressive than the national average where the lowest 20 percent of residents spend 7 percent of their income on excise or sale taxes.
Most states do not collect sales taxes on the purchase of food and other essentials. Hawai‘i’s GET has no such exemptions, but a refundable food general excise tax credit is available to Hawai‘i residents with incomes under $50,000. The credit, adjustable by income, ranges from $110 at an income level under $5,000 to $35 for incomes between $40,000 and $49,999 (Hawai‘i Revised Statutes §235-55.85). This tax credit was the most commonly claimed in 2015, appearing in 323,283 returns, or 45 percent of all those filed.
Taxes are a necessary part of a functioning government and, therefore, a functioning society. Revenues, particularly from taxes, drive the budget, which is the blueprint for our government’s efforts to reinvest into and strengthen our communities. But there is clearly room for improvements that could bring our tax code better in-line with that equity framework, and the GET should be the focus of these efforts.