Ka Wai Ola - Office of Hawaiian Affairs, Volume 5, Number 11, 1 November 1988 — Those "Hidden" Taxes WeAll Pay [ARTICLE+ILLUSTRATION]

Those "Hidden" Taxes WeAll Pay

When we think of state taxes, the taxes with whieh we are most familiar are the ineome, general excise, and the property tax. lndeed, these three taxes are the cornerstones of government finances in Hawai'i. However, there are a variety of other taxes

whieh we don't realize we are paying because they are "hidden" in the cost of the products we purchase. These taxes are "indirect" taxes whieh are paid by others but the cost of whieh is passed along in the pnee of the product. For example, we pull up to the pump at the gas station and see that the pnee is $1.21 per gallon. Little do many realize that federal, state, and loeal fuel taxes are included in the cost of every gallon of gas we purchase. Beginning with the 9 cents per gallon federal fuel tax to the 11 cents state fuel tax and anywhere from 4 cents to 11.5 cents per gallon for county fuel taxes and you ean begin to see how mueh of that price per gallon is fuel taxes. In some counties, the fuel taxes account for as mueh as 31.5 cents per gallon. In addition to the fuel taxes, the 4 percent general excise tax is also embedded in the price of the fuel. This is a bit more difficult to calculate as the tax is imposed on the price of the fuel without the fuei taxes in order to avoid possible double taxation. Another tax whieh contributes substantially to the cost of the product — yet many consumers do not realize that they are paying — is the tax on aleoholie beverages. The tax is actually imposed on the wholesaler or distributor of the beverages and is calculated on the wholesale price of the beverage. Until 1986, the tax on aleoholie beverages, more commonly known as the liquor tax, was a percentage of the wholesale price. The rate was setat 20 percent of the pnee at whieh the product was sold by a wholesaler. However. many wholesalers argued that since the pnee of the product included such costs as shipping and customs (if it was an imported beverage), the tax tended to discriminate against products whieh must be shipped into Hawai'i as opposed to products made locally. It was under this cloud of possibly being a violation of the interstate commerce clause that the 1986 legislature changed the way liquor taxes are imposed in Hawai'i. Under the current law, liquor is taxed based on the type of product and the volume of that product. The rates are measured on a gallonage basis ranging from a low of 50 cents for draft beer to $5.42 for distilled spirits such as whiskeys. Under the gallonage approach, products of the same category are taxed at the same rate per gallon regardless of whether the product is imported from a foreign country or made here in Hawai'i. Unfortunately for Hawai'i consumers, when the legislature converted the tax to a ga!lonage basis, it required that the rates be set so that tax eollections would equal those under the percentage tax. In doing so, Hawai'i ended up with some of the highest liquor tax rates in the nation. For example, only Georgia has a higher rate on distilled spirits than Hawaii's $5.42 per gallon. What is even more startling is that when Hawaii's tax on beer is converted to the barrel basis, whieh is the most eommon unit for beer taxes in other states, we find Hawai'i has the

highest beer rate in the nation at $25.11 per barrel. When compared with its twelve sister states in the West, Hawaii's next closest rival is Utah where the tax is $11.00 a barrel. It is no wonder that there is such a disparity between mainland and loeal beer prices. But wait, that's not all. Under the current liquor tax law, there is an automatic escalation of rates whenever the average price of a particular product category increases and the volume sold also increases. If this phenomenon occurs, the tax department has the authority to increase the rate of the tax in the same proportion. Thus, there are silent increases in the liquor tax that many consumers go on paying without knowing. The 1989 legislature will be forced to review this tax as there is a sunset clause in the law that will repeal the current provisions and go back to the 20 percent of wholesale pnee approach. Finally, there is the tax on tobacco products. It continues to be set as a percentage of the wholesale value with the rate being 40 percent. Like the liquor tax, it is paid by the wholesaler of the product based on the value at wholesale. Thus, more often than not, the consumer does not see the tax at all. While lawmakers have argued that the latter two taxes should be structured to contribute increasing tax collections as the price of the product increases, many fail to realize that in addition to the specific excise taxes, these products are also subject to the general excise tax like any other product. Although it may not be popular to support reduction in tax rates for such "vices," it is a matter of pnneiple that if these two products are to be burdened with an additional tax, the tax rate should be evident and not automatically be in-

creased, be it a matter of price or external adjustment. For the consumer taxpayer, the taxes that we all pay are not always apparent at the check-out counter. Those "hidden" taxes merely add to the cost of living in Hawai'i. Next time when you think you've seen all the taxes you pay, think again.

Taxes and You

By Lowell L. Kalapa, Director Tax Foundation of Hawaii

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