Ka Wai Ola - Office of Hawaiian Affairs, Volume 6, Number 11, 1 November 1989 — Taxes and You [ARTICLE+ILLUSTRATION]

Taxes and You

By Lowell L. Kalapa, Director Tax Foundation of Hawaii Ww

When are there enough taxes?

Every so often the question pops up about how Hawai'i compares with other states on the amount of taxes we pay to our state and loeal governments. The instant response is usually based on the total of state and lr>r^l ypq rr»llp>rtoH

— , divided by the resident populahon; or the taxes paid by every man, woman, and child in Hawai'i. For the fiscal year 1987, this burden was$l,990, to put Hawai'i eighth in the nation's tax-burden race. Although the figure is generally accepted, there are some who believe that not all that amount should be allocated to resident populahon. They argue that a good deal of the taxes paid in Hawai'i are "exported" or paid by visitors to Hawai'i so residents don't pay that mueh in direct taxes. Critics of the export theory argue that tobe truly fair equal allowanee must be made for all states. The point is eaeh state exports a part of its burden by way of the goods and services sold to people or companies outside the state. For example: copper pipes used in the plumbing of a Honolulu house were, at one time, subject to Wyoming tax when the copper was taken from the

ground. So when severance taxes were collected in Wyoming a part of the tax is paid by Hawaiians who buy the copper pipes. To determine how mueh state tax is paid by non-residents, would be a monumental task. There is a way to measure how mueh tax is imposed on Hawai'i residents and taken out of the eeonomie base. One recent study of the 4 percent general excise tax revealed an interesting fact. For years, Hawaii's general excise tax has been acknowledged as one of the most comprehensive transactions tax, (a tax whieh is imposed on the sale of an item.) In fact, it is unusual in its applieation when compared to other state sales taxes. One reason is that the base for the general excise tax is comprehensive as the tax applies every time a transaction takes plaee. It applies to not only goods (a retail sales tax) but to services. Few, if any states, have anything like the general excise. tax.

Unlike the retail sales tax the consumer pays, the general excise tax must be paid by the seller of the product or service. This leads to eomplianee on the part of the taxpayer. The businessman who owes the tax will pay the tax as the future of the business is at risk. On the other hand, if the eonsumer doesn't pay the retail sales tax, it is very difficult to collect. Returning to how high taxes are in Hawai'i: a recent study found that if collections of the general continued on page 23

Ta.\cs and You

By Lowell L. Kalapa, Director Tax Foundation of Hawaii

from page 21 excise tax were re-calculated to determine the base, that is the value against whieh the tax is imposed and computed, the tax base would be 129 percent of the total personal ineome of the state.

This means the tax base (or cost of goods and services) subject to the general excise tax, is 29 percent greater than the total ineome base of the state. This means some goods and services are being taxed more than onee. How does this compare with other states whieh have sales taxes? The state of New Mexico has the closest elone of our general excise tax. New Mexico's tax base is equal to 87 percent of that state's total personaI ineome. It is the next highest percentage after Hawaii's. Even though New Mexico's tax is similar, it is not ascomprehensive in its applieahon. California's sales tax base is only 50 percent of

that state's personal ineome. Washington's tax base is only 75 percent of its total state personal ineome.

Another study compared Hawaii's use of various tax sources taking into account eaeh state's population and the amount collected for eaeh $1,000 of ineome. This study found Hawai'i relies heavily on the ineome and general excise taxes while relatively little use is made of the real property tax. Using "100" as the average or norm as used by other states, one study showed the use of the general excise tax was 90 percent greater than the national average use (based on populahon) and the ineome tax was used 31 percent more than the nahonal average use. When measured by ineome, the general excise use was 8 percent higher and the ineome tax use 2 percent higher than the

national average. While the use of the real property tax was 36 percent less than the nahonal average use, it appears that the taxpayer's capacity or ability to pay state and county taxes may be overworked by the state imposed general excise and ineome taxes.