Hawaii’s average 4.35 percent general excise tax rate may be relatively low when compared with sales taxes in other states, but the GET’s structure makes it a greater burden on economic activity than the headline number suggests, according to a report released Wednesday by the Tax Foundation.
Hawaii’s statewide 4 percent GET, paired with an average 0.35 percent local tax rate, is the 46th lowest combined rate among the 50 states and the District of Columbia, the Tax Foundation officials said in the semiannual report.
However, unlike most other states that charge a sales tax only when a consumer purchases merchandise from a retailer, Hawaii imposes the GET on a seller every time a good or service changes hands throughout the supply chain.
"Experts generally agree that Hawaii has the broadest sales tax in the United States, taxing many products multiple times," according to the report from the Washington, D.C.-based policy institute.
The resulting "pyramiding effect" adds to the cost of goods and services in Hawaii in a way that lacks transparency, said Scott Drenkard, a Tax Foundation economist.
"It’s a process that consumers don’t see. The GET is baked into the price of the product. It’s better to have transparency so people know what they’re paying in taxes," Drenkard said.
The Tax Foundation report cited a study by the publication State Tax Notes that estimated Hawaii’s GET ultimately taxes 99.21 percent of the state’s personal income. That compares with the national median where the sales tax based applies to 34.46 percent of personal income, according to the report.
"The general excise tax has the perverse outcome of forcing businesses to vertically integrate in a way that doesn’t make sense," Drenkard said. "It’s a disincentive to trading with other companies."
One positive feature of the Hawaii GET system is that it is spread across both goods and services, Drenkard said. That has resulted in a more balanced tax base as the services sector has grown to make up a larger and larger share of the economy in most states, he said.
States that tax only merchandise have had to raise rates at a faster pace to make up for the narrower tax base, he added.
Alaska, Delaware, Montana, New Hampshire and Oregon have no state sales tax, according to the Tax Foundation report. Of those states, Alaska and Montana allow local governments to charge sales taxes. Tennessee has the highest combined sales tax at 9.44 percent. Arkansas is second at 9.18 percent and Louisiana third at 8.89 percent, according to the report.
