Just say “No” to increasing the General Excise Tax on Hawaii Island

The General Excise Tax (GE Tax) is a tax on the gross sales of a business. Currently, it is 4.166% for Hawaii Island businesses and an additional half a percent higher on Oahu. There are very few exceptions: it is collected on basically all goods and services including clothes, food, rent, automobiles sales and just about everything else. It is a very broad tax.

Recently Mayor Kim has floated the idea of adding a half percent to the tax, which would be restricted to in use road projects. He would then reallocate the funds that he had budgeted for roads for other County of Hawaii services. This is will grow the county budget 6-9%.

It is a bad idea…a very bad idea.

It’s bad for businesses

Let’s assume a business is a perfect monopoly; that is, they have 100% complete control over their sector of the economy. There is no competition. Adding a half percent to the GE tax would result in a direct pass through to the buyer/consumer of .5%. The consumer pays more, but the business would, in theory, suffer little, as buyers have no choice. They could, though, consume less if the prices become prohibitive. The power company, HELCO, is the only company I know that has no competition—a perfect monopoly.

I think this is the model Mayor Kim has in mind: businesses on the island are perfect monopolies.  Increasing taxes won’t hurt businesses that much because we don’t have much choice. Tourists will come regardless of prices and local businesses will not suffer because they will just pass on the tax to consumers and other businesses.

This is where our mayor’s incomplete understanding of business shows.

Every business, with few exceptions, competes globally. The small shop that sells souvenirs likely buys the products from a distributor in Oahu that collects and pays the GE tax when it is sold to her store. The owner then collects and pays the GE tax when she sells the items. At some point, the cost of item becomes prohibitive and Hawaii becomes prohibitively expensive to visit. Restaurants, hotels, vacation rentals, taxis, tour providers and so on will all suffer when increased taxes make them too expensive for travelers. That’s the tourism sector.

Now let’s look at any business that retails items to individuals or businesses that live here. Add a half percent increase in the price of nearly ALL goods and services and life here becomes more expensive.

What has been the biggest trend in consumer behavior the past ten years? Buying online. When goods and services become too expensive in Hawaii, people will buy off-island. This has already had a huge impact on the ability of many businesses to survive and will only become more pronounced with an increase in the GE tax. Businesses will go out of business and consumers will have less ability to keep their money on the island by buying local. Almost every business competes globally–from a small fabric store to our vacation activities providers. Become too expensive, and people will look elsewhere.

It’s bad, really bad, for low-income residents.

Let’s also take a look at consumers. Poor and lower-middle class families have no choice to spend the majority of their income on basic consumer products like bread, milk, clothes, and rent. Many of these people are living paycheck to paycheck, so it’s going to have the biggest impact on them. They might spend 95% of their income on necessities; whereas, a wealthy person might only spend 30% on necessities. Another .5% is a lot when you’re living with no disposable income. This is what they mean when they say the GE tax is high regressive: it places a bigger burden on the poor than the wealthy.   

So, what’s the solution?

To me, it seems to be abundantly clear: cut or reallocate spending. That is, live within our means.

If the public is clamoring for new and better roads, we should find ways to cut other parts of the budget. Our economy and all the associated taxes – real estate, gasoline, vehicle registration – are adding millions a year to our County’s coffers, and this trend will continue. Hold expenses where they are, and there will be many millions of dollars added to the County’s budget every year. This is inevitable if the other taxes are unchanged. We can simply grow our revenue keeping rates as they are, as the increase in property values and the growth in our island population and tourism will, over time, provide millions of dollars of extra revenue.

We can do what every family does–set aside money over time and save up the money for big projects. We can make priorities. As a consumer and business owner, I appeal to our leaders to exercise fiscal restraint.