Tuesday, December 15, 2009

Hawaii's Version of Sales Tax Hides Costs

For those of you who follow me on Twitter, you may already know that I just got back from a vacation in Hawaii last week. Which is why I was surprised to see that my home away from home was in the news this morning for their sales taxes that are likely to increase.

Currently, Hawaii’s sales tax on services is around 5%, however there are additional taxes on items that arrive by cargo ship. Since many items are shipped to the island, the actual tax paid on most products is significantly higher. Additionally, the state’s government is hoping to increase the standard 5% sales tax to a staggering 11-17%. Unfortunately, it seems to me that this drastic increase would hurt the massive tourism industry and thus harm the state’s economy more than it would help.

"We cannot tax ourselves out of this economic situation," said Carol Pregill, president of Retail Merchants of Hawaii. "When you increase costs to a retailer, the costs have to be passed on to the consumer."

According to the Associated Press, Hawaii lawmakers will consider legislation in January that would increase the general excise tax by 1 percentage point and exempt food and medicine. Currently, food and non-prescription medicine are among the items that are taxed.

The bill, which was estimated to raise $200 million annually for education, passed the state Senate this year and is now pending before the House. It faces hurdles because of business opposition and politicians' fear of raising taxes in an election year.

The excise tax pays for nearly half the state's budget, and tourist spending accounts for about one-fifth of total excise tax collections.

The Aloha State is already one of the most taxed states in the nation, but labor union leaders have said a tax increase could save government jobs and help students, whose school year was cut by 17 days annually due to budget cuts.

"People have this perception that we have only a 4 percent tax, and they don't realize we're already on an apples-to-apples basis one of the highest tax states," said Ronald Heller, a tax attorney and former member of the state Tax Review Commission.

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