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Hawaii’s Gross Receipts Tax: Economically Damaging Despite Low Rate

2 min readBy: Joseph Bishop-Henchman

The Associated Press has an excellent article about a proposal to raise Hawaii’s sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. from its current state-and-local average of about 4.38%. The article quotes several experts who emphasize that thinking Hawaii’s sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. is low compared to other states is deceptive, because it has a very broad base.

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.

Sales taxes have rates (which can be high or low) and they have bases (which can be broad or narrow). The median state sales tax in the United States applies to about 42%-43% of transactions, but there are exceptions. The biggest exception is Hawaii, which has the broadest sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. in the United States.

So broad, in fact, that it applies to more than entire economy. Professor John Mikesell in 2004 estimated that Hawaii’s sales tax is imposed on 109.8% of possible transactions and Professor William Fox in 2002 put the number at 108.2%. This means that many Hawaiian goods and services are being taxed more than once.

This “pyramiding” with gross receipts taxes like Hawaii’s means that a low rate can hide the true economic cost of the tax. In 2006, we estimated that Washington State’s gross receipts tax pyramids anywhere between 1.5 and 6 times, depending on the product. Effective tax rates vary dramatically by industry, resulting in both a complicated effort to have different tax rates for different products and potential for significant economic damage and distortion. The tax rates are low (ranging from 0.471% to 1.5%), but because of the pyramiding the effective tax rate is much higher.

If you did an apples-to-apples comparison, factoring out state sales tax bases, Hawaii has a sales tax rate equivalent to over 11%. The gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. format allows for a low rate but it cannot hide the fact that Hawaii’s sales tax is one of the most economically burdensome in the country.

More on gross receipts taxes here.