Governor Abercrombie signed into law SB754 as Act 105.
What the bill does: The bill suspends for two years (from July 1, 2011 to June 30, 2013) the general excise and use tax exemptions for certain persons and business activities. During the two-year suspension period, the formerly exempt persons and business activities will be subject to the four per cent general excise or use tax rate (but not the 0.5 per cent surcharge in Honolulu for the rail project).
Keep in mind:
(1) The bill is the major revenue generator for resolving the $1.3 billion general fund shortfall over the next fiscal biennium that the Legislature confronted.
SB 754 generates, for the general fund, $173.2 million in fiscal year 2011-12 and $220.3 million in fiscal year 2012-13. The general funds, along with other revenue enhancements/diversions and $618.0 million in budget cuts, are necessary to close the budget gap.
2) The bill is supported by the Governor and part of the Administration's financial plan.
3) The bill promotes fairness.
Suspending the exemptions eliminates a preference for the formerly exempt persons that other businesses do not have. Many businesses, such as restaurants, supermarkets, accounting firms, etc., do not enjoy general excise tax exemptions. In effect, those businesses must make up for the tax revenues foregone through the exemptions.
This unfairness would have worsened if the general excise tax rate had been increased without suspending the exemptions. The businesses without exemptions would have had to pay more taxes while the exempt ones would still pay $0.
A new Tax Review Commission is past due to convene and study the state tax system, as required by the Constitution. Review of and recommendation on SB 754 would be most appropriate for the Commission.
4) The bill is the major alternative to an increase of the general excise tax rate.
The House position was that a general excise tax rate increase would have raised the cost of doing business and cost of consumer products and services much more than would have occurred under SB 754. Raising the cost of business and cost to consumers would have negatively impacted the economic recovery and standard of living. Moreover, a general excise tax increase would have been regressive (although this effect could have been mitigated with credits for low-income persons).
Most of the general public mistakenly assumes that a one per cent general excise tax rate increase will require them to pay just one cent more on every dollar of purchase. This mistaken assumption ignores the pyramiding effect of a rate increase, an effect in which the tax at previous transaction levels is hidden in the price of the final product or service.
5) The bill is consistent with the way the general excise tax is supposed to work.
Opponents of SB 754 argue that the bill will force them to pass-on the newly imposed tax. The argument fails to recognize that the general excise tax is set up for the pass-on of the tax at every transaction. That is why the general excise tax rate is so low compared to the sales tax rates of other states.
Moreover, this argument fails to recognize that the pass-on would have been much worse if the general excise tax rate had been increased.
In sum, suspending the general excise tax exemptions will have lesser detrimental impacts and be fairer than increasing the general excise tax rate.