Island Voices
Debate on excise tax exemption is all shibai

By Lawrence W. Boyd
Economist at the University of Hawai'i Center for Labor Education and Research

Big news! It looks as if we are going to have a real debate over issues in the state Legislature. The major issue that will be debated is whether food and drugs will be exempted from the general excise tax.

Remember that all real debates are about choices. Advocates of this measure basically pretend there will be only benefits and no costs. It will make taxes fairer and we won’t lose tax revenue. Neither one of these propositions is true and thus this debate will be phony from the beginning.

Prescription drugs and prosthetics are already excluded from the tax, so it is nonprescription drugs and other medical services that would be excluded. Low-income families purchase proportionally less of these than higher-income people.

It is true that low-income households do purchase proportionally more food with their income, and that is why levying this tax is deemed regressive. Once your income exceeds $10,000, however, the changes in food expenses as a percentage of income is relatively minor. Broadly speaking, those substantially affected in this category qualify for food stamps, and these purchases are already exempt from the excise tax. The monthly number of individuals who used food stamps in 1999 was 177,000, which tends to indicate we aren’t missing anyone.

More disturbing is the light-minded way advocates of this proposal write off the revenue loss from cutting the tax. Yes, the state would lose $130 million (or $250 million), but according to them, tax cuts actually increase tax revenues.

The math here is deficient. If tax revenues increase by about 1 percent for each 1 percent increase in economic growth, a 10 percent tax cut must generate at least 10 percent increase in growth. At the best, a 10 percent tax cut might generate a 2 percent increase in growth.

States must balance their budgets, and therefore when we cut taxes, we must also cut expenditures. Thus, a real choice, for example, would be a substantial teacher raise or a cut in the excise tax. But this isn’t the way this debate will go.

In this debate, you don’t have to make that choice. In this debate, you can be for higher teacher’s salaries and a cut in the excise tax. It’s a great political strategy. It is also economically irresponsible. The people really without choices in this "debate" are the real losers, the voters.

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