Posted on: Saturday, February 12, 2005

Tax Foundation stands by its numbers on excise-tax hike

By Mike Leidemann
Advertiser Transportation Writer

When the Tax Foundation of Hawai'i said last week that raising the state excise tax to 5 percent would cost a family of four an extra $900 a year, the calculations were based on a detailed analysis of income and how the excise tax works here, foundation officials said yesterday.

The figures accurately reflect the estimated costs of increasing the excise tax by 25 percent (from 4 to 5 percentage points), said Lowell Kalapa, the foundation president.

On the surface, the figures look high because people often think of the current 4 percent excise tax as a simple sales tax that shows up on their receipts in stores and restaurants.

However, it is not a sales tax. Instead, the excise tax is paid by businesses every time a product or service is sold or resold in the state, creating a multiplier effect that consumers pay but often don't recognize as coming out of their pocket, Kalapa and other economists said.

That cumulative effect results in an excise "tax base," used in measuring the potency of a tax, of about 144 percent of personal income in Hawai'i, according to economist William Fox in his essay in the popular 1992 book, "The Price of Paradise: Lucky We Live Hawai'i."

"For example, suppose a parcel of property is leased for $1,000 and subsequently subleased two times, each after a 10 percent markup," Fox wrote. "The total excise tax on leasing this property would be more than 14 percent of the initial lease rent."

That multiplier effect helps make the Hawai'i excise tax base three times the average of other states in the nation.

In order to raise the same amount of revenue generated by excise tax ($1.9 billion last year), the state would have to impose a sales tax of about 16 percent, Kalapa said. Or as Fox puts it: "Comparing a conventional sales tax to Hawai'i's excise tax is a bit like comparing a firecracker to a hand grenade."

So in calculating the impact of an excise tax increase on its "Arnie Aloha" family earning about $82,840 a year, the Tax Foundation used a tax base figure $90,720 (total income minus all other federal state and local taxes multiplied by 144 percent). Using that formula, the foundation estimates that the statistical family already pays $3,628 in direct and hidden excise tax charges.

Increasing that figure by up to 25 percent, as two legislative committees recommended allowing counties to do last week, would add $907.20 to the family's yearly costs. That breaks down to $226 per person.

The figures come out the same using other ways of calculating the effect of the excise tax, according to the Tax Foundation.

In 1999, for instance, visitors spent $9.4 billion in Hawai'i. At 4 percent, the general excise tax collected on that amount was $394 million or about 27 percent of the total excise taxes collected.

That left residents with $1 billion of the general tax burden or $895 per resident, Kalapa said. That comes out to $3,480 for a family of four, almost the same figure that is arrived at using Fox's tax-base formula.

State Transportation Director Rod Haraga also said last week that figures he has heard, using a different calculation, suggest that building a rail line in Honolulu would cost families between $800 and $1,000 per year.

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