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The Honolulu Advertiser
Posted on: Sunday, March 6, 2005

Businesses fear excise-tax hike

By Catherine E. Toth
Advertiser Staff Writer

When Cheryl Robello opened a pet grooming shop five years ago, she didn't realize how expensive running her own business would be.

Cheryl Robello, owner of Pet Haven Salon, gives the royal treatment to a Yorkshire terrier. Robello pays a general excise tax on everything she purchases to run her business.

Jeff Widener • The Honolulu Advertiser

And she knew nothing about Hawai'i's general excise tax.

"I had no idea," said Robello, 41, owner of Pet Haven Salon in Kapolei. "It's frustrating because so much percent of what you (make) goes to taxes. ... It's difficult to do business here."

Because she owns a service-based business, Robello pays the current 4 percent general excise tax on everything she needs to operate her business, from shampoos to cleaners. Even her accountant tacks on the GET.

"Because we're a service, we pay GE taxes on everything," Robello said.

The state is considering a measure that would give counties the authority to increase the excise tax from 4 percent to 5 percent to help finance transportation projects, including a proposed rail rapid-transit line for O'ahu.

While the hike will directly affect consumers who will have to pay more to buy goods and services, the increase would also affect business owners who are taxed on everything they purchase to run their businesses.

"It may not affect me as much as it will my customers," Robello said. "But if it affects customers, you'll have less business."

The proposal comes at a time when the state economy is doing well and the need for traffic solutions is high.

"But that's the danger of a situation like this," said Tim Lyons, executive vice president of the Hawai'i Business League, which opposes the GET increase. "We, as an organization, are definitely pro-rail. But the argument is how best to finance it."

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 or their pockets.

Sales tax vs. general excise tax

A sales tax is a tax imposed on consumers who buy goods at retail. A general excise tax is imposed on the businesses instead of the customer.

Hawai'i does not have a sales tax; instead, the state has a general excise tax that is assessed on all business activities, including retail sales, commissions, rental income and services. Businesses pass along the cost of the tax to their customers.

The general excise tax rate varies depending on the business activity: 0.15 percent on insurance commissions, 0.5 percent on wholesale sales and 4 percent on most activities at the consumer level.

SOURCE: State Department of Taxation

Learn more

State Legislature: www.capitol.hawaii.gov

State Department of Taxation: www.state.hi.us/tax

Tax Foundation of Hawai'i: www.tfhawaii.org

For example, a restaurateur is able to buy spices and vegetables at the wholesale-level general excise tax of 0.5 percent because those go into the final product, which is resold. But he has to pay the full 4 percent GET on not-for-resale goods such as napkins, utensils, uniforms, take-out boxes and menus. He even pays the 4 percent tax on services provided to him by his attorney and accountant. The extra cost he pays is then passed onto consumers.

"The breadth of our GE tax is all-encompassing," said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i. "Raising it any percentage point will have a dramatic effect on the cost of goods and services."

When consumers pay 4 percent on a product they've purchased, they're actually paying a tax on an inflated base price because businesses have had to build into that price their overhead costs, which includes the general excise tax they pay on products or services they consume, Kalapa said.

Raising the general excise tax will likely mean price tags on goods and services will go up, frustrating consumers and perpetuating the image that Hawai'i is an expensive place to do business.

"We're the fourth-most-expensive city in which to live and do business," Kalapa said. "This (increase) will put us at the top."

Business owners and advocates say raising the general excise tax seems like an easy way to raise money to fund mass transit now because the state economy is doing well. But raising taxes may stifle its growth instead.

"When our economy was poor, no one could figure out how to stimulate it. Now that it's booming, our legislators go back and tax exactly what has stimulated it," said Bev Harbin, president of the Employers' Chamber of Commerce and former small business owner. "Along with increases in healthcare costs, insurance costs, it all adds up."

Harbin estimated that a company that generates $1 million in revenues spends anywhere between $7,000 and $10,000 a year in general excise taxes.

"That's huge," she said. "Imagine if you add another 1 (percentage point) to that."

Opponents of the measure say increasing the GET will also create further problems for business owners, particularly in terms of implementing and enforcing the hike.

For example, if only Honolulu County raises the general excise tax to 5 percent and the other counties don't, how will O'ahu-based companies charge Neighbor Island consumers who won't benefit from Honolulu's rail system? How will O'ahu-based service businesses, such as attorneys and accountants, charge their Neighbor Island clients? How will O'ahu-based retailers deal with customers returning merchandise bought on the Neighbor Islands?

Cheryl Robello, owner of Pet Haven Salon, worries that passing on an increase in the excise tax to consumers would hurt her business.

Jeff Widener • The Honolulu Advertiser

"The added cost of compliance for businesses have to be taken into account, too," Kalapa said. "It's going to be a nightmare."

But some business owners don't mind paying the extra money if that money is strictly earmarked for traffic solutions.

"Our economy is very fragile, and we're already taxed heavily from various sources," said Steven Ai, president and chief executive officer of City Mill Co. Ltd. "Right now I'd be opposed to a simple increase in the GET. But if there was an increase with a definite plan and a definite price tag with a special fund that could not be touched, I'd be open to it."

Mike Fox, president of Hawai'i Modular Space, said raising taxes may hurt the growth of the state's economy. But he does recognize the need for the state to do something about increasing traffic congestion.

"I'm a firm believer in improving the efficiency of our government and keeping taxes as low as possible because taxes tend to bog down the engine of our economy," Fox said. "But that being said, traffic is one of the biggest strangleholds we're dealing with in the economy and in our quality of life. People are sitting in their cars for two hours each day when they could be home with their families and enjoying life. ... I'd be in favor for a slight tax increase, but 1 (percentage point) seems a bit high."

Robello said she is thankful she doesn't have to make the commute from Central O'ahu to downtown anymore. Her drive from Kailua to Kapolei takes about half an hour.

As a Hawai'i resident and business owner, she understands the need for traffic relief and would support the general excise tax increase if the money goes to funding mass transit.

"If that's what their plans are and that's what they're going to do with the money, I'm not going to say anything about it," Robello said. "That's a great thing. But if they use the funds for other things, well, then I don't know."

Reach Catherine E. Toth at 535-8103 or ctoth@honoluluadvertiser.com.