Posted on: Saturday, May 21, 2005
Tax hike would cost family $245, state says
By Gordon Y.K. Pang
Advertiser Capitol Bureau
The average family of four would need to pay $245 more each year if the state excise tax is increased to 4.5 percent, according to an analysis done by the Finance Committee staff of the state House of Representatives.
The $245 estimate is substantially less than the often-cited $450-a-year estimate from the Tax Foundation of Hawai'i. Foundation president Lowell Kalapa called the House study "single-dimensional" and not reflective of all the impacts the tax increase would have.
How much more an O'ahu family can expect to pay if the half-percent tax is implemented is a critical question as the Honolulu City Council weighs whether to vote for the tax hike as a means to finance a multibillion-dollar transit system on the island.
The proposal is advancing quickly at City Hall, and a final vote is expected in July. A bill approved by the Legislature gives the counties the option of raising the excise tax from 4 percent to 4.5 percent, which amounts to a 12.5 percent increase. Gov. Linda Lingle has not yet taken action on the bill but has indicated she will not veto it.
The House analysis assumes the median income for a family of four on O'ahu is $70,000 annually, noting that the U.S. Department of Housing and Urban Development now uses $64,200 as the median and Bank of Hawai'i puts it at $75,261.
The analysis calculates that a family making $70,000 would have $49,000 left after state and federal income taxes. Assuming no savings or investments and all $49,000 is spent, a half- percent excise tax increase would cost a family $245 annually, under the analysis.
In order for a family to end up paying $450 more annually, it would need to be making at least $128,571, according to the analysis.
Kalapa, however, said the House analysis is too narrow in focus and fails to consider that the excise tax is imposed on merchants, wholesalers and others when they pay rent, purchase equipment or incur other costs to provide a product or service, what's known as "the multiplier effect."
"They're not looking at the cost of the tax on all the prior stages to retail," Kalapa said. A grocer, for instance, would need to pay 4.5 cents on every dollar for everything "from brooms and mops that clean up the milk spills in the aisles to the purchase of equipment that he uses in the back room to inventory his product."
That additional cost, he said, inevitably would be passed on to the consumer in the form of increased prices. "That cost in increased price has to be accounted for in the impact of raising the rate from 4 to 4.5, and this analysis doesn't do that."
The foundation's estimate of $450 more annually assumes a median income of $82,840 each year. House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo, Wilhelmina Rise), said lawmakers in recent years have passed legislation to blunt the multiplier effect by lowering the excise tax on some transactions.
"So the ... increase (to 4.5 percent) will have a negligible effect," Say said. "At this point, the so-called multiplier effect is not based on any real numbers or analysis."
Reach Gordon Y.K. Pang at gpang@honoluluadvertiser.com or at 525-8070.
