HAWAII TAX SYSTEM: GET TAX REVIEW COMMISSION Tax Research & Planning, DOTAX Seth Colby December 16th, 2020 HAWAII SYSTEM OF TAXATION GENERAL PRINCIPLES OF TAXATION • Economic Efficiency • Impose the smallest possible distortion on behavior (If distortion is intended, it should distort in the desired direction) • Fairness • Horizontal Equity—taxpayers with the same ability to pay have the same tax liability • Vertical Equity—tax liability rises as ability to pay increases • Progressive, regressive, neutral • Alternative—tax liability is based on the benefits received • Compliance and Administrative Burdens • Cost imposed on private sector to comply with law • Cost government bears to collect taxes MEASURING PROGRESSIVITY • Regressive – lower income people pay a higher percentage of their income in taxes • Neutral – everybody pays the same percentage of income in taxes • Progressive – higher income pay a larger percentage of their income in taxes Tax % Tax Burden = Income % Tax Burden Low Income High Income • Isolated and distant from other economies • Exporter of services (tourism) ATTRIBUTES OF HAWAII • Small land/ small population with narrow economic base (tourism and government) • High cost of doing business GET AND IIT COMPRISE THREE QUARTERS OF STATE REVENUE AT A GLANCE: HAWAII TAX SYSTEM • Hawaii receives significantly more revenue from sales tax and less from property tax than most states Composition of state and local taxes Hawaii U.S. Avg Property 17% Other Taxes Other Taxes 22% Corporate 19% Property Corporate Income Income 31% 2% 4% Individual Income 21% General Sales 38% Individual Income 23% General Sales 23% Source: Tax Foundation HAWAII TAX State tax collections State-Local Tax Per capita Burden as a Share of COLLECTIONS ARE 2015 State Income 2012 HIGHLY Collections Total Tax State per Capita Rank Burden (per N.D. $ 7,583 1 State % Rank Capita) N.Y. 12.7% 1 $ 6,993 CENTRALIZED Vt. $ 4,861 2 Conn. 12.6% 2 $ 7,869 Hawaii $ 4,530 3 N.J. 12.2% 3 $ 6,926 • Hawaii collects more of its tax revenues Minn. $ 4,452 4 Calif. 11.0% 6 $ 5,237 at the state level than at the local level Conn. $ 4,438 5 Ill. 11.0% 5 $ 5,235 Wyo. $ 4,020 6 Wis. 11.0% 4 $ 4,734 when compared with other states Mass. $ 3,976 7 Md. 10.9% 7 $ 5,920 N.Y. $ 3,952 8 Minn. 10.8% 8 $ 5,185 Calif. $ 3,862 9 R.I. 10.8% 9 $ 4,998 • These rankings may overstate Hawaii's D.C. 10.6% 10 $ 7,541 Del. $ 3,715 10 tax burden, because Hawaii may be Mass. 10.3% 12 $ 5,872 N.J. $ 3,524 11 Ore. 10.3% 10 $ 4,095 able to export more of its taxes: Md. $ 3,305 12 Vt. 10.3% 11 $ 4,557 Ark. $ 3,086 13 Del. 10.2% 16 $ 4,412 Maine $ 3,057 14 Hawaii 10.2% 14 $ 4,576 • Federal government (income tax Ill. $ 3,055 15 Maine 10.2% 13 $ 3,997 deduction) R.I. $ 3,026 16 Pa. 10.2% 15 $ 4,589 Ark. 10.1% 17 $ 3,519 W.Va. $ 3,018 17 US 9.9% $ 4,420 Wis. $ 2,949 18 Tourists and non-resident Military N.C. 9.8% 20 $ 3,659 • Iowa $ 2,942 19 Ohio 9.8% 19 $ 3,924 N.M. $ 2,882 20 W.Va. 9.8% 18 $ 3,331 Wash. $ 2,879 21 Utah 9.6% 21 $ 3,556 Pa. $ 2,821 22 Ind. 9.5% 22 $ 3,585 Mont. $ 2,753 23 Kans. 9.5% 23 $ 4,131 Mich. $ 2,717 24 Ky. 9.5% 24 $ 3,298 Mich. 9.4% 25 $ 3,631 Kans. $ 2,708 25 U.S. $ 2,694 Source: Tax Foundation ABILITY TO RAISE REVENUE Short-run tax • Does the system produce the required adequacy revenue during the current budget period? Long-run tax • Does the system produce the required adequacy revenue over the long term? • Does the system provide stable revenues Stability over the economic cycle? HAWAII'S TAX SYSTEM IS RELATIVELY STABLE AND RESILIENT OVER THE LONG TERM • State revenues as a 9.0% percentage of Gross State Product is the same in 2019 8.5% as it was in 2007 and 8.0% slightly lower as a 7.5% percentage of Total Income 7.0% • State revenues were 6.5% negatively affected by the 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Great Recession (implying State Rev/ GDP Mean less stability of tax system) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 AVG State Rev/ GDP 8.1% 7.9% 7.3% 7.3% 7.3% 8.0% 8.5% 8.2% 8.3% 8.3% 7.9% 8.1% 8.2% 8.0% State Rev/ TPI 9.9% 9.4% 8.5% 8.7% 8.6% 9.4% 10.1% 9.6% 9.6% 9.7% 9.4% 9.7% 9.8% 9.4% Tax Revenue Volatility Score Pew Charitable Trust 1998-2017 Volatility State Name Score State Name Score 1Alaska 37.6 27Hawaii 5.6 2North Dakota 16.1 28South Carolina 5.4 3Wyoming 13.6 29Kansas 5.3 4Vermont 10.4 30North Carolina 5.0 HAWAII’S 5California 8.6 31US 5.0 6New Mexico 8.4 32Maine 4.9 REVENUE 7Colorado 8.4 33West Virginia 4.7 8Arizona 8.1 34Alabama 4.6 9Louisiana 7.4 35Indiana 4.5 SYSTEM IS 10Florida 7.1 36Rhode Island 4.4 11Oklahoma 7.1 37Tennessee 4.3 STABLE 12Connecticut 7.0 38Washington 4.3 13Delaware 6.9 39Ohio 4.3 RELATIVE TO 14Mass. 6.8 40Mississippi 4.2 15Utah 6.5 41Missouri 4.1 OTHER 16Idaho 6.3 42Nebraska 4.0 17Montana 6.2 43Wisconsin 4.0 18Oregon 6.2 44Iowa 4.0 STATES 19New York 6.1 45New Hampshire 3.9 20Minnesota 6.1 46Michigan 3.8 21Texas 5.9 47Pennsylvania 3.7 22Nevada 5.8 48Arkansas 3.7 23Illinois 5.8 49Maryland 3.4 24Georgia 5.7 50Kentucky 2.7 25Virginia 5.7 51South Dakota 2.7 26New Jersey 5.6 GENERAL EXCISE & USE TAX GENERAL EXCISE AND USE TAX: WHAT IS IT? • General Excise and Use Tax • The GET is a gross receipts tax that is imposed on the privilege of doing business in the State of Hawaii. The Use Tax applies to purchases from out-of-state vendors that are not required to collect tax on their sales to Hawaii • Vs Sales Tax • A sales tax is levied on the customer but collected by business. The GET is levied on the business • A sales tax is usually limited to retail sales of tangible goods whereas the GET is levied on almost all business activity • Vs Value Added Tax (VAT) • A VAT only taxes the value added by business. The GET taxes the gross receipts of the business, so it taxes some business-to-business transactions GENERAL EXCISE AND USE TAX: WHAT IS IT? • Provides slightly less than half of Hawaii's general fund revenue • The GET is levied on the "gross income" or "gross proceeds of sale" derived from the sale of tangible personal property or services • Very broad coverage. Economic activities that are not taxed must be explicitly cited in the law • Two-tiered Rate System: Wholesaling, manufacturing, producing, wholesale services 0.5% Retail and all others 4.0% • Few exemptions • (e.g. exports, financial transactions, core activities of non-profits) • Tax is levied on the business • Can visibly be passed onto customer • Use tax applies to purchases from out-of-state vendors that are not required to collect tax on their sales to Hawaii 14 • Applied to the wholesale and retail rate EXEMPTIONS/ DEDUCTIONS REDUCE TAX ON B2B SALES AND MAKE GET MORE LIKE A VAT • Broad Tax Base • Hawkins (2002)--problems of cascading are less of a problem for small states with broad tax base • Wholesale is taxed at a lower rate (0.5%) • Exemption of exports • Exempts taxes on insurance premiums and Public Utility Companies (But these items are subject to alternative taxes.) • Exempts cost of subcontractors • Refundable income tax credit for GET paid on the purchase of capital goods by businesses • Does not tax SNAP (Supplemental Nutrition Assistance Program) WHAT IS NOT COVERED BY THE GET: TOP TEN EXEMPTIONS Deduction/ Exemption (2019) Exempted Amount Exemption Cost Rationale $ millions $ millions Foreign Trade Zones 6,199 0 Usually not taxed Non-profit Organizations 5,985 239.4* Social Subcontract Deduction 3,715 18.8 Reduce pyramiding Taxes Passed On 3,221 0 Reduce pyramiding Out of State Sales 2,041 0 Usually not taxed Prescription drugs and prosthetics 2,074 83.0 Social Sales to Federal Government 1,478 0 Usually not taxed Maintenance Fees 1,421 7.1 Usually not taxed Affordable Housing 1,352 54.1 Social * See 2019 General Excise and Use Exemption Report COMPARISON OF CONSUMPTION TAXES GET Sales VAT Taxpayer Business Consumer Business (statutory) Coverage Broad Narrow Broad Activity taxed Gross receipts Cost of taxable Value-added goods Inputs taxed Yes (kind of) No No Administrative Low Medium High Burden THE TRADEOFFS OF THE GET Pros Cons • Low administration cost • Regressive* • Imposes little in the way of • Tax pyramiding * market distortion • Broad based tax and low rates • Hard to avoid • Exportable periods of sharp economic downturns during is it less correlated but to GDP, correlated is closely revenue GET GET REVENUES ARE STABLE ANDARE STABLEGET REVENUES CLOSELY CORRELATED WITH ECONOMIC PERFORMANCE 0.5 1.5 2.5 1 2 2000 2001 2002 2003 2004 2005 2006 vsGDP GET GET 2007 2008 2009 GDP 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 GET RAISES SIGNIFICANT REVENUE THROUGH A LOW RATE AND A BROAD BASE Amongst the lowest sales Highest per capita Broadest scope of tax rates in the country collections of any sales tax of any state state Sales Tax Collections State Breadth Rank State Tax Avg.