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Grassroot Institute of Hawaii – HB2228 Testimony

Feb. 13, 2020
9:00 a.m.
Conference Room 329

To: House Committee on Health
Rep. John M. Mizuno, Chair
Rep. Bertrand Kobayashi, Vice Chair

From: Grassroot Institute of Hawaii
Joe Kent, Executive Vice President

RE: HB 2228 — RELATING TO THE GENERAL EXCISE TAX EXEMPTIONS
Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on HB2228, which would provide a general excise tax exemption for medical services provided by physicians and advanced practice registered nurses acting in the capacity of a primary care provider.

It is well established that Hawaii is currently suffering from a doctor shortage. A recent study estimated that Hawaii is currently “short” by approximately 820 physicians — an increase over the previous year and an indication that lack of access to healthcare is a worsening problem in our state.

Luring new doctors to Hawaii — and keeping those who are already here — is a complicated proposition. Many proposals would take years to demonstrate success in addressing the issue. In the meantime, Hawaii residents will continue to suffer from the shortage of available medical professionals and the high cost of healthcare in our state.

There is, however, a more immediate way to make Hawaii more attractive to physicians: Create a general excise tax exemption for medical services.

Hawaii is one of the few states to levy a form of sales tax on medical services, and the form of that tax — the general excise tax — eats into the margin of the typical Hawaii physician’s office. If the doctor chooses not to pass on any of that tax burden to his patients, he or she risks running an unprofitable practice. If the tax is passed on, then the doctor is contributing to higher medical costs. Under the circumstances, it is no surprise that some doctors choose not to practice in the state at all.

According to a study commissioned by the Grassroot Institute of Hawaii, exempting medical services from the excise tax would help make medicine more affordable in the state for both doctors and residents.[1]  Healthcare spending for medical services in Hawaii totals about $9 billion, of which the for-profit private sector accounts for $5 billion. An exemption from the state’s 4 percent GET would save private, for-profit medical providers approximately $200 million. Waiving the GET surcharges imposed by the counties would save an additional $22 million more.

This represents substantial savings for individual practices. According to the Grassroot Institute study, the savings from that base 4 percent GET exemption would be about $5,275 each for the approximately 38,000 full-time workers in the medical industry. That’s the equivalent to 6.7% of the average medical service worker’s wage and 5.8% of current GET collections. Even if the exemption were applied selectively to only areas deemed to have acute shortages, the savings would be $72 million, or about $1,920 per for-profit medical service worker in the state. Exempting only private practice doctors would still result in a savings of $78.9 million for physicians and patients.

But there are more advantages to the GET exemption than just saving money for doctors and patients. It could also help address the doctor shortage. For example, if the GET exemption led an additional 820 physicians to set up shop in the state, it would result in an increase of almost 4,000 full-time positions in the industry, 4,000 additional supplier and induced jobs, $1.4 billion in additional economic activity and about $67.3 million in taxes — more than one-third of the cost of the tax cut.

It is common practice for the state to use GET exemptions to encourage or aid certain industries. Already, Hawaii exempts petroleum refining, aircraft maintenance and leasing, and orchards from the GET. As we point out in our report, “This means that the state of Hawaii uses its tax code to encourage the development of orchards, but discourage the provision of medical care.”
State policymakers are rightly concerned with both making healthcare more affordable and addressing the shortage of medical professionals in Hawaii.

By creating an general excise tax exemption for medical services, there is an opportunity to help both patients and doctors by making Hawaii a more attractive — and less expensive — place to practice medicine.

Thank you for the opportunity to submit our comments.

Sincerely,
Joe Kent
Executive Vice President, Grassroot Institute of Hawaii

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[1] “How the state GET affects healthcare costs in Hawaii,” Grassroot Institute of Hawaii, January 2020, www.grassrootinstitute.org/wp-content/uploads/2020/01/How-the-state-GET-affects-health-care-costs-in-Hawaii.pdf.