The following was originally published Dec. 15, 2022, by Honolulu Civil Beat.
It could lower healthcare costs in Hawaii while also addressing the state’s acute doctor shortage.
Tax cuts are trendy all of a sudden.
In a very welcome turn of events, Hawaii’s leaders have become increasingly vocal about the need for new exemptions to the state’s regressive general excise tax.
Gov. Josh Green reiterated his support for a GET exemption for food and medicine during his inaugural ceremony last week, saying it would help make our state more affordable.
This is a hopeful sign. However, for groups that champion reducing the tax burden on working families, there is a big difference between political rhetoric and real-world change.
Especially regarding general excise tax exemptions, there are important details that need to be ironed out before these campaign promises can be turned into effective legislative proposals.
For example, the proposed exemption for “food” is vague; it could apply to everything from fancy restaurant meals to musubi at 7-Eleven. The compromise could be an exemption or reduced tax rate for groceries, as Hawaii is one of only 13 states that still impose a “sales” tax on such a basic necessity.
It is true that grocery purchases under the government’s Supplemental Nutrition Assistance Program are already exempt from the excise tax. But given the strain that inflation has put on ordinary families, why limit tax relief on groceries to only those who qualify for SNAP funds?
In addition, when it comes to making a real difference for Hawaii consumers, one has to ask why the governor limited his proposed GET health care exemption to “medicine” rather than “medical services.”
Exempting medicine would be helpful, but extremely limited in its effect. Since prescription drugs are already exempt from the general excise tax, the proposed exemption for medicine would apply to only certain over-the-counter medications. This is a good idea, but it doesn’t go far enough because the negative impact of the tax on medicine is dwarfed by its effect on medical services.
Exempting medical services, on the other hand, has the potential to help lower health care costs in our state while also addressing the state’s acute doctor shortage.
Hawaii is one of only two states that allow broad taxation of medical services. While hospitals and nonprofits are exempt from the tax, private practice physicians have expressed that it has become a significant burden on them, making it increasingly difficult to run a profitable practice, or even operate without a loss.
The state Department of Taxation claims the excise tax can be passed on to patients — even those being served through Medicare, Medicaid and TRICARE insurance — but local physicians are understandably reluctant to do so.
Guidance from the federal government indicates it would actually be illegal to pass on the tax to Medicare and TRICARE patients, and physicians are uncomfortable taxing patients for medical services in general.
Combined with Hawaii’s low Medicaid and Medicare reimbursement rates, the GET basically serves as a disincentive to treat Medicare patients at all — effectively reducing care options for our most vulnerable population.
Ultimately, the excise tax makes it more expensive to maintain a private practice in our state, which is why we have seen so many doctors, nurses, and medical professionals leaving Hawaii for the mainland in recent years.
For a state that has an estimated doctor shortage of 750 full-time providers as well as more than 3,800 general healthcare worker vacancies, failing to act at this point could wind up being catastrophic.
There have been some initiatives intended to bring more medical professionals to our state, as well as retain the ones we have. But it would be more effective in the short run to exempt medical services from the general excise tax.
According to calculations from the Grassroot Institute of Hawaii, a medical services GET exemption would save patients and doctors approximately $200 million. On the flip side, that would be a loss in state revenue, but one that could easily be absorbed by the state’s current $2 billion surplus.
In addition, if the exemption attracts more doctors to Hawaii, the loss in revenue could be offset by the additional economic output generated by new or expanded physician offices.
I have no doubt that if the state could attract more doctors by spending $200 million, legislators would happily consider it. In essence, that’s what a GET exemption for medical services would be — a program to encourage doctors to practice in Hawaii, with the additional benefit of lowering health care costs for everyone.
Gov. Green is on the right track with his plan to address inflation and lower the cost of living by reducing the general excise tax. But to make a real impact, he should go beyond the rhetoric of “food” and “medicine” and pursue a targeted effort to keep doctors in Hawaii by also exempting medical services from the GET.