Hawaii’s state sales tax rate is often ranked among the lowest rates in the nation. But comparing Hawaii’s version of a sales tax to that of other states is like comparing apples and oranges because Hawaii doesn’t have a normal sales tax.
In fact, technically, Hawaii doesn’t have a sales tax at all. Instead it has a general excise tax, sometimes abbreviated as GET or GE tax, which is unique among all the states.
What’s the difference between a sales tax and an excise tax?
To the consumer, the excise tax seems like a sales tax because most businesses show an excise tax charge on their receipts, as if the consumer were paying that in addition to the basic product price.
In reality, the excise tax is a tax on the total revenues of the businesses, at every transaction level, from manufacturing to wholesale to retail.
With a normal sales tax, the amount due is paid by consumers at the retail level. That amount then is separated from all other revenues of the business and turned over to the government periodically, typically monthly or quarterly.
California, for example, has a 7.25% sales tax for most goods, which means a $100 purchase would face a tax charge of $7.25. The business would keep the $100 and turn over the $7.25 to the state.
In Hawaii, the state’s rate is 4%. As of this writing, three of the state’s four counties — Honolulu, Hawaii and Kauai — add a 0.5% surcharge.
The GET rate applies mostly at the retail level, since wholesalers and manufacturers pay only 0.5%. But even the lower rates are incorporated into the final price at the retail level, driving up prices for Hawaii consumers.
Why do businesses charge 4.712% instead of 4.5%?
So if Hawaii’s general excise tax in most counties is 4.5%, why do so many businesses charge consumers 4.712% instead?
Well, it’s because the tax is measured by the gross receipts of the business, and the tax passed on is included in the receipts. That is one of the fundamental differences between the GET and a sales tax.
For example: If a Hawaii business charges $100 for a good or service, the general excise tax on that amount would be $4.50. But if the business charges the customer $4.50 to compensate for that expense, its GET expense now will be 4.5% of $104.50, which works out to $4.70.
For the business to recover exactly what it needs to pay the State, the business will charge 4.712%. Thus, if the business charged $4.71 and the customer paid $104.71, its tax would be 4.5% of $104.71, which works out to $4.71, and the business is left with its $100 sales price.
In fact, because of this quirk, many businesses actually list the GET amount on their receipts as 4.712%.
What goods are covered by the excise tax?
Hawaii’s excise tax covers most sales in the state, including necessities such as fuel, clothing and food. There are, however, some GET exemptions — more than 50 of them, actually.
Insurance producers, for example, pay only 0.15% on commissions they earn. Some industries enjoy more sweeping exemptions. Shipyards pay no excise tax on services performed on federally owned ships and vessels that operate in international or interstate commerce, while certain nursing home income is exempt.
Who really pays the general excise tax?
As a practical matter, businesses pay Hawaii’s general excise tax — it’s a levy on their gross income. But of course, they try to pass the tax onto their customers.
Hawaii’s base 4% GET rate might sound low compared to California’s sales tax rate, but, again, it applies to sales at every level — not just sales at Costco or the neighborhood market. Producers, distributors and retailers must all pay the excise tax any time they sell a good.
Wholesalers receive a special 0.5% rate, but in any case, the pyramiding or cascading effect of the tax as it makes its way through the chain of transactions increases the price that consumers ultimately pay. Assuming the base rate of 4%, some people estimate that its effective rate for consumers at the end stage — what consumers pay at the cash register — could be anywhere from 4.32% to 13%. It all depends on the product and how many times its ingredients and components have changed hands in Hawaii.
So why is Hawaii the only state with a general excise tax?
History of the excise tax
Hawaii’s general excise tax has clearly played a major role in the state’s history and economy. The state it nearly a century ago, in 1935, during the Great Depression.
Because low property values meant that local property taxes were not generating as much money as they were previously, the Hawaii Territorial Legislature instituted the general excise tax.
At the time, its rate varied between 0.25% and 1.25%, depending on the industry. Most businesses faced the higher rate.
Over the years, the rate slowly increased. At the end of World War II, the rate jumped to 1.5% for most sales. By 1957, it was 3.5%.
Should Hawaii change its excise tax?
Some people believe the excise tax should be reformed. Beth Geisting, director emeritus of the Hawaii Budget and Policy Center, wrote in 2018 that the excise tax is regressive because lower-income individuals must allocate a higher share of their incomes to pay the tax.
“There is clearly room for improvements that could bring our tax code better in line with that equity framework, and the GET should be the focus of these efforts,” Geisting wrote.
Others argue that the excise tax should remain intact. In August 2022, University of Hawaii economics professor emeritus James Mak wrote, “Since every tax in that system has shortcomings, it is a good idea to have a balanced mix of revenue sources.”
Many lawmakers are reluctant to reform the GET because it traditionally accounts for between 40% and 50% of the revenues of the state’s general fund each year.
Some Hawaii lawmakers, including the state’s new governor, Josh Green, have suggested exempting food and medicine from the tax, to help lower Hawaii’s cost of living.
At the same time, the Grassroot Institute of Hawaii has been leading a campaign to exempt medical services, on the grounds that the state is facing a doctor shortage, and that such an exemption could help make Hawaii more attractive and affordable for doctors to practice, as well as lower medical costs for patients.
Regardless of the fate of those bills, debate over the pros and cons of Hawaii’s unique “sales tax” will likely continue, especially while Hawaii remains one of the most expensive states to live in the country.