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Reject HB2781 to stop permanent GET increase

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Finance on Feb. 27, 2024.
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Feb 27, 2024, 10 a.m.
Hawaii State Capitol
Conference Room 308 and Videoconference

To: House Committee on Finance
      Rep. Kyle T. Yamashita, Chair
      Rep. Lisa Kitagawa, Vice-Chair

From: Grassroot Institute of Hawaii
           Ted Kefalas, Director of Strategic Campaigns

RE: TESTIMONY OPPOSING HB2781 — RELATING TO TAXATION

Aloha Chair Yamashita, Vice Chair Kitagawa and Committee Members,

The Grassroot Institute of Hawaii opposes HB2781 which would let the county surcharges on the state general excise and use taxes lapse as scheduled on Jan. Dec. 31, 2030, but then replace them with a permanent 0.5% state “surcharge” on the state GET and use tax as of Jan. 1, 2031.

The bill notes that this would give the counties “six years to find alternative revenue sources to support programs that are currently funded by the county surcharge on state tax,” but this alleged magnanimity seems more like a long-range attempt to sneak a permanent tax increase past the public while simultaneously putting the counties on notice that they would have to find new revenue sources to replace their surcharges.

If that indeed is what would happen — that the counties would find new revenue sources to replace their surcharges — then what we’re really talking about here is another tax increase. This inescapably would contribute to our high cost of living, which is already the highest in the nation.

A far better choice than what is being proposed in this bill would be to simply allow the county GET surcharges to lapse. Otherwise, what we would be doing is permanently increasing Hawaii’s GET to 4.5%, despite the statements originally that it would fall back to 4% in 2031.

In addition, The GET is widely recognized as being a regressive tax, which makes the idea of a permanent increase even more objectionable. Rhetoric notwithstanding, a “surcharge” is a tax hike, and a permanent increase in the GET would disproportionately affect Hawaii’s most economically disadvantaged residents.

According to the Institute on Taxation and Economic Policy, Hawaii’s GET falls most heavily on those least able to afford it and takes up an average of 11% of family income for the poorest 20% of earners.[1]

In addition, Hawaii’s GET is often singled out as one of the barriers to doing business in our state.

We already know that many private practice doctors have said the GET is a major factor in their decisions to close up shop and either retire or move to the mainland.[2] But national groups have weighed in too.

The 2022 ALEC-Laffer State Economic Competitiveness Index ranked Hawaii 50th among all states for its “sales tax” burden, meaning that the GET contributes a significant negative effect to the state’s economic outlook.[3]

And the national Tax Foundation estimates that because of the GET’s broad applicability and the fact that some products are taxed multiple times, Hawaii’s general excise tax “ultimately taxes 119% of the state’s personal income,” compared to a national median of  36%.[4]

Looking at the even broader picture, one must consider that tax increases in general are not a good idea for Hawaii’s economy, especially not now when it already has one of the highest tax burdens in the nation.[5]

Consider these points:

>> Hawaii’s population has been declining for the past six years.[6] Tens of thousands of Hawaii residents have moved to the mainland over the past six years — and mainly to states without income taxes, such as Washington, Nevada, Texas and Florida.[7] Their departure from the islands is not only emotionally distressing, but economically depressing as well.

>> Fewer people remaining means fewer people to work at our private businesses, or even staff our government agencies. It also means fewer people to help pay for Hawaii’s ever-increasing tax burden.

>> Higher taxes for the residents who still live here is more fuel for the exodus of talent and capital — our friends, neighbors and family — to places that are more affordable. It’s a downward spiral economically fostered by the relentless upward spiral of more and more taxes.

>> Hawaii taxes high-income earners at 11%, second only to California at 13.3%.[8] Hawaii’s top 1.5% of taxpayers already pay 34.9% of all income taxes in the state.[9]

>> Finally, Hawaii is suffering from a stagnant economy, and both the Economic Research Organization at the University of Hawai‘i[10]  and the state Department of Business, Economic Development and Tourism[11] have predicted continued slow economic growth in 2024. Tax hikes could exacerbate this slowdown, since entrepreneurs will be less likely to want to invest their capital — or “wealth assets,” as the case may be[12] — in Hawaii’s economy.

In short, Hawaii’s residents and businesses need a break from new taxes, tax increase, fees and surcharges. This is not the time to make Hawaii a more expensive place to live and do business.

We urge you to defer HB2781 rather than pricing yet more residents out of paradise.

Thank you for the opportunity to testify.

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] Meg Wiehe, et al., “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” Sixth Edition. Institute on Taxation and Economic Policy, October 2018, p.54.
[2] “How the state GET affects healthcare costs in Hawaii,” Grassroot Institute of Hawaii, January 2020.
[3] Arthur B. Laffer, Stephen Moore and Jonathan Williams, “Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, 15th Edition,” American Legislative Exchange Council, 2022.
[4] Janelle Fritts, “State and Local Tax Rates, 2023,” Tax Foundation, Feb. 7, 2023.
[5] Jared Walczak and Erica York, “State and Local Tax Burdens, Calendar Year 2022,” Tax Foundation, April 7, 2022.
[6] Maria Wood, “Where People from Hawaii Are Moving to the Most,” 24/7 Wall Street, Jan. 23, 2022.
[7] Katherine Loughead, “How Do Taxes Affect Interstate Migration?” Tax Foundation, Oct. 11, 2022.
[8] Timothy Vermeer, “State Individual Income Tax Rates and Brackets for 2023,” Tax Foundation, Feb. 21, 2023.
[9]Hawaii Individual Income Tax Statistics,” Hawaii Department of Taxation report for Tax Year 2021, August 2023, Table 12A.
[10] Carl Bonham, Byron Gagnes, Steven Bond-Smith, et al., “State Facing Headwinds as Maui Recovery Begins,” Economic Research Organization at the University of Hawai‘i, Dec. 15, 2023.
[11] Hawaii Department of Business, Economic Development, and Tourism, “Hawaii Economic Growth Remains Low for 2024 as Recovery Continues,” Dec. 11, 2023.
[12] Aaron Hedlund, “How Do Taxes Affect Entrepreneurship, Innovation, and Productivity?” Center for Growth and Opportunity at Utah State University, Dec. 23, 2019; Ergete Ferede, “The Effects on Entrepreneurship of Increasing Provincial Top Personal Income Tax Rates in Canada,” Fraser Institute, July 10, 2018; Robert Carroll, Douglas Holtz-Eakin, Mark Rider and Harvey S. Rosen, “Personal Income Taxes and the Growth of Small Firms,” National Bureau of Economic Research, October 2000.

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