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SB1035 SD2 HD1 would ease GET burden for doctors

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Finance on April 3, 2024.
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April 3, 2024, 2:15 p.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 

COMMENTS IN SUPPORT OF SB1035 SD2 HD1 — RELATING TO THE GENERAL EXCISE TAX

Aloha Chair Yamashita, Vice-Chair Kitagawa and other members of the Committee,

The Grassroot Institute of Hawaii would like to offer its support for SB1035 SD2 HD1, which would provide a state general excise tax exemption for medical and dental services provided to patients who receive Medicare, Medicaid, or TRICARE benefits.

With this bill, the Legislature could lighten the tax burden on both patient and health care providers.

At present, Hawaii is the only state to tax gross receipts on patient copayments and deductibles,[1] as well as the only state to tax Medicare and TRICARE.

Nonprofit facilities are currently exempt from the GET, but private practice physicians are not. Thus, private practice doctors and clinics must pay the state’s 4% GET plus any county surcharge.

As the Grassroot Institute explains in its report, “The case for exempting medical services from Hawaii’s general excise tax,” the GET is a significant expense for doctor offices, making it difficult for such practices to thrive in our state.[2]

Applying the GET to TRICARE, Medicare and Medicaid beneficiaries is especially burdensome for doctors. As explained in the Grassroot report, the tax cannot legally be passed on to TRICARE or Medicare patients, which forces doctors to absorb those costs entirely.

Similarly, in the case of Medicaid, doctors must either pursue an indigent patient for their share of the GET, which may result in higher administrative costs than can be recouped, or deny service based on the patient’s inability to pay the tax.

Under the circumstances, many private practice doctors consider it impossible to pass the tax on to Medicaid patients as well.

The result is that physicians are either disincentivized from treating Medicare, Medicaid and TRICARE patients or forced to absorb the GET for those patients.

Fortunately, there is a simple and effective solution, as described in this bill: Create a GET exemption for medical services.

Separate research from the Grassroot Institute of Hawaii found that exempting medical services from the excise tax would help make healthcare more affordable in Hawaii for both doctors and residents.[3]

Healthcare spending for medical services in Hawaii totals about $9 billion a year, of which the for-profit private sector accounts for $5 billion.[4] An exemption from the state’s 4% GET would save private, for-profit medical providers approximately $200 million.[5] Waiving the GET surcharges imposed by the counties would save an additional $22 million more.[6] Together, these actions would result in substantial savings for individual practices.

There are other possible benefits to this exemption. It would help reduce the cost of medical care for Hawaii residents and likely help alleviate the state’s doctor shortage.

The most recent report from the Hawaii Physician Workforce Assessment Project estimates that the state has an unmet need for 757 full-time equivalent physicians.[7] The largest area of need is in primary care, but there are significant shortages across multiple specialities.

The COVID-19 crisis helped emphasize the importance of improving healthcare access in Hawaii. It also demonstrated that we must pursue multiple strategies to address the shortage of healthcare professionals in the state.

Luring new doctors to Hawaii — and keeping here 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.

It is hard to know exactly how beneficial a GET exemption for Medicare, Medicaid and TRICARE services would be, but it would at least remove a major burden for existing local practices.

If this bill were to encourage more doctors and clinics to stay in the state or keep practicing, it will have accomplished its goal.

It is common practice for the state to use GET exemptions to encourage or aid certain industries. Already, Hawaii exempts petroleum refining, orchards and aircraft maintenance and leasing from the GET.  We think healthcare is at least as important as any of those industries, if not more so, and we hope that the members of this committee think so too.

State policymakers are rightly concerned with making healthcare more affordable and addressing the shortage of medical professionals in Hawaii. By creating a general excise tax exemption for health services rendered to Medicare, Medicaid and TRICARE beneficiaries, there is an opportunity to make Hawaii a more attractive — and less expensive — place to practice medicine.

Thank you for the opportunity to testify.

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] Effective July 1, 2023, New Mexico allowed for the deduction of copayments and deductibles from its gross receipts tax. At the time, New Mexico was the only state other than Hawaii to tax medical services. “Gross Receipts Tax and Health Care Services,” New Mexico Taxation and Revenue Department, July 2023.
[2] Malia Hill, “The case for exempting medical services from Hawaii’s general excise tax,  Grassroot Institute of Hawaii, January 2023.
[3] “How the state GET affects healthcare costs in Hawaii,” Grassroot Institute of Hawaii, January 2020.
[4] Ibid, p. 2.
[5] Ibid.
[6] Ibid.
[7] “Hawaii Physician Workforce Report 2023,” Hawaii Physician Workforce Assessment Project, December 2023.

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