Can We Sack the GET?
 
Every so often a question comes up from some alert readers.  “The Hawaii General Excise Tax (GET) is regressive, meaning it falls hardest on the poor.  Hardly anyone understands it, because it is so unlike the sales taxes, and even the gross receipts taxes, in any of the other States.  It taxes basic necessities, like food, medical care, and electricity.  So why don’t we just get rid of it?”

It seems to me that there are several reasons why our lawmakers are going to keep it around for a very long time, if not forever.  Are they good reasons?  That’s up to you to decide.

First, the tax produces money.  A LOT of money.  As seen in Chart 1.2 of the Department of Taxation’s annual report for fiscal 2020-2021, the GET brings in more than $3 billion per year, and normally produces 40%-45% of all tax dollars collected.  (In a typical year the individual income tax produces roughly 30% of all tax dollars collected, and all other taxes combined produce the other 30%.)  Lawmakers who know this fact will understandably be reluctant to mess with this goose, because it’s been consistently laying lots and lots of golden eggs, even when our economy was in the dumps because of the COVID-19 pandemic.

Second, the tax produces money with a relatively low nominal rate.  Four percent doesn’t seem like a lot compared to 7-8% in Nevada, 7-10% in California, 6-11% in Arizona, and so forth.  So it’s tough to tell lawmakers that 4% is outlandishly large compared with other States.

Third, there is rarely a constituency that rises up to oppose an increase in the GET.  Many businesses on which the GET is imposed pass on the tax to consumers, so they would have a hard time arguing that an increase in the GET hurts them.  Consumers get pinched, but typically in small amounts so they are unlikely to put up a fuss.  There have been notable exceptions, however, such as when dozens of angry taxpayers showed up at a Senate Ways and Means committee hearing in 2011 and saw that committee kill the bill in a 10-4 vote (then-Ways and Means chair David Ige was one of the four voting to raise the tax).

Fourth, a good part of the tax is well hidden from constituents.  Unlike sales taxes, our GET applies to business-to-business transactions such as when a farm sells vegetables to a distributor, who then sells the vegetables to a supermarket, which then sells them to a consumer.  The farm and the distributor have to pay 0.5% tax each, and the supermarket pays 4.0% or 4.5% (which it passes on to the consumer).  The consumer only sees 4.712% on the retail receipt (the extra 21 basis points is a “tax on tax,” because the tax is imposed on not only the retail price of the vegetables but also the amount of tax passed on to the consumer).  The two earlier 0.5% layers are not shown on the receipt but simply factor into the sales price.  Furthermore, businesses pay full retail tax when they are end users, such as when they pay for power, rent, and office supplies.  Those get factored into the prices of their goods and services as well.

Fifth, the GET lets us offload some of the tax burden to tourists.  They don’t pay income tax, but they do need to pay GET like the rest of us.  The Tax Foundation of Hawaii estimated that tourists bear between 15% and 20% of the tax bite.  Other studies have put the export percentage as high as 38%.  Even 20% of $3 billion annually is not small potatoes.  If we aren’t able to collect that $600 million the rest of us are going to have to make up for it somehow – or rely on state government to tighten its belt by that much (fat chance of that happening).

For better or worse, there are reasons why we have our GET and probably won’t be sacking it any time soon.  If you think you have a better way of funding our state government, great!  Our lawmakers need to hear from you. 

Addressing the Tax Crisis in Health Care
 
It’s been obvious for some time that there is a physician crisis here in Hawaii.  Simply put, we don’t have enough doctors here.  The ones we do have are moving away, and most of the medical school graduates are opting to stay away from here. 

According to the Hawaii Physician Shortage Crisis Task Force, taxes are one of the reason for the shortage.  A petition attributed to the task force on change.org argues that Hawaii’s General Excise Tax (GET) taxes patients for getting sick or injured, and it penalizes physicians who serve Medicare, Medicaid, and TRICARE populations who are already accepting substantially lower reimbursement rates even before the GET is applied.

Health insurance and the GET don’t mix, that’s for sure.  According to the petition, Medicare doesn’t pay GET, and prevents physicians from passing it on to the patient.  The same is true for Medicaid/QUEST and TRICARE (the health care system for the federal uniformed services).  Some private insurers also don’t pay for GET, requiring medical care providers to bill patients for the tax separately.  No other state taxes health care in this way, the petition says. 

So, health care providers are caught between a rock and a hard place.  They are required to pay a tax that most states don’t impose on health care, and they can’t get economic relief by passing on the tax like most businesses do.
In the late 1970’s, insurance agents apparently had the same problem.  A study undertaken by the Legislative Reference Bureau at the time found that  there were three types of commissioned agents who were prevented from passing on the cost of the general excise tax to their customers. Taxi drivers were prohibited by county ordinance, travel agents were prohibited by federal law, and insurance agents were prohibited by state law.  State legislators weren’t willing to do anything about the taxi drivers and the travel agents, apparently because the problem was created by another government entity; but they figured they needed to give some relief to the insurance agents. 

Act 144 of 1978 recites, “The legislature finds that under present law insurance agents are prohibited from passing on the excise tax to their customers, while the other occupations which operate on a commission basis are allowed to pass on the tax. The direct result of this differential statutory treatment is that those occupations which can and do pass on the excise tax are subject to an actual burden of .15 per cent while insurance agents are subject to an actual tax burden of either 2 or 4 per cent.”  That law made insurance agents’ commissions subject to GET at 0.15%.  That rate is still in effect today, and the commissions are, moreover, exempt from the 0.5% county surcharge that is slapped on top of all 4% GET levies.

Arguably, doctors and medical practices are worse off than the insurance agents.  Commission agents are taxed only on their commissions, and not on every dollar that comes in the door.  Doctors and other service providers, however, are taxed on everything they earn from providing their services.  Hospitals found a way out of the problem by structuring as charitable organizations, and then qualifying for tax-exempt organization treatment in the GET section applicable to charities.  But individual doctors and small medical clinics can’t do that.  (And one recent hospital that didn’t structure itself in that way found itself in bankruptcy court.  Twice.)

Should medical services be given the 0.15% special rate like insurance agents are?  There does seem to be precedent for that solution.  Some lawmakers will think of doctors as wealthy fat cats who are there to be fleeced, not pitied.  I wonder what they are going to say when THEY need doctors and can’t find them here.

General Excise Tax on Nonprofits
 
Many of us have had the chance to work with nonprofit associations, either as a board member, volunteer, or paid staff.  It isn’t clear to many people how our tax laws, specifically our GET, apply to these associations, so I am presenting a simplified guide to how the GET works.

A nonprofit can earn three kinds of income, which I call green, yellow, and red income.  These three categories cover most, but not all, of the income that a nonprofit can earn.

Green income is gifts, grants, contributions, and membership dues.  Green income is exempt from GET.  This kind of income is exempt from GET because it’s a gift, and it doesn’t matter if the recipient is nonprofit, for-profit, or an individual.  If the donor gets something substantial in return for the contribution, it’s not a gift and therefore not green income.

Yellow income is what some people call “exempt function income.”  To have exempt function income, the recipient must be registered as a tax-exempt organization.  An organization registers with the Department of Taxation on Form G-6, which these days is submitted online.  If the registration is approved, then exempt function income is income derived from the conduct of an activity that contributes importantly to the reason why the organization is exempt.  For example, if the exempt organization is a school, tuition is exempt function income.  If it’s a museum, admission fees are exempt function income.  For a hospital, charges for medical care are exempt function income.

There are further restrictions on some types of organizations.  For example, for a hospital the law says that exempt function income needs to be from the conduct of a hospital “as such.”  There was a court case that decided that if a hospital provides a parking lot for patients and visitors and charges parking fees, the parking fees are GET taxable because, although having relatives and friends visit a patient can make the patient get better faster, a parking lot is not a hospital “as such.”

Yellow income is exempt from GET if all these conditions are met.  This is the kind of income that is reported on the GET return as exempt and is listed in the second column of the return.  Again, an organization can’t have any yellow income unless it is registered on Form G-6 and approved by the State.  A determination letter from the IRS recognizing it as federally tax-exempt is not enough.

Red income is most of the other income a nonprofit receives.  Red income is income from fundraising.  Whether it be a bake sale, benefit dinner, or a silent auction, any income from an activity the primary purpose for which is raising money is GET taxable.

There are a couple of other categories of income that usually aren’t of significance.  A nonprofit earning income from dividends is exempt from GET because all dividends are exempt from GET.  If it earns some interest  from safekeeping funds in the bank, that is exempt because it’s not considered “business” subject to the tax.  If it gets a few bucks by auctioning off used property or other physical assets occasionally, there is a “casual sale” exemption that kicks in.

There are, of course, more complicated nonprofit organizations with different kinds of income.  This article can’t, and doesn’t, cover everything.  It does illustrate that the GET, as applied to nonprofits, is more complex than some folks would care to believe. 

We encourage nonprofits to get a qualified tax professional involved if they have some income that they aren’t sure how to report or classify.