Tax Increase or Exemption?

Hawaii's Senate Ways and Means Committee needs to generate new revenue to offset the projected deficit of $1.3 bi over the next two years.

The first option is 1% increase in GET. This initiative would raise about $500 to $600 mi per year. To protect poor and middle-income residents from the regressive, broad-base tax, there will be a $100 mi in tax credits.

The second alternative is temporarily suspending GET exemption on certain business activities and imposing a 4% GET on them. This adoption would bring in about $200 mi per year.

The governor and the House prefer the second option. The Senate leans toward the first. Chamber of Commerce of Hawaii and Hawaii Association of Realtors are against first alternative and are silent towards the second.

General Excise Tax in Hawaii has not been raised since 1965. Economists praise its broad application and relatively low 4% rate. Critics highlight the pyramid effects and regressive nature of GET.

Tax exemptions on GET aims to address pyramid effect on certain business activities - where tax is applied at more than one point along a chain of related economic transactions.

Tax Foundation of Hawaii claims that both initiatives - GET raise and tax exemption - would damage the economy. It recommends to move special fund revenue into state's general fund and scale back high technology and tax credits to help with deficits.

If exemptions are suspended, construction and aircraft industries, for example, will be highly affected. The extra cost of production will be eventually passed on to consumers and job positions will be lost.

Unions and liberals, however, argue that cuts on social service programs like drug treatment will end up costing government more in the long run. There will be higher costs with health care and criminal justice.

Democrats are in favor of GET increase. They argue that this raise is needed to generate revenue for the budget and a net tax savings will be provided for middle and low-income taxpayers through tax credits.

Republicans oppose new tax increases to balance budget.

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