Small Business News
October 2005 | Online Edition
Take Hike Imbedded in Prices Affect Everyone
By Lowell L. Kalapa, Tax Foundation of Hawaii
Proponents of the recently approved hike in the general excise tax rate for Honolulu continue to argue that it will be just half a cent more and it will only add another $245 to the family's annual general excise tax burden. In the latter case, they used more "realistic" family budgets than the highly touted $450 in family tax burden that this column has reported.
Again, those who believe it is only a half-cent more ignore the fact that the general excise tax is paid by everyone at all levels. So while a grocery store may purchase the cereal or meat at wholesale and pay the lesser half percent rate on the purchases, goods and services purchased by the same store for consumption by the store are taxed at the full 4 percent rate. When that retail rate rises to 4.5 percent on everything purchased by the store from the rent it pays for the store space to the mops and brooms to sweep the grocery store floors, that additional rate will have to be passed on to the customers of that store.
Even those taxpayers who are residents of the Neighbor Islands will be affected as the bulk of the goods and many of the services consumed by Neighbor Island taxpayers sooner or later pass through Honolulu. So the box of cereal that is warehoused in Honolulu will be tapped with the increased general excise tax rate because the rent the warehouse owner pays will be subject to the higher rate.
Probably the most unsuspecting culprit is the cost of energy. Many taxpayers don't know that the fuel oil burned by Hawaiian Electric Company in Honolulu is subject to the 4 percent general excise tax even though the fuel oil is burned to produce electricity, which is subsequently sold to consumers. This is because the fuel oil is "consumed" by Hawaiian Electric and therefore is a sale for consumption and not for resale. As a result, the cost of electricity on Oahu will also rise as a result of the increase in the general excise tax rate.
Given that nearly everything produced or stored on Oahu utilizes electricity, that increased cost of electricity will be embedded in the cost of all goods and services passing through Honolulu on the way to the Neighbor Islands. Goods and services sold outside the state are exempt from paying the general excise tax when sold to someone outside the state, but the cost of the energy to produce those goods and services will be a part of the price charged to the customer outside the state.
The general excise tax is paid by a refinery at the 4 percent rate on the wholesale price of the gasoline. Thus, when the tax rate rises to 4.5 percent, gasoline sold from the refiner to the dealer will be at the higher rate. Given that the refiner is located in Honolulu, there will be some question of whether or not gasoline sold to a Neighbor Island dealer will be subject to the current 4 percent rate or the higher 4.5 percent rate as the refiner is licensed to do business in Honolulu. Thus, Neighbor Island drivers may be picking up some of the tab for the higher Honolulu rate.
Regardless, because the 4 percent rate is imposed on all energy produced or used in Honolulu, the cost of the higher tax rate will be embedded in the shelf price of all goods and services either produced or passed through Honolulu. While consumers will only see the added half-penny on their grocery receipts, they won't see the higher tax rate in the cost of the goods they purchase, they'll just see higher prices.
So while consumers in Honolulu will see the higher rate shown out as the tax on their purchases, they, along with their counterparts on the Neighbor Islands, will not see the cost of the hidden tax increase in the shelf price of everything they buy. However, what they will notice is that their paycheck will be buying a lot less than it did before the tax rate went up. Honolulu businesses selling goods and services outside the state will find that even though their sales are exempt from the general excise tax, what they have to charge to recover their costs will be less price competitive with goods and services produced in other states.
However, the one that will hit all consumers in the state is the higher cost of energy as it is impacted by the higher general excise tax rate. From the lights that illuminate the workstation in an office or a garment factory to the delivery of the goods or services by truck or automobile, the general excise tax will only exacerbate what is already an intolerable cost for fuel.
So whether the family of four makes $50,000 or $150,000, the hike in the general excise tax rate will ensure that those families will be buying a lot less than before the rate increase.
Lowell Kalapa is the President of the Tax Foundation of Hawaii. For more information, please call 536-4587 or log on to http://www.tfhawaii.org
Bubble Talk?
By Walt Harvey (R), East Oahu Realty, ABR, CRS, GRI, SRES, ePRO, QSC
Is Hawaii real estate in a bubble and if so, will it burst anytime soon? The August median price single family home on Oahu was $625,000, on Maui $693,000, on Kauai $700,000 and The Big Island was $370,000. Interest rates have risen slightly and some mainland markets are cooling. Should we be concerned? Letís examine some fundamentals.
With the exception of second home markets, mainland real estate is driven by local economic conditions, primarily employment. The better the job situation is, the better the real estate market tends to be. Folks have stable employment, start families and buy homes. As their families grow, they move up into larger homes. As families mature and children leave the nest, some parents downsize with most people remaining in the same general area. The local real estate market reflects the local supply and demand.
Hawaii is different. Our real estate demand is global. We are a popular second home spot for not only mainland buyers but Pacific Rim buyers as well. How popular? A recent news article revealed that mainland residents own 20% of Maui County homes. Those are home owners that are not as dependent on local economic conditions but those are also discretionary home owners and investors. If many of them suddenly decided to sell their property, we could have an oversupply situation. The trend seems to be the opposite.
So what about a bubble in Hawaii real estate? The bubble talk I hear most seems to come from the securities industry. Overall, stocks and bonds have not done as well as real estate and perhaps predictions of a burst may send investors back to Wall Street.
What do experts say? Bank of Hawaiiís economist, Paul Brewbaker feels that the market will slow rather than collapse: "Presuming that there is not a major reversal in economic conditions and fundamentals, the worse we can expect is that once we reach those high levels ($700,000-$800,000 on Oahu), home prices will stop rising and just stay there."
Walt Harvey is an SBH Director and a real estate broker with East Oahu Realty.
He can be reached on their website: http://www.coastalhawaii.com.
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