Hawaii's Tax Pyramid plan crippling small businesses
State's answer to its budget deficit is crippling small construction companies
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Other industries hurt
The suspension of Hawaii’s sublease GET deduction is expected to bring in the second-most revenue from Act 105, according to the Tax Department, at $105 million, over the next two years. It increases the amount of tax paid by sublessors and is often passed on to sublessees, many of whom are small business owners. To recover costs, small business owners try to pass the cost on to consumers, but that is not easily done, says Steven Sofos, president and principal broker at Sofos Realty, because it affects businesses’ ability to compete.
Sofos adds that sublessors and sublessees dealing with space in a building on leasehold land – land that is leased by owners such as Kamehameha Schools or Queen Emma Land Co. – are affected the most because of the added layer of cost from the leased land.
Some other GET exemptions that were suspended affected Hawaii ocean and air transport services, but companies have chosen to absorb the costs instead of passing them on to consumers.
Keoni Wagner, Hawaiian Airlines’ VP of public relations, says, “Hawaiian is paying millions more in tax now – millions that out-of-state competitors don’t have to pay – as a consequence of Act 105.”
The air transport-related exemptions existed to level the playing field so locally based airlines could compete with those based elsewhere, as well as to promote more infrastructure investment by local airlines. With the suspension of Act 105’s suspension of the those exemptions, some of Hawaiian’s competitors have an advantage.
Hawaiian’s fares have not been increased as a direct result of the act, but Wagner acknowledges, “Anything that adds to operating costs increases pressure on fares and fees.”
To address the added GET expense, Matson, Hawaii’s largest shipping company, announced to customers last June that a $52 fee would be added to every container; however, the fee was retracted before it could take effect. Jeff Hull, head of Matson public relations, says the company decided to absorb the cost instead of passing it on to consumers.
Act 105’s future
Proponents say Act 105 is necessary so the state can balance its budget, and they stress that the suspension of the GET exemptions is temporary. However, Sen. Sam Slom, the only Republican in the state Senate, who voted against the final version of the bill that became Act 105, says, “They say temporary, it’ll sunset in two years, but what will likely happen is it will be extended, or the sunset provision will be taken out.”
Sen. Ige says that won’t happen without a full discussion. “We’d have to pass legislation again, so there will be lots of debate,” he says. “Everybody would know about it and we’d also have answers regarding impacts and revenue by then.”
Hawaiian Air’s Wagner says his company thinks the exemptions will return. “With tourism and the economy now rebounding strongly, thanks in part to Hawaiian’s growth plan, we expect the legislation to sunset next year as it was designed to.”
The construction industry also hopes the tax increase will die as scheduled on June 30, 2013, but many in the industry fear it will be extended.
“We have to be optimistic in this industry, but I don’t think the state’s financial situation is going to improve any next year, so my personal opinion is that there will be another act that will continue this,” says Michael Brant, Gentry Homes’ VP of engineering and past president of the Building Industry Association of Hawaii. “The state typically looks at ‘How can we increase revenues,’ but the better alternative is to look at reducing costs. We just don’t feel that there was much of an effort put into that.”
How Pyramiding Raises Costs
GET exemptions were created in the past to prevent some, but not all, of the excise tax pyramiding on goods and services in Hawaii. Here’s an example:
A company building a custom home would subcontract the foundation work to a subcontractor that is an expert in that area. That company would sub-subcontract the excavation and steel-reinforcing parts of that job to two other experts. Similar subcontracts might go to plumbers and electricians.
In the past, the contractor, subcontractors and sub-subcontractors would pay the full 4 percent state general excise tax only on work they performed themselves. Now, each layer must pay the full GET on the entire value of their contracts. This means part of a job that might have cost, say $76,000, including the tax, might now cost $84,000 with three layers of tax worked in.
It means more revenue for the state, but someone has to foot the bill – either the contractors, subcontractors or homebuyer, or the higher costs kill the project altogether.
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