Two ways to simplify Hawaii taxes

This month, as we struggle with complicated federal and state tax returns, we will also be celebrating Tax Freedom Day – the day we stop paying for government and start earning money for ourselves.

How can we keep more of our hard-earned money? Here are two suggestions:

#1  Replace the general excise tax with a reasonable sales tax. Let’s repeal the Hawaii GET, which taxes all business transactions, from wholesale to retail – and replace it with a reasonable state sales tax on retail-level goods, with fewer tax credits. It would stimulate consumer spending, lower the cost of goods, and encourage business growth.

With the general excise tax: If you spend $100 for groceries on Oahu, you pay $4.71 in general excise taxes ($4.17 on the neighbor islands). The store’s earnings are inflated to $104.71, making it seem as if Hawaii’s economy is stronger than it is.

With a comparable sales tax: if you spend $100 for groceries on Oahu, you pay $4.50 in sales taxes ($4 on the neighbor islands). The store’s earnings are accurately reported at $100.

Saving 21 cents for every $100 you spend may not seem like a lot, but it amounted to $91,534 in overpaid taxes in 2008, in addition to general excise taxes at the wholesale, manufacturing, and production levels. The general excise tax also hits us on food and medicine – basic necessities that are often exempt from a sales tax.

#2  Create a flat state income tax. It may sound crazy, but it would make our lives easier. More people would file taxes, there would be fewer errors, and we would save money on paperwork and auditing. Right now, the Hawaii tax code (Title 14) is 340 pages long, with an additional 296 pages in administrative rules (Title 18). The income tax instructions are 56 pages long just for Hawaii residents (40 pages long for the “short form”).

Six states already have a flat rate personal income tax: Colorado (4.63%), Illinois (3%), Indiana (3.4%), Massachusetts (5.3%), Michigan (4.35%), Pennsylvania (3.07%), and Utah (5%). Two states, New Hampshire and Tennessee, tax only dividends and interest income. To be fair, states like Illinois and Michigan are in fiscal trouble – but all the states are facing the effects of irresponsible spending, unfunded pension liabilities, Medicaid costs, and unemployment.

A flat state income tax could also attract new residents and businesses to Hawaii, who are fed up with complicated and confusing taxes in other states (and lured by the great weather and close proximity to Asian markets).

We all need to pay taxes, because we all need roads and infrastructure, public safety, schools, parks, and national defense. But paying taxes should be as simple and reasonable as possible.

What do you think? Can we use taxes to encourage hard work and thrift, instead of waste and spending?

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One Comment on “Two ways to simplify Hawaii taxes”

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