Producers already enjoy reduced rate
measures introduced during the last session would have exempted from the general excise tax the sale of fresh farm produce that is intended for human consumption within the state. In order to claim the exemption, a farmer would have to register with the state Department of Taxation and pay an annual fee.
The sponsors of the exemption apparently intended the measure to encourage the sale of locally grown produce by exempting the sale of that produce from the 4 percent general excise tax. While it may have sounded like a good idea, the proposal, in fact, reflected ignorance about the tax and how businesses operate in the state. It appears the proposal made the assumption that such farm fresh produce is sold only at so-called farmers markets and the produce is sold to the final consumer and, therefore, is subject to the full retail rate of 4 percent. Contrary to the perception, it is more than likely that most locally grown produce is sold to wholesalers, retail markets or food establishments.
The early drafters of the general excise tax recognized this and accorded farmers the lesser 0.5 percent rate, as the bulk of the farm production would be resold either through supermarkets or food establishments. Only with the recent advent of farmers markets have many farmers sold their produce to final consumers and, therefore, must pay the 4 percent rate on those sales. Although some may argue that exempting the sale of produce by those who grow that produce will help the local industry, it should be remembered that the general excise tax is levied for the privilege of doing business in the state.
Thus, exempting the sales of locally grown produce sold by farmers puts retail grocers, who may also be selling locally grown produce together with imported produce, at a disadvantage as the grocer will continue to pay the 4 percent tax on sales made to customers of the grocery store.
It should be remembered that the use of the tax system for such purposes is an inefficient means to accomplish such goals. Generally, exemptions from the excise tax are granted in recognition that the imposition of the tax would impose an unusual burden or would otherwise cause the taxpayer to do business in an inefficient manner. Exemptions from the general excise tax are also granted because an entity is a nonprofit organization, or if the tax imposed would have a severe economic impact on the state’s economy. The proposal to exempt sales of locally grown produce by farmers meets none of these criteria and could not be justified.
When a farmer’s produce is sold to retailers, such as grocery stores or to wholesalers, the rate imposed is 0.5 percent, or 50 cents on a $100 sale. Thus, it is not the cost of the tax that adds to the price of locally grown products as much as it is the external factors such as the cost of land, labor and regulatory compliance. Granting a general excise tax exemption to the farmer will not significantly reduce the cost of the produce.
If the concern is that locally produced farm products are much more expensive than imported products, consumers and lawmakers need to recognize that it is not the cost of the tax which makes local produce more expensive as much as it is all of the other costs incurred by farmers, from labor to regulations and compliance with various standards established by state laws. Instead of attempting to give away the state treasury with such myopic tax breaks, lawmakers need to pay more attention to the overall economic climate of the state, which currently suffers from a continuing burden of taxes and regulations. Lawmakers should remember that giving a tax break to one type of activity comes at a cost to all other taxpayers not so favored, unless they are willing to effect a commensurate decrease in state spending. So, one has to ask: What is the unusual burden of taxes borne by this particular industry or activity, or is this proposal nothing more than pandering to the fad industry of the day which, in the case of this particular proposal, is support of the farm-to-table rage?
When the Legislature convenes in the next few months, high on its agenda should be the issue of improving the state’s business climate by reducing the cost of doing business in Hawaii. Indeed, Hawaii has earned the dubious honor of being at the bottom of the barrel when it comes to being a business-friendly state. The plethora of overly burdensome and complex regulations, the strangle of permits required to do business in the state, the numerous labor regulations and the threat of substantial hikes in the minimum wage all add to the cost of locally produced goods, as well as to the cost of just surviving in the 50th state.
* Lowell L. Kalapa is president of the Tax Foundation of Hawaii.