Center for Labor Education & Research, University of Hawaii - West Oahu: Honolulu Record Digitization Project
Honolulu Record, Volume 9 No. 26, Thursday, January 24, 1957 p. 1
How Hawaii Got Its Tax System
This is the second of a series of articles based on The Tax System of Hawaii, by Robert M. Kamins (U. of Hawaii Press, 1952). Dr. Kamins, now bead of the Legislative Reference Bureau, was associate professor of economics at the University when the book was published.
Once upon a time Hawaii, which today cannot even elect its own governor, was a sovereign state. It could levy taxes as it saw. fit, including import duties; and in fact nearly half the income of the Kingdom and the Republic of Hawaii came from the customhouses. When Hawaii became part of America, this source of revenue was cut off.
Tax receipts slipped from $2,629,464 in 1900 to $1,807,654 in 1902.
These are "once upon a time" figures, too. Collections in 1956 were $88,405,823.
The remaining half of the Republic's revenues came, in roughly equal thirds, from the real property tax, the personal property tax, and poll taxes plus various licenses.
The real property tax has been an important (source of income for over a century. Today it is only half as important percentagewise as when Hawaii, first came under the American flag.
"Lady Dog Legislature"
The personal property tax, once as important as the tax on real estate, had dropped to only 9 per cent of the total intake when it was abolished in 1947. Exemptions, writes Dr. Kamins, "had trimmed the tax base so that it had essentially become a tax on business inventories and equipment . . . Repeal of the tax nevertheless removed some $4,000,000 from the annual revenues of the Hawaiian tax system." This loss was made up by increasing real property maximums and by the general excise tax.
The poll tax, which swallowed up the formerly separate road and school taxes, dates back to the feudal days of the Kingdom. Many are the stories of the piliklas poor Hawaiians had In finding the few dollars to pay it in the earliest years. The poll tax was levied on every adult male regardless of his income, and as one expert says, it "offends every standard of good taxation." Still, it accounted for one-eighth of Hawaii's revenues in 1902. It had fallen to be a mere nuisance tax, bringing in only 2 per cent, when it was abolished in 1943.
Licenses are not thought of as taxes today, for the money they bring the treasury is hardly half a drop in the bucket. But in 1902 they came to 8 per cent of total receipts, and Hawaii's first legislature became known as the "Lady Dog Legislature" for its long wrangles over one particular license.
Taxation During the Depression
This legislature also introduced the net income tax (1901) to replace in part the lost revenues from imports. By 1910, Kamins writes, "income tax yields equalled those of the real and personal property taxes formerly the mainstays of the internal revenue structure. During World War I and up until 1931, however, property tax collections steadily climbed, to outstrip receipts from the cyclically sensitive income taxes."
"In the depression years following: 1931," goes on Kamins, "both property and income tax yields slumped. To meet its financial needs, the territorial government entered the field of excise taxation on a large scale, enacting a motor fuels tax In 1032, a business excise in 1933 (succeeded by the present gross income tax two years later), liquor and tobacco taxes in 1939. Relief funds and unemployment benefits were provided by enactment of the tax on wages, salaries and dividends in 1933, and by the unemployment compensation tax of 1939."
Disguised Soles Tax
Of these, the general excise tax became Hawaii's top money-getter, now bringing in 41 per cent of the revenues. As applied to retail sales and to some extent to other types of business, it is largely a disguised sales tax, passed on to the consumer.
The liquor and tobacco taxes, though providing only a small part of the income, fall directly on the consumer.
The liquid fuel tax has become one of the major sources of territorial income, earmarked for improvement of Hawaii's transportation facilities.
A public utility excise tax (which takes the place of property taxes) was enacted in 1953 and brings in 3.2 per cent of the total revenue. The insurance company tax dates all the way back to 1883 but amounts to little. The bank excise tax of 1933 amounts to even less.
An estates and inheritance tax, running back to the past days of the monarchy, always has been a very minor source of revenue.
Tax Base Changed in '30's
Hawaii's distinctive tax is the famous 2 per cent compensation tax—properly speaking, a flat tax on wages, salaries and dividends no matter how large or how small. To quote Kamins, it "was first adopted in the Hawaiian Unemployment Relief Act of 1933 Collected at its source, this 1/2 of 1 per cent levy was extended as a public welfare tax following passage of an unemployment compensation act in 1939. The tax rate was increased to 2 per cent in 1943, but three-quarters of all amounts paid under this compensation and dividends tax were allowed as credits against the personal income tax."
In 1902, in spite of the poll tax, the tax burden fell chiefly on the middle and wealthy classes But the tax revolution of the 1930's changed the tax base.
"The effect of these changes," says Kamins, “has been to create a fiscal system heavily reliant upon consumption taxation, secondarily based upon the real property tax and a flat tax upon wages salaries, and dividends, with but minor employment of progressively scaled taxes upon income and inheritances.”
TAX COLLECTIONS, 1902
Amount Percent
Estate and inheritance $ 6,074 .3
Insurance 3,846 .2
Income, corporate and personal 287,367 15.9
Licenses 147,061 8.2
Personal Property 571,249 31.6
Real Property 532,637 29.5
Poll 231,485 12.8
Vehicle 16,087 .9
Other taxes 11,848 .6
Total 1,807,654 100.0
TAX COLLECTIONS, 1956
Amt. Per cent
Bank Excise $175,000 0.2
Compensation and dividends 12,686,725 14.3
Employment security
Contributions 2,737,081 3.1
Fuel 11,658,695 13.2
General excise, consumption
and compensation 36,274,843 41.0
Inheritance and estate 296,140 0.3
Insurance premiums 1,115,595 1.3
Liquor and permits 2,103,756 2.4
Net income — corporation 3,990,890 4.5
Net income — individual 1,981,407 2.3
Public utilities 2,869,907 3.2
Real property 11,256,689 12.7
Tobacco and licenses 1,259,350 1.4
Other taxes (delinquent) 745
Total 88,405,823 100.0
It is only common humanity to feed the hungry. If our hospitals are too big, too complex, too impersonal to do these small kindnesses for the sick, something is very wrong.