The Tax System of Hawaii 9780824892692

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THE TAX SYSTEM OF HAWAII

THE TAX SYSTEM OF HAWAII ROBERT M. KAMINS Associate Professor of Economics University of Haivaii

UNIVERSITY OF HAWAII PRESS HONOLULU, HAWAII 19

52

Library of Congress Catalog Card Number 52-12657

COPYRIGHT, 1952, BY UNIVERSITY OF H A W A I I PRESS Manufactured in Honolulu, Hawaii, by Advertiser Publishing Co., Ltd.

PREFACE A book about taxes is not likely to be a labor of love, for taxation is among the least lovable of institutions. Necessary, unfortunately; important, undoubtedly; but hardly arousing affection unless it be in the heart of the tax collector or the budget director. It may be the compulsory nature of tax levies which makes them emotionally disturbing to a nation raised in a tradition — however illusory — of free will in individual actions. The force government exerts in exacting financial support from its population, supporters of majority and minority parties alike, does violence to this belief and so augments the feeling of loss — also illusory under good government — which accompanies the payment of taxes. This volume, then, is rather the product of curiosity and concern — curiosity as to the workings of a tax system which displays highly unusual features, concern for the continued well-being of one of the best-favored sections of the United States. A fuller understanding of its present tax structure may assist in the achievement of a fiscal system still better suited to the needs of the territory: this is a teacher's credo. The study was first prepared in 1949 as a doctoral dissertation for the University of Chicago and, despite substantial revision, bears marks of its original mold. Dr. Roy Blough, Director of the Department of Economic Affairs of the United Nations, Dr. Richard Goode of the International Monetary Fund, and Dr. Milton Friedman, at that time all of the University of Chicago, were at once incisive in raising basic questions and helpful in seeking their solution. The information presented and the views expressed are those of the author, who accepts full responsibility for them. Sincere thanks are due to Torkel Westly, Tax Commissioner of Hawaii, to Norman Meller and Arthur L. Kirkpatrick of the University of Hawaii, and to Mrs. Nora Kirkpatrick of the Bank of Hawaii, who reviewed part or all of successive drafts of this book, to its appreciable improvement. "Mahalo" also to my students at the University of Hawaii who, during discussions both in classroom and out, have helped sharpen the exposition. V

vi

T H E T A X SYSTEM OF HAWAII

Finally, I inscribe a token of thanks that finds no easy verbal expression to my wife for her partnership in this work, from beginning to end. ROBERT M . KAMINS

Honolulu, Hawaii September 1,1952

Table of Contents PREFACE

V

LIST OF TABLES

x

L I S T O F CHARTS

xii

I. I N T R O D U C T O R Y Purpose and Scope of Study

i

3 4

II. THE GOVERNMENTAL STRUCTURE A N D T A X BASE . Government Under the Organic Act Limited Local Government Wide Taxing Power The Economic Base of the Tax System Specialized Economy Trade Imbalance Volume of Trade Concentration of Economic Control Employment Level of Personal Income

.

6 6 6 7 8 8 10 12 13 14 15

III. T H E PRESENT T A X SYSTEM OF H A W A I I : AN O V E R V I E W Composition of the Tax System Dependence on Three Taxes Small County Taxes Comparison of Hawaii's Tax System with Mainland Systems Sales and Gross Receipts Taxes Income and Death Taxes Compensation and Dividends Tax County Taxes in Hawaii Tax Earmarking

22 23 25 26 26 27

IV. T A X E S ON CONSUMPTION: THE GENERAL EXCISE AND ITS AUXILIARIES

32

The General Excise Tax Few Exemptions, High Rates Taxation of Overseas Shipments Taxation of Federal Contractors Auxiliary Taxes Consumption Tax Compensating Tax Some Economic Effects of the General vii

Excise

19 20 20 22

32 32 33 35 36 36 . 3 8 39

viii

THE TAX SYSTEM OF HAWAII Who Really Pays the Tax? Effects on Imports and Exports Firms with Large Turnovers Effects on Sugar and Pineapple Summary of Economic Effects

.

V. TAXES ON CONSUMPTION: SPECIFIC EXCISES . . . . Motor Fuel Tax Rates and Base Administration Distribution of Revenues Liquor Tax Rates and Base Tobacco Tax Small Tax Base Some Economic Effects of Specific Excises Who Bears These Taxes? Effects of Liquor Tax VI. TAXES ON INCOMES AND INHERITANCES Compensation and Dividends Tax No Personal Exemptions; No Deductions Collection at Source Personal Net Income Tax Calculation of Tax Income Tax Rates Tax Credit Comparison of Income, Wage, and Dividend Taxation . Heavier Load on Wages and Dividends Comparison of Burden Corporate Income Tax Allocation of Income to Hawaii Treatment of Dividends Some Economic Effects of Income Taxes Effects on Labor Supply Impact on Corporations Inheritance and Estate Taxation The Inheritance Tax The Estate Tax VII. TAXES ON SPECIFIC BUSINESSES Bank Excise Tax Public Utility Tax Insurance Company Tax Some Economic Effects of Business Taxes VIII. REAL PROPERTY TAXATION The Tax Base Scope of Exemptions Home Exemptions Computation of Tax Rates Property Tax Assessment Fractional Assessments

39 42 43 43 44 46 46 46 48 49 49 50 50 51 52 52 53

.

55 55 55 56 58 58 59 60 60 61 62 64 64 65 65 66 67 67 68 70 73 73 75 76 78 80 81 82 83 86 88 88

TABLE OF CONTENTS

¡x

Reassessment Program Appeals Boards of Review . . Tax Appeal Court Allocation of Property Tax Revenues Summary and Comments

89 89 89 90 90 91

I X . C O U N T Y T A X REVENUES County-Administered Taxes Motor Vehicle T a x : Bicycle Tax Public Utility Franchise Tax License Taxes Liquor License Taxes Other Business Licenses County Revenues from Territorial Collections Tax Sharing Gasoline Tax General Excise Tax Effects of General Excise Shares

97 98 98 99 101 101 102 103 104 104 104 105

X . TERRITORIAL T A X ADMINISTRATION Department of the Tax Commissioner Organization of Central Office Tax Administration Outside Oahu Civil Service Personnel Office of the Treasurer Administrative Devices: Tax Clearance and Extra-Territorial Enforcement of the haws The Tax Clearance Extra-Territorial Tax Enforcement Cost of Tax Collection Administrative Regulations

107 107 110 112 112 113

X I . AN APPRAISAL OF HAWAII'S T A X SYSTEM

119

A Basis for Appraisal Standards of Judgment Applying the Standards Uniformity of Taxation Lack of Equality and Neutrality Heavy Consumption Taxes Public Understanding Adequacy of Yield The Tax Burden Flexibility Property Tax Rigidity Rigid Bank Tax Limited Earmarking Summary

119 119 120 120 120 122 122 124 124 124 125 126 126 126

Tax

X I I . ALTERNATIVE T A X PROGRAMS FOR HAWAII . . . . Personal Income Tax Revision Equality of Income Taxation

114 114 114 114 116

128 129 129

THE TAX SYSTEM OF HAWAII

X

Using the Federal Tax Base Streamlining Administration Corporate Income Tax Revision Removing Double Taxation of Dividends Integrating Rates with Personal Tax Taxing Banks Like Other Corporations General Excise Tax Revision A Sales Tax Instead? Property Tax Revision New Standards of Assessment Reduction of Exemptions Revising Tax Ceilings Death Tax Revision . Taxation of Foreign Heirs Adoption of Gift Tax Administration by Tax Office Where Taxes Can Best Be Reduced General Excise Tax Corporate Income Tax Taxes on Wages and Dividends Where Taxes Can Best Be Increased Property Taxes Income Taxes Making Tax Dollars Stay Home Summary and Conclusion

129 131 131 131 132 132 132 133 134 135 135 136 137 137 137 138 138 138 139 139 139 139 140 l4l 142

APPENDIXES:

A. Outline of Territorial and County Taxes, as of June 1952 .

.

. 147

B. Evolution of Hawaii's Tax System C. County License Tax Collections, Calendar Years 1944-1951 .

.

154 . 181

D. Uniform County Business License Fees Imposed in Hawaii, 1952 . 182 BIBLIOGRAPHY

185

List of Tables 1. Estimated Balance of Payments for Hawaii: 1951

11

2. Retail, Wholesale, and Service Trades in Hawaii: 1939 and 1948

12

3. Median Incomes of Families and Unrelated Persons in 1949 .

16

.

4. Territorial and County Tax Collections in Hawaii, Fiscal Years Ending 1951 and 1952

21

5. Percentage Distribution of Taxes Collected by the Territory of Hawaii and the Mainland States, Fiscal Years Ending 1950 and 1951 6. Taxes Accruing to the Counties of Hawaii, Calendar Years 1950 and 1951 7. General Excise, Consumption, and Compensating Taxes: Tax Base, Rates, and Revenues for Calendar Year 1951 8. Gallonage Taxed under Liquid Fuel Tax, Calendar Years 19321951 9. Liquor Tax Base and Collections, Fiscal Years 1940-1952 . . . 10. Tobacco Tax Base and Collections, Fiscal Years 1939-1952

23 27 37 47 50

.

51

11. Taxation of Compensation and Dividends Compared with Taxation of Other Forms of Income in Hawaii

61

12. Collections of State and Federal Individual Income and Employment Taxes in 1951

63

13. Percentage Ratio of Bank Tax Revenues to Net Worth, Net Income, and Bank Deposits, Calendar Years 1937-1951 . . . .

74

14. Public Utility Tax Rates and Revenues, Fiscal Years 1937-1952 .

76

15. Insurance Tax Revenues, 1937-1952

77

16. Real Property Tax Assessments, Exemptions, and Net Valuation, Entire Territory of Hawaii, Calendar Years 1951 and 1952 . . .

81

17. County Tax Rates in the Territory of Hawaii, Calendar Years 1930-1952

87

18. County Tax Revenues in Hawaii, Calendar Years 1946, 1948, and 1951

98

19. County Motor Vehicle Tax Collections, Calendar Years 19441951 99 20. County Public Utility Franchise Tax Collections, Calendar Years 1944-1951 101 21. Real Property Tax Collections in Each County, Calendar Years 1944-1951 104 xi

xii

THE TAX SYSTEM OF HAWAII

22. County Shares of General Excise Tax Compared with Revenues from Repealed Personal Property Tax 23. Allocation of Tax Office Personnel 24. Expenditures of the Department of the Tax Commissioner, Fiscal Years 1944-1951 25. Cost of Tax Administration in Hawaii and Twelve States . . . 26. Current Collections of Three Major Territorial Taxes, Calendar Years 1948, 1949, 1951

105 110 115 116 125

B-l. Internal Tax Revenues of the Hawaiian Kingdom, Biennial Periods: 1852-1894 160 B-2. Total Tax Revenues of the Hawaiian Kingdom, Biennial Periods: 1852-1894 164 B-3. Revenues of the Provisional Government and Republic of Hawaii, 1894-1898 166 B-4. Tax Revenues of the Territory of Hawaii, Fiscal Years 19001952 173-175

List of Charts A. Tax Patterns-—Hawaii and Mainland States; Percentage of Non24 Property Taxes Collected in 1951 B. Earmarking of Territorial and County Tax Revenues, Fiscal Year 1952 28-29 C. The Weight of the General Excise Tax: Heavy on Imports, Heavier on Local Products 34 D. Effect of Home Exemption Under Fractional Assessment . . . . 84 E. Organization for Territorial Tax Administration, as of September 1952 1(8-109 F. Portion of Total Collections in Hawaii Derived from Real Property Tax, 1931-1951 134

THE TAX SYSTEM OF HAWAII

CHAPTER I

INTRODUCTORY It was as true . . . as turnips is. It was as true . . . as taxes is. And nothing's truer than them.

—David Copperfield

DURING THE CENTURY and a half in which Hawaii has had a written history, there has been published no general account of the manner in which its government raises and spends public funds. That popular interest has not been lacking is evidenced by the appearance from time to time of reports upon particular phases of taxation, 1 and by the perennial concern of the legislature and the press with matters of tax policy. A comprehensive study of the tax system has not been attempted, however, until this time. The title of this study invites comment. Like all other jurisdictions of which the author has knowledge, Hawaii has no tax "system," but rather an assemblage of revenue laws accumulated and gradually modified over the decades. The eclectic nature of the tax structure makes it difficult to characterize, for its very diversity refutes any simple theory of the economic or political motivations which have helped shape the tax laws. Here is a jurisdiction which pioneered among the states and territories of the American union in enacting levies on incomes and inheritances at the beginning of the century. A latecomer to the field of excise taxation, this same jurisdiction now imposes on consumers one of the heaviest tax burdens in the entire United States. Is this history evidence of tax legislation favoring the wealthier groups in the Islands? (If so, how are the early experiments in progressive taxes, still in force, to be explained?) Do the tax laws reflect fiscal policy-making by, or on behalf of, an increasingly broad portion of the population? (If so, why the recent tendency to place more of the tax load on consumers and wage earners?) Examining the evolution of Hawaii's revenue laws, one must conclude from the evidence available that they have been adopted piecemeal as the economy developed, as local and federal financial require3

4

THE TAX SYSTEM OF HAWAII

ments multiplied, and as new fiscal problems and solutions gained the attention of the executive and of the legislature. T h e tax structure is nobody's plan; it reflects no consistent view of the proper distribution of the tax burden. It is a composite, the resultant of diverse views, and such it must be expected to remain, since the wishes of different economic groups may not coincide and since the primary goals of fiscal policy are many and vary in the course of time. P U R P O S E A N D SCOPE OF S T U D Y This study of the tax system of Hawaii has a three-fold purpose. It will attempt to describe critically the several taxes comprising the fiscal structure, to appraise the functioning of the entire tax system, and to suggest means whereby the tax laws might be improved in the interests of equity, more effective administration, and desirable economic effects. Comparison is frequently made with mainland experience, primarily to underscore the distinctive features of public finance in Hawaii. Toward a better understanding of a revenue structure which differs in several basic respects from that of the mainland states, the governmental and economic background of Hawaii is outlined, and a brief description is given of the development of the present tax system. W h i l e the revenue laws of the territorial government — which collects more than nine-tenths of all nonfederal tax receipts in Hawaii — are central to this study, the chief features of the county fiscal structures are also examined (in Chapters III and I X ) . Tax-sharing, a device recently adopted on an extensive scale by the Territory, is discussed, both as it affects intergovernmental fiscal relations and as it applies to the distribution of particular levies. The final two chapters, X I and X I I , bring together some primary facts and basic conclusions formulated in greater detail in the other portions of this study, and may be considered independently by those who must read in haste. It is here that an appraisal of Hawaii's tax system is attempted and alternative approaches toward its improvement suggested. A reading of the preceding chapters is required, however, for critical evaluation of the facts presented and the conclusions drawn. Basic to the value judgments expressed in this study, particularly in the two concluding chapters, is the premise that taxation according to ability-to-pay is a fundamental objective for fiscal policy, to be sought in a territorial or state system as well as in the federal tax structure. This point of view expressly rejects the argument that the

INTRODUCTORY

5

national government has pre-empted the field of progressive taxation in any sense which compels inferior governmental units to rely primarily upon regressive forms of taxes. 2 Acceptance of this premise does not of course preclude the use of tax measures which bear no direct relationship to financial ability. Economic adjustments already made to existing property or excise levies, as well as the government's vested interest in existing revenue sources, give substance to the familiar dictum that "old taxes are good taxes." However, where means of replacing regressive with progressive taxes can be devised without sacrifice of needed revenues or diminution of economic activities, such action should be a primary goal of fiscal policy. Hawaii is paused on the threshold of statehood, with the entire framework of its government under examination; it is therefore an opportune time to analyze critically its revenue structure. W i t h a half-century of experience as a territory behind it, during which it has had and has freely used the power to choose its own tax laws, Hawaii now has a particularly favorable chance to introduce such improvements in its tax system as are desired by the people and their representatives. NOTES 1. Notably critical examinations of several elements of the tax laws made in 1907 and in 1930. The earlier report was prepared by a commission appointed by the governor of the territory in 1907; the 1930 report was written by Professor Fred R. Fairchild on behalf of a tax board created in 1929 (Report of the Tax Board of the Territory of Hawaii, Honolulu, 1931). 2. The terms "progressive" and "regressive" require definition. As used here and throughout this study, a "progressive" tax denotes one in which the amount of tax increases more than proportionately to the taxpayer's income or wealth, while a "regressive" levy increases less than proportionately to these ultimate tax bases. A "progressive" tax — typically imposed at graduated rates — takes a larger fraction of a person's income or wealth if he is well off than if he is poor. Conversely, a "regressive" tax — typically imposed at a flat rate on the sales price of goods or services — has the effect of taking a smaller fraction of a wealthy person's income or property than of a poorer man's. The dividing line, a tax exactly proportional to the taxpayer's income or wealth, is frequently approached in form by use of flat rates of taxation, but seldom in fact, since the rates apply to differing portions of the incomes or expenditures of various economic groups.

CHAPTER

II

The Governmental Structure And Tax Base Hawaii was the last important Pacific island area to be discovered ( 1 7 7 8 ) ; yet, because of its strategic position, it was the first to achieve modernity. Economically, the story of this change is a history of sandalwood, whales, sugar, pineapples, and tourists, accompanied by an ever-increasing dependence upon the American mainland. —James H. Shoemaker, The Economy of Hawaii in 1947

GOVERNMENT UNDER THE ORGANIC ACT BY COMPARISON with the states of the mainland, the government of the Territory of Hawaii exhibits a simplicity of structure to delight the student of comparative government. The contrast is not to be found in the territorial government itself, which is divided into legislative, executive, and judicial branches according to the familiar American pattern.1 It lies rather in the simple form of — and in a large measure the absence of — local government. Limited Local

Government

Local government in the Hawaiian Islands is limited to the City and County of Honolulu and the counties of Hawaii, Kauai, and Maui, a total of four units.2 There are no school districts, no special administrative districts, no towns or townships. Municipal government, as such, does not exist. Even Honolulu with a population of some 250,000 — more than half of the civilian population of the entire territory — has no independent status, being integrated with the rest of the island of Oahu and with outlying ocean areas into a city-and-county government. The other cities, for political purposes, are simply constituent elements of the counties in which they lie. As a consequence of its simple governmental structure, the fiscal system of Hawaii is highly integrated, encumbered by few of the interlevel problems indigenous to state-local relations in many 6

GOVERNMENTAL STRUCTURE AND TAX BASE

7

areas of the continental United States. The entire taxing power is exercised by the Territory, which grants to the counties authority to collect two relatively minor taxes plus miscellaneous fees and licenses. (See Chapter IX.) The Organic Act, which has served in lieu of a constitution for Hawaii since her incorporation as a territory in 1900, makes no explicit provision for the power to tax. As in Connecticut, Rhode Island, and Vermont, states whose constitutions are also silent on the subject of taxation, the courts have uniformly held that the taxing power is inherent in the authority of the legislature, which in Hawaii extends to "all rightful subjects of legislation not incompatible with the Constitution and laws of the United States locally applicable" (Section 55 of the Hawaiian Organic Act). This section has been construed to confer upon the territorial legislature the same comprehensive authority to tax which is vested in the legislature of the states.8 Wide Taxing Power Unimpeded by specific constitutional restrictions, the legislature of Hawaii has had an unusually free hand in the exercise of its taxing power. In the absence of tax limits, requirements of "uniformity" or "equality" in the imposition of taxes, or other vaguely expressed constitutional provisions which have been interpreted narrowly to restrict the fiscal authority of several states, the Hawaiian government can impose any tax, on any base, at any rates, and with any exemptions it deems fit, subject only to the very general restrictions of the federal constitution, or to disapproval by the Congress of the United States — an intervention never made by the national government. Generally silent on the subject of administration of the laws, the Organic Act contains no reference to tax-collection agencies. As a result, the territorial government encountered no obstacles in the fundamental law of the territory when, two decades ago, it centralized responsibility for the enforcement of all major taxes by creating the Department of the Tax Commissioner. This situation may be contrasted with states such as California, Colorado, and Oklahoma, where tax administration bodies and procedures are prescribed by constitutional provisions and can be modified only by amendments to the constitution. "Dedication" of revenues by constitutional mandate, a fiscal straitjacket into which several mainland states have attempted to force their tax systems, is also obviated by the brevity and generality

8

THE TAX SYSTEM OF HAWAII

of the Hawaiian Organic Act. While certain taxes are earmarked in part or in full — notably the property tax and gross income tax for county budgets, the motor fuel tax for highway and airport construction and maintenance, and until 1949, the compensation-dividends tax for welfare expenditures — these allocations of revenue are established by statute rather than embodied in the organic law, and thus can be modified or abolished by majority vote of the legislature. Similarly, the fundamental law does not attempt to establish a pattern of territorial-county fiscal relationships, but leaves such arrangements to the discretion of the territorial legislature. Such, in broad terms, is the framework of government under the Hawaiian Organic Act as it relates to the exercise of the taxing power. The constitution drafted for the future state of Hawaii by the Honolulu convention of 1950 and approved by both the legislature and by the people of the territory in the fall of that year — at this writing still awaiting action by Congress to become effective — carries over the same essential provisions with respect to taxation. Under Article VI, which prescribes the fiscal powers of the proposed state, the sole restriction on the taxing authority of the legislature is an injunction against levying heavier taxes on the property of nonresidents than is assessed against holdings of Hawaii's residents. (It is noteworthy that proposals to limit graduated income taxes were submitted to the 1950 convention but were rejected.) Under this constitution Hawaii's basic law will continue to be distinguished by the granting of broad taxing authority to the legislature and by the delegation of minimum fiscal powers to the few units of local government. This high degree of centralization places a special responsibility on the governor and the legislature for creating a good tax system. Mistakes of the central government cannot be offset by the counties in the absence of local taxing powers. Constructive fiscal .policy for both levels of government stands or falls with the tax program of the executive and the enactments of the legislative body of the Territory (or State) of Hawaii. T H E ECONOMIC BASE OF T H E T A X S Y S T E M Specialized Economy Deficient in minerals, fuel, or cheap electrical power, the Hawaiian Islands have long specialized in two cash crops and two service "industries," depending heavily upon imports to supply the needs of an increasing population. Total land area of the territory is 6,435 square miles, but wide waste areas, due to relatively recent

GOVERNMENTAL STRUCTURE AND TAX BASE

9

volcanic flows, as on the island of Hawaii, or due to extreme aridity, as on Molokai, keep some 92 per cent of this area out of cultivation. Despite century-old attempts to diversify its production, the Hawaiian economy rests on four major bases: sugar cane, pineapple, the tourist trade, and military expenditures of the federal government. Supported by these primary sources of Island income, there has developed a superstructure of marketing and service enterprises, which resulted in an expanded tax base. Cane sugar production is Hawaii's largest industry, with an output of about one million tons of raw sugar annually. Favored by moderate year-round temperatures, plantation cultivation of the cane is on a continuous basis, which in regularity and degree of mechanization more closely resembles industrial fabrication than middle-latitude farming. The 2 8 plantations which currently supply the Hawaiian sugar crop cultivated some 221,000 acres during 1951 — m o r e than two-thirds of all arable land — employing 22,000 workers, approximately 12 per cent of the employed labor force of the territory. Largescale irrigation and extensive mechanization brought total investment in the Islands' cane sugar industry to more than 175 million dollars by 1947, almost half of the aggregate capitalization of all business incorporated in the territory at that time. 4 In recent years an average of 95 per cent of the milled sugar has been shipped to California for refining; the remaining 5 per cent is locally processed for local use. Their output limited and their market protected under successive federal Sugar Acts since 1937, the plantations of Hawaii supply approximately 14 per cent of the United States sugar consumption, and about 3 per cent of the total world output, 1951 production totalling 996,000 tons of 9 6 ° raw sugar, valued at 125 million dollars. (Plantations receive from the national government additional income, some 9 million dollars in 1951, for complying with the quota restrictions, minimum wage rates, and other requirements of the federal Sugar Act.) Five commercial agencies, the so-called "Big Five" factors, market the bulk of Hawaii's sugar crop. Hawaii grows a major fraction, about 80 per cent, of the world supply of pineapple; it is her second-ranking agricultural crop. Much more seasonal than sugar cane, pineapple cultivation and processing provides year-round employment for about 10,000 persons; during the summer harvest the work force is doubled. Approximately 70,000 acres, about one-third of that in sugar cane, has been under pineapple cultivation in recent years. Value of the 1951 pineapple pack was reported to be approximately 100 million dollars.

10

THE TAX SYSTEM OF HAWAII

The bulk of Hawaii's pineapple crop is processed locally. Eight companies, four of which are represented by the large agencies which handle the marketing of most of the raw sugar, operate plants which produce canned and frozen pineapple, juice, and such by-products as citric acid, bran, and alcohol. Owing in part to the sensitivity of the growing plants to variation in rainfall (unlike sugar cane, most pineapple fields are not irrigated), the periodic inroads of insect pests and plant diseases, and the competitive influence of other canned fruits, pineapple production is less stable than sugar output, both in physical and monetary terms.5 Although increasingly diversified, Hawaiian agriculture apart from sugar cane and pineapple cultivation is of secondary importance, occupying only approximately 5 per cent of all land under cultivation. Kona coffee (from the Kona district of the island of Hawaii), nuts, and honey are exported in relatively small quantities, while meat, dairy products, rice, bananas, papayas, and a variety of truck and field crops partly supply local demand. A slowly expanding fishing industry has annually marketed a catch valued at an average of 4 million dollars since 1947, most of it sold locally. The territory, however, remains heavily dependent upon food shipments from the mainland to supply a population which has more than doubled since 1920, fluctuating at about half a million since the close of World War II.6 Trade Imbalance

Since Hawaii imports most of its food and virtually all farm and industrial equipment as well as durable consumers' goods, its commodity trade with the mainland and foreign nations has been chronically out of balance. During World War II and in the postwar years the annual excess of visible imports over visible exports has averaged more than 100 million dollars.7 This trade deficit is partially offset by two important sources of United States dollars — tourist expenditures and sales to federal agencies in Hawaii, as Table 1 reveals. The volume of tourist trade has expanded markedly in the postwar period. Some 78,000 civilians, more than double of the number in 1941, visited the Islands during 1951, spending approximately 28 million dollars during their stay. Local expenditures of airlines and steamship lines, plus spending by transient, off-duty military personnel, brought gross receipts from the tourist trade to between 35 and 40 million dollars, according to estimates of the Hawaii Visitors Bureau. Purchases of goods and services by the armed forces and other federal agencies constitute a much larger, and more volatile, source

GOVERNMENTAL STRUCTURE AND TAX BASE

11

of mainland dollars. Outlays of the federal government in Hawaii in 1951 for payrolls, construction, and supplies were estimated at 272 million dollars, an amount in excess of the total value of visible exports — sugar, pineapple, and all other products — in that year. The Table 1 ESTIMATED BALANCE OF PAYMENTS FOR HAWAII: 1 9 5 1

(In Thousands of Dollars)

DOLLAR RECEIPTS: 1. Local sales of goods and services

$334,212

(a) To federal government 2 (b) To tourists, transients, and crew members (c) To shipping and air lines and other mainland concerns

$272,714 32,260 29,238

2. Visible exports

$238,740

(a) Of sugar and pineapple (b) Of coffee, fish, flowers, wall board, sportswear, and metal scrap (c) Of all other products (macadainia nuts, papayas, hides, curios, etc.)

$221,754 14,018 2,968

3. Returns on investments outside territory

$ 21,985

4. Remittances from workers in forward Pacific a r e a s and other personal gifts

$ Total

7,977

$602,914

DOLLAR EXPENDITURES: 1. For goods outside territory

$400,831

(a) From mainland

$381,912

(b) From foreign nations

18,919

2. For services

$ 79,373

(a) Ocean and air freight (b) Transportation, hotel and other services to Hawaiian residents while outside territory (c) Insurance, mainland advertising, amusements, etc 3. Payments to federal government (taxes, postal services, etc.)

$ 34,277 28,097 16,999 $127,539

4. Payments to mainland and foreign investors (interest, dividends and profits)

$ 17,642

5. Remittances of dues, fees, and gifts to mainland and foreign nations, including money t^ken with them by emigrants

$

Total EXCESS OF EXPENDITURES OVER RECEIPTS SOURCE: B a n k of H a w a i i , Men, Land and Jobs

7,097

$632,482 $ 29,568 in Hawaii,

1952, p p . 4 - 5 .

a . Includes grants-in-aid, veterans' payments. O l d Age & Survivors I n s u r a n c e benefits, a n d other t r a n s f e r s f r o m federal g o v e r n m e n t .

12

THE TAX SYSTEM OF HAWAII

bulk of these expenditures are by the armed forces, whose local activities fluctuate widely with changes in international relations.8 The federal payroll in Hawaii after World War II has remained two or three times as large as that of the sugar industry, in spite of this fluctuation, making the national government the largest source of personal income in Hawaii. A substantial amount of this income, however, as well as the expenditures arising from it, remains outside the territorial tax system. Volume of Trade A rising volume of commerce has greatly expanded Hawaii's tax base in recent years. Between 1939 and 1948, successive federal censuses of business revealed that while the number of firms in the territory increased only moderately, sales multiplied. Table 2 shows Table 2 RETAIL, W H O L E S A L E , AND SERVICE TRADES IN HAWAII : 1 9 3 9 AND 1 9 4 8

(Sales and Payroll in Thousands of Dollars) No. of F i r m s

Retailing Wholesaling Services

0

Year's Sales

Year's Payroll

1948»

1939

1948

1939

1948

4,885

4,256

$382,680

$120,681

$43,753

709

704

480,734

97,045

27,798

2,337

2,186

44,617

15,340

14,512

SOURCE : U . S. Bureau of the Census, V. S. Census of Business—1948; Wholesale, and Service Trades. Bulletin N o . l - R W S - 5 1 .

Hawaii:

1939b

Retail,

a. Includes administrative and auxiliary units. b. Payroll figures for 1939 not available. c. Personal, business, and repair services, amusements, and hotels.

a tripling of retail transactions and sales of services, while the value of sales of goods at wholesale increased almost five-fold over the nine year period. Since 1948, some 36,000 organizations licensed under the general excise tax have been reported by the Department of the Tax Commissioner to be actively engaged in business; more than two-thirds of them are in the city-county of Honolulu. Although comprehensive data concerning values added in production are not available for Hawaii, reports to the tax department under the comprehensive general excise tax supply the gross receipts of profit-seeking enterprises. Retail sales exceeded 522 million dollars during 1951, according to these returns, while gross income of whole-

GOVERNMENTAL STRUCTURE AND TAX BASE

13

salers totalled 2 4 9 million dollars (see Table 7 ) . Sugar processed in 1951, was valued at approximately 109 million dollars, prior to its entrance into interstate commerce; while gross revenues of the canning industry, predominantly pineapple, were about 75 million dollars. Other food producers and horticulturalists reported sales of some 47 million dollars. Contracting, based in large part upon Army, Navy, and territorial projects and augmented by a postwar housing boom, has formed an expanding portion of the economic base. During 1951, approximately 88 million dollars of gross income was realized by businessmen in this field. Manufacturing in Hawaii, consisting almost entirely of light industries such as handicrafts and food processing, accounted for gross receipts of about 77 million dollars. The gross earnings of amusement companies and radio stations totalled 13 million dollars; other service industries received 73 million dollars. In all, gross incomes of business firms licensed under the general excise tax aggregated 1,368 million dollars in 1951. Additional sales, not subject to the general excise, but reported under the consumption and compensating taxes, approximated 59 million dollars. These figures are exclusive of the receipts of non-profit institutions, or of public utilities, banks, and insurance companies, all of which are exempted from the general excise tax and its auxiliaries. Concentration of Economic

Control

From Hawaii's incorporation as a territory of the United States to the present day, the question of monopolistic controls in the Islands has been raised perennially. It is widely believed, though never systematically demonstrated in detail, that a relatively small group of persons actively directs a large part of the Islands' economy/' Center and symbol of the monopolistic elements are the "Big Five," large commercial agencies which have long been dominant in the production and marketing of cane sugar and, to a lesser degree, of pineapples. In 1950 these five firms10 represented plantations producing all but 35,000 tons of the entire sugar output of 9 6 1 , 0 0 0 short tons 11 and were agents for four of the eight pineapple companies. In addition, these companies hold interests in the Matson Navigation Company (which in turn owns the three largest hotels in the territory), in one of Honolulu's largest department stores, in a major tuna cannery, and in some of the sugar plantations and pineapple canneries which they represent. They act as general importers and insurance brokers, operate wholesale outlets on all major islands, 12 and engage in a variety of other marketing and financial functions. 13

14

THE TAX SYSTEM OF HAWAII

Aside from a brief account of a cartel agreement among members of the Pineapple Producers Cooperative Association in 1932, 14 there has been no detailed study of private industrial controls in Hawaii. In the absence of a comprehensive analysis of the Hawaiian economic structure, it is impossible to judge the degree of monopoly in the various fields of production and marketing.15 (An appraisal expressed in the volume by MacDonald, listed below in note 9, is that monopolistic elements were strong in Hawaii before World War II but have subsequently weakened markedly.) More readily apparent is the concentration of land ownership and control in the territory. Thus, as of 1945, 28 persons, trusts, and corporations owned 83 per cent of privately held land on Oahu, constituting about 23 per cent of total assessed land values. More than 11 per cent of private land values throughout all the Hawaiian Islands were owned by the three largest landlords.16 In addition to their land holdings of some 130,000 acres, the sugar- plantations leased almost 72,000 acres of privately owned land and 34,000 acres of public land at the end of 1945, while pineapple companies, owning 21,000 acres, leased 40,000 additional acres of private lands and 3,000 acres from the territorial government.17 Combined freeholds and leaseholds thus gave the sugar cane and pineapple plantations at least short-term control over some 300,000 acres out of a total of approximately 328,000 acres of arable land in 1945. 18 While this analysis is not concerned with the broader issues of economic policy, the seeming existence of monopolistic elements is pertinent to a discussion of taxation in Hawaii. This relevancy lies in the fact that a lack of vigorous competition not only affects the incidence of taxes, but may also evoke demands for changes in the tax system itself.19 Employment More than a third of Hawaii's population is in the labor force. The 1950 census, which showed the total civilian population to be 499(800, reported 166,300 persons to be employed and 17,500 seeking employment. Of the total employed 110,300 were on payrolls of private firms, 18,500 were self-employed, 3,000 were unpaid family workers, and 34,600 were in the service of federal, territorial, and county governments.20 By March, 1952, employment had risen to approximately 183,000; the number of unemployed — due to emigration of members of the working population in 1950 and 1951 as well as to increased employment — had diminished to 7,500, less than 4 per cent of the labor force.

GOVERNMENTAL STRUCTURE AND TAX BASE

15

Two characteristics of the pattern of employment in Hawaii are noteworthy in a study of territorial public finance. One is the large portion of the working force in governmental employment. In 1950 the number of civilians employed by the federal, territorial, and county governments in Hawaii approximated the combined average monthly employment of the sugar and pineapple industries. Since the outbreak of hostilities in Korea, which has limited the availability of data on federal employment, it is apparent that government is now the largest employing "industry" in the territory. The second factor to which attention is directed, is the relatively small amount of self-employment and family work. The bulk of income received by employed persons enters into payrolls and is therefore easily available for tax assessment. This factor helps explain the productivity of Hawaii's wage tax (see Chapter V I ) and offers possibilities of effective net income taxation not to be found in other agricultural areas where family workers, receiving no regular wages, form a large segment of the labor force. Level of Personal Income Hawaii appears to occupy a middling position when ranked among mainland states according to average income received by the population of each jurisdiction. Comparative data on this point have not yet been published, since Hawaii has thus far been excluded from the state-by-state surveys of personal income made annually by the federal Department of Commerce. There is evidence, however, to justify the conclusion that Hawaii is neither rich nor poor, but rather a middle-income area. An estimate of net income paid out to the people of the territory in 1947, made by the Legislative Reference Bureau of the University of Hawaii, showed the average to be approximately $1,312 — just 19 dollars above the average for the continental United States, thus placing Hawaii in a median position among the 48 states. Preliminary findings of the National Income Division of the U. S. Department of Commerce also tend to bear out this conclusion. According to tentative estimates made by the department in connection with allocation of federal aid under the National School Lunch Act, per capita income payments in Hawaii during the late 1940s approached the average for the entire United States. Family income, estimated during the 1950 census, further justifies a belief that the level of average personal income in Hawaii is not far from the nation's. Data from preliminary census reports, brought together in Table 3, shows that median family incomes in the terri-

16

THE TAX SYSTEM OF HAWAII Table 3 MEDIAN INCOMES OF FAMILIES AND UNRELATED PERSONS IN 1 9 4 9

Entire Population: Families and unrelated persons Families only Urban Population: Families and unrelated persons Families only

Hawaii

All United States

Hawaii as Per Cent of U.S.

$2,723 3,538

$2,599 3,068

104.8 115.3

2,763 3^245

112.4 115.5

3,095» 3,750»

SOURCE : U. S. Bureau of the Census, 1950 Census of population: Series PC-6, No. I I , and PC-7, No. 2. a. Metropolitan area of Honolulu.

Preliminary

Reports,

tory exceeded those of the mainland. Taking in the entire population, both families and "unrelated persons" (those living alone or with people not related to themselves), the average income in Hawaii exceeds the national median by almost 5 per cent. Restricting the comparison to the families of urban areas (Honolulu, in the case of the territory), the gap is increased to 12 per cent or more. Hawaii's relatively high average is partly explained, however, by the fact that its families tend to be larger (averaging 4.3 persons in 1 9 5 0 ) than in the nation as a whole (averaging 3.4 persons). Allowing for the disparity in family size, per capita income in Hawaii would more closely approximate the national average. Closer calculation cannot be made from these data, however, without information as to the number of "unrelated persons" and their net returns from economic activity. Statistical materials currently available seem to indicate that per capita income in Hawaii most clearly approaches the average of the Central States ( $ 1 , 5 4 6 in 1 9 5 0 ) , falling below that of the Middle Eastern or the Far W e s t e r n region of the mainland ( $ 1 , 6 7 6 and $1,711, respectively), but far exceeding the average of the South ( $ 9 5 9 ) or Southwest ( $ 1 , 2 2 5 ) . More precise comparison awaits the publication of data now under preparation by the U. S. Department of Commerce. After 1952, if present plans of the department are executed, estimates of per capita net income, a primary yardstick for measuring tax burdens, will be available for Hawaii as they are now for the mainland states.

NOTES 1. T h e m o s t i m p o r t a n t ways in w h i c h t h e territorial g o v e r n m e n t differs f r o m that of the states o n t h e m a i n l a n d a r e ( 1 ) t h e a p p o i n t m e n t by the

G O V E R N M E N T A L STRUCTURE A N D T A X

BASE

17

President of the United States of the governor and of the secretary of Hawaii, as 'well as members of the supreme court and circuit court; ( 2 ) the Organic Act, which serves the territory in lieu of a constitution, amendable only by act of Congress, and not by the people of the territory; and ( 3 ) the power of Congress to amend or invalidate laws passed by the legislature and approved by the governor. 2. A fifth "county," Kalawao, is a small peninsula on the island of Molokai in Maui county which contains a Hansen's disease hospital and settlement administered by the territorial Department of Health. A sheriff is the sole county officer. County water boards and the Honolulu Redevelopment Agency function with varying degrees of independence under the several county governments. Urban redevelopment agencies, now organized only in Honolulu, may receive special property tax revenues, noted in Chapter VIII, note 8. 3. W. C. Peacock & Co. v. Pratt (Hawaii, 1903) 121 Fed. 772; In re Craig (1911) 20 Hawaii 483; In re Kalanda (1914) 22 Hawaii 96; Cassels v. Wilder (1915) 23 Hawaii 61; Yerian v. Hawaii (1942) 130 Fed. (2d) 786. 4. James H. Shoemaker, The Economy of Hawaii in 1947, with Special Reference to Wages, Working Conditions, and Industrial Relations, p. 33. 5. Ibid., p. 75. 6. The civilian population of the territory was estimated at 470,747 as of January 1, 1952, by the territorial Department of Health. 7. U. S. Bureau of the Census. United States Trade in Merchandise and Gold and Silver with United States Territories and Possessions, Annual Summaries for 1943-1947. (Reporting terminated in 1948.) 8. Military expenditures alone amounted to some 206 million dollars in 1951 according to estimates presented to an economic education seminar of the territorial Department of Public Instruction. (Honolulu Star-Bulletin, March 12, 1952, p. 1.) 9. Journalistic accounts of the Hawaiian economy prior to World W a r II, all emphasizing control by a few intermarried families, are to be found in the following books and articles: Joseph Barber, Hawaii: Restless Rampart; Blake Clark, Hawaii: The 49th State; Alexander MacDonald, Revolt in Paradise; "Hawaii: Sugar-Coated Fort," Fortune Magazine, August, 1940, pp. 31 ff.; "Feudal Paradise, Ltd.," Readers' Digest, June, 1943, pp. 19 if. 10. American Factors, Ltd.; Castle & Cooke, Ltd.; Alexander & Baldwin, Ltd.; C. Brewer & Co., Ltd.; Theo. H. Davies & Co., Ltd. (The use of "Limited" instead of "Incorporated" gives evidence of the importance of British influence in Hawaii's commercial development during the nineteenth century.) 11. Honolulu Chamber of Commerce, Hawaiian Pacts and Figures: 1950, p. 34. 12. James H . Shoemaker, The Economy of Hawaii in 1947 . . . , p. 147. 13. Operations of the Office of Price Administration in the Territories and Island Possessions, Region IX, Office of Price Administration, May, 1947, pp. 72-73. 14. A. L. Dean, "Into the Depression and Out," Thrum's Hawaiian Annual for 1938, p. 91. The Pineapple Growers Association has since succeeded the earlier association. 15. One of the few thoroughgoing attempts to collate information concerning this aspect of the territory's economy is the graphic presentation of interlocking directorates, in James H. Shoemaker, Labor in the Territory of Hawaii, 1939, p. 197. 16. Statehood for Hawaii, pp. 759-760. It should be noted that the largest single landowner is the Bernice P. Bishop estate, the income of which is dedicated to the Kamehameha Schools in Honolulu, established for children of Hawaiian ancestry.

18

THE TAX SYSTEM OF HAWAII

17. Ibid., p. 745. Estimates by the Commissioner of Public Lands. 18. This pattern of land usage continued through 1951, when combined sugar cane and pineapple crops utilized over 295,000 acres of a total of 309,000 acres under cultivation. 19. Thus, as far back as 1908, a special tax commission appointed by the governor considered, and rejected, a graduated land tax aimed at breaking up large estates. (Report of the Tax Commission to the Governor df Hawaii, June 30, 1908, pp. 1 5 - 1 6 ) . 20. U. S. Bureau of die Census, 1950 Census of Population; Preliminary Report, Series PC-6, No. 11. Discrepancy of 100 (items total 166,400, rather than 166,300) presumably due to rounding.

CHAPTER

III

The Present Tax System of Hawaii: An Overview Taxes are a portion of the produce of the land and labour of a country placed at the disposal of the government; and are always ultimately paid either from the capital or from the revenue of the country. —David Ricardo, The Principles of Political Economy and Taxation

HAWAII'S FISCAL SYSTEM is d i s t i n g u i s h e d by a virtually c o m p l e t e

integration of taxing power in the hands of the central government. Neither the Organic Act which has served as a constitution for Hawaii nor its statutes provide for the levying of taxes by the counties (or the city-county of Honolulu), sole units of local government in the territory. The few taxes collected by the counties are imposed by territorial law.1 A s a consequence of this centralization of fiscal authority, all but 5 to 6 per cent of tax revenues in Hawaii, aside from federal levies, are collected by the territorial government. This integrated tax structure is nowhere duplicated among the mainland states, in each of which receipts of local government units are an important part of state-local tax collections.2 The fiscal dominance of the territorial government must be taken into consideration when comparing its tax structure with those of mainland states. Notably, in Hawaii the central government collects the property tax (subsequently transferred to the counties), which is the second largest source of territorial tax receipts (see Table 4 ) . On the mainland, where the bulk of property levies are paid directly to local units, they have recently comprised less than 4 per cent of state tax revenues. An increasing number of municipalities and other local governments in continental United States are authorized to impose taxes on income, sales, admissions, etc., while the four counties of Hawaii are limited to the public utility franchise tax and license taxes prescribed by territorial law.3 19

THE TAX SYSTEM OF HAWAII

20

While the centralized nature of the territorial tax system in some instances precludes comparison with mainland states, such comparisons which can be made serve to underscore its own distinguishing features. The fact that the Territory of Hawaii depends heavily upon any given tax to finance its operations is more significant than the same statement applied to any of the mainland states, for in the latter the relatively large receipts of counties, municipalities, and special districts and other subdivisions of the state have not been considered.4 In Hawaii, however, local collections have become an increasingly tiny portion of the over-all fiscal system. If the territory's tax structure is unbalanced in any respect, one cannot look to the revenues of its local government for counterweights. COMPOSITION OF THE TAX SYSTEM In the fiscal year ending June 30, 1951, the Territory of Hawaii received approximately $71,262,000 in taxes, an amount larger than the 1951 tax revenues of 15 mainland states.5 The city-county of Honolulu and the counties of Maui, Kauai, and Hawaii in their fiscal years ending December 31, 1950, collected additional levies of $4,376,000, bringing total territorial-county tax realizations (for these non-coinciding fiscal periods) to $75,638,000.° Territorial tax collections increased to $76,683,000 in the fiscal year 1952 and county tax receipts rose to approximately $4,667,000 in 1951. Total tax revenues of both levels of government in Hawaii thus exceeded $81,000,000 during the past fiscal period, 1951-1952 — about triple the level of tax collections in 1940, the last prewar year. Dependence on Three Taxes Hawaii's tax structure is widely varied, consisting of 18 territorial and county taxes and a miscellany of county licenses, and contains every major type of levy imposed by the several states. Examination of the tax receipts shown in Table 4 reveals, however, that this diversity is more apparent than real, since three taxes — the general excise (gross income), compensation-dividends, and property tax — yield two-thirds of all territorial and county tax receipts. In 1951, 40 per cent of all taxes collected by territorial and county governments were forthcoming under the general excise tax and its auxiliaries, the consumption and compensating taxes. Second-ranking tax is the levy on real property, collected by the territory on behalf of its counties. This has recently averaged some 14 or 15 per cent of territorial-county tax revenues. Collections of

PRESENT TAX SYSTEM: A N OVERVIEW

21

Table 4 TERRITORIAL AND C O U N T Y T A X COLLECTIONS IN HAWAII FISCAL Y E A R S ENDING 1 9 5 1 AND 1 9 5 2

(In Thousands of Dollars) 1952

1951 Tax

Yield

Per Cent of Total

Yield

Per Cent of Total

TERRITORIAL: 1. General excise, consumption & compensation 2. Real property 3. Compensation-dividends 4. Motor fuel 5. Corporate income 6. Unemployment compensation 7. Public utility 8. Liquor 9. Personal income 10. Tobacco 11. Insurance company 12. Inheritance and estate 13. Bank excise 14. Miscellaneous licenses 2 15. Taxes levied in former years Subtotal

$29,921 10,701 9,892 6,974 3,566 2,480 2,008 1,912 1,483 1,099 784 212 149 73 8

39.6 14.1 13.1 9.2 4.7 3.3 2.7 2.5 2.0 1.5 1.0 0.3 0.2 0.1 r n h m f O) (O f irt t— eo oo

13 4) 4) O. OS O

CO co c- to CO t - f -H O CO -H

Iß H O) o Iß N

O n (Û IN Kl T (O to CO lA O CO «H niontoioinh

n m o o n « to CO O (M TT to CO O m in in co co co co to c— e-» t"» e*» co CO CO CO CO co 00 CO co co co co co co co

H c[O O N n (O m t " (O N N

v CO Kl O O o n o) o) h ® N N n n

(C N h n H O

o o m c* o m N O O)