Is there a way to cut a hole in another object?

Yore already doing it better than I can, which is make a giant black active object with a big hole in it and have it follow the guy around

There is an effect too that creates a hole in the active and you can also reposition the hole if needed. I'm using it in my game it might even be called "Hole.fx" i don't remember right now nor if it is included at default or part of a shader pack or something

that shader has a bunch of parameters: fS, fE, fX, fY, fRatio, fC, iInvert, iH, iV. No idea what most of them do, but I'd guess you'd want to look at fX and fY.

Try something like:
always
-set effect parameter "fX" to xMouse
-set effect parameter "fY" to yMouse

Shaders don't use pixels as a unit of measurement - coordinates always range from 0 to 1.
So for example, the object/layer to which the shader is applied, will always have an X coordinate of 0 at its left edge, and 1 at its right edge, regardless of how big it is, or where it is positioned on screen.
Therefore, you need to offset the coordinates to account for position, and then scale the coordinates to account for size.

X = (MouseX - ObjectX) / ObjectWidth
Y = (MouseY - ObjectY) / ObjectWidth

Surface object is flexible enough to allow all sorts of different things like this, and it might be a tad more accessible to beginners. Shaders are likely to be the more efficient method but it depends on your application. If the performance of Surface is adequate in your game then there's nothing wrong with using it (unless you want to export to some platform that doesn't support it).

If you do want to learn shaders, my suggestion is:

1.) Find a very simple shader to use as a template.
2.) Code a shader that just renders every pixel in the sprite as red.
3.) Code a shader that uses the sprite's alpha mask, but colors all the pixels red.
4.) Code a "health bar" shader that renders a sprite, but cuts off anything to the right of a given pixel value, which you feed in as a parameter.

Once you've gone through this learning process, making a hole-cutting shader would be pretty easy. Just feed in an X, Y, and radius for the hole, then have each pixel test if dX*dX + dY * dY > radius * radius before they can be drawn.