by John M. Knox
We’ve had decades of angst over whether Hawai‘i is “tax hell,” spends way too much government money, and has way too many local government workers. However, absolutely none of those things is true, and for the most part has not been true since at least the early 1990s.
U.S. Census data on government finances show we’re a boringly ordinary state, at least at the level of overall expenditures, revenues, and employment.
More important is whether any of that really matters, compared to things Census data can’t measure – e.g., government effectiveness and efficiency, or long-term fiscal health in the face of future demands for more services and unfunded liabilities.
But let’s look first at what Census data can tell us, and why the numbers fly in the face of other reports that seem to suggest we’re being taxed into the ground to pay for some huge army of bureaucrats.
Why Do We Keep Reading about “Big Government” in Hawai‘i?
Short answer: Statistics are complicated, so it’s easy to cherry-pick numbers and spin them in simplistic and incorrect ways. Also, the structure of Hawai‘i government is unique, so even a fair-minded comparison of state finances can make us look bad if we don’t remember how different we are. Here are some principles to keep in mind –
- Never compare numbers for state governments alone. Always look at combined state and local government data. Hawai‘i’s state government takes on functions that in most other states are assumed by city or county governments – e.g., education, airports, public hospitals. In that way, we’re extraordinary. That’s why the numbers we’ll talk about mostly come from the U.S. Census Survey of State and Local Government Finances, not the Census survey of state governments only. Anything that compares just state governments on money or workers will automatically portray Hawai‘i as a “big-government” state – which is true in a way, but has to be balanced by the fact that our counties are weak or “little” governments.
- Look at numbers over time. Any one year’s data can be atypical, and things can change. That’s why our examples here are charts from Fiscal Year 1993 on, not numbers from just one year. The charts show a lot of stability, but some blips or changes do appear – e.g., our government spending was on the high side back in the ‘90s, but not more recently.
- The best comparisons are for overall revenue, spending, or jobs. Every government has a different pattern of collecting money, spending it, and assigning workers. One state has more police, fewer teachers; another has more teachers, fewer police. Those differences matter for some purposes, but not if you’re asking whether Hawai‘i generally has too many workers, too few, or “just right.”
- Look at the size of the economy, not population. To compare Census numbers on workers or revenues for tiny Hawai‘i vs. giant California, you have to divide by some common denominator. It seems natural to divide by population, but that would omit all of Hawai‘i’s tax-paying (and service-consuming) tourists. That’s why our charts compare states based on numbers as a percent of their Gross Domestic Products (GDPs).
What’s the Reality?
Using the above principles, we tracked various Census numbers each year (except for one or two in which they went unreported) from FY93 to the most recent available year, generally FY13. We compared Hawai‘i to every other state and to the “Average State” (unweighted – i.e., Hawai‘i counts the same as California).
This produced a very long, detailed report that can be downloaded from www.johnmknox.com or just Googling the title, Comparing Hawai‘i State/Local Government Finances to Those of Other American States.
Taxes and Other Revenues: At the highest level, “Total Revenue,” Hawai‘i numbers as a percent of GDP have remained very close to the Average State number since FY93. (See Fig. 1.)
Our report also shows Hawai‘i consistently gets higher percentages of its revenue than do other states from taxes, rather than from other sources (e.g., charges and fees, federal funds, or government-run enterprises such as liquor stores).
In particular, we rely on our version of the sales tax, the GET, which is shared to some extent with tourists. If we look just at that, Fig. 2 shows we’re highest in the nation these days. But this is an example of focusing on a selected part, not the whole.
We also rank high or fairly high on motor vehicle license taxes, “selective” taxes (e.g., hotel room tax), alcohol/tobacco taxes, and individual income taxes – but low on corporate income taxes, property taxes, and combined “other” taxes (e.g., death and gift taxes, miscellaneous license taxes, etc.).
Spending: Fig. 3 shows, as previously mentioned, that Hawai‘i once was slightly higher on “Total Expenditures” as a percentage of GDP, but in more recent years has been essentially the same as the Average State.
The full report shows we have usually been somewhat higher than average on what the Census calls “Direct General Expenditures.” These exclude inter-governmental expenditures and spending for utility, liquor, and insurance trusts, so may be a better measure for comparison. But even here, Hawai‘i spending in the last few fiscal years came down to match that of the Average State.
Our combined state/local government spending is higher than in most other states for certain categories – e.g., airports/parking/ports, sewerage/solid waste, and the judicial/legal system. It’s lower for other categories, including corrections, K-12 education, and “other education and libraries.”
Government Workers: The full study shows that Hawai‘i’s combined governments’ workforce size and salaries are now very much in line with the rest of the country. That’s despite Hawai‘i’s greater demands for services (i.e., with visitor population) and despite our higher cost of living.
It should be noted that government “Total Salaries and Wages” as a percentage of GDP has typically been below the Average State figure since Fiscal Year 2000, even though the number of full-time-equivalent government workers per resident has closely tracked the Average State result (Fig. 4). This of course excludes federal workers, who are numerous in Hawai‘i.
What Isn’t Being Considered Here?
Lots of things, and some of them are very important.
Ideally, in the future we’ll be talking less about general tax burden and size of government, more about some of the following.
Fiscal Integrity: A government economist recently remarked, “We’ve been paying our employees with short-term checks and long-term promises. Will we keep those promises?”
He was talking about public employee pensions and, particularly, health benefits. These long represented a lurking “unfunded liability” that the 2010-12 State Tax Review Commission identified as a source of accumulated State government budget shortfalls by 2025 of between $3 billion and $17 billion, depending on type of accounting system.
The Legislature thereafter passed a law committing both the State and the counties to fund the benefits starting in FY19 – with any difference for that year between the funding and actual need to be covered by automatic transfers from GET collections for the State and hotel room tax collections for the counties.
This could represent an enormous change in government financial conditions here (and in other states facing similar challenges). The Census numbers do tell us about current debts, but not about these upcoming obligations.
Pressure for More Services: Public retiree benefits are not the only looming new demands. The 2016 Legislature considered (but did not pass) tax increases to deal with long-term health care costs for Hawai‘i’s aging general population, as well as better funding for K-12 education. There is also potential need for higher debt service to cover infrastructure upgrades.
Effect on Overall Economy: The Census data don’t tell us which revenue and spending structures are associated with good or bad economies (though perhaps some graduate student can wring a thesis out of the numbers). That’s always fodder for extended debate. For example, business groups complain about the GET’s pyramiding effect, while economists praise it precisely because it is so broad-based.
Government Effectiveness and Efficiency: Finally, Census data don’t answer perhaps the most important question of all – are our governments doing a good job of providing the services we most need with the least possible outlay of money?
That sounds like a simple and obvious question, but try getting agreement even around your own family dining table on how to measure “effectiveness,” or what is an acceptable trade-off of more dollars for more results!
And we haven’t even touched on ideas about how to measure which states are doing the best job of raising money “equitably” or distributing services “fairly” among society’s many stakeholders.
Maybe it’s just easier for us to argue about whether Hawai‘i taxes too much or spends too much, compared to other places. But now we know: At least for now, it doesn’t, so it’s really time to start thinking about those harder questions.
John Knox, PhD, runs the socio-economic consulting firm John M. Knox & Associates, Inc. He is a member of the 2015-17 State Tax Review Commission. The study summarized here is an update and expansion of analyses he did in the early 2000s, as reported in articles for The Honolulu Advertiser and Hawai‘i Business.