The Tax Foundation, a national organization that studies federal, state, and local tax policy, today released its 2013 State Business Tax Climate Index. This report, issued annually, ranks states as to the relative impact tax policy has on ability to attract business enterprises. Hawaii has dropped from 35th to 37th place over the past year.
Joe Henchman, a Vice President at the Foundation, explained that the annual index “measures the elements of each state’s tax system that are important to all types of business, reducing the many complex considerations to an easy to use ranking.” Scott Drenkard, an economist with the group, has constructed an overall index based on a study of 5 important tax systems. In order of weighting, this includes indices of personal tax (most businesses file as individuals), corporate tax, sales tax, property tax, and unemployment insurance. These indices are combined to establish an overall index ranking for each state, 37th in Hawaii’s case.
The Foundation notes that businesses prefer tax structures where a tax applies broadly with low flat rates, rather than codes with many exceptions and with high graduated rates. When asked, Drenkard said that Hawaii’s fall occurred not because of changes to Hawaii’s code, but because positive reforms in other states lowered Hawaii’s relative position.
Oregon has allowed its 11% personal income tax bracket to expire, so for now Hawaii is the only state with an 11% top rate. Not surprisingly, Hawaii ranks 41st on personal tax. It has a very positive ranking of 4th on corporate tax. Hawaii is 31st on sales tax. The GRT has the virtue of a very broad base including services, but the 4.5% rate (5.0% on Oahu) is quite high given the base. Hawaii is 30th in unemployment insurance, and 15th in property tax.
There is a lot of consistency among the best ten and worst ten states. The best ten states usually get along without one of the three major taxes (personal, corporate, and sales), plus are well structured in the other categories. The worst ten states feature high rates and poorly structured loophole-filled systems. New York and New Jersey usually vie for 50th place, with New York winning the dubious honor in 2013 due to some modest reforms in New Jersey. California retains its 48th place finish.
Most states will move no more than one spot up or down year to year. However, Michigan moved six places up due to tax reforms that included replacing its margin tax (a complicated gross receipts tax) with a low flat corporate income tax. Maine also jumped seven places due to reform of both personal and corporate tax systems.
As we watch Hawaii slip towards the bottom ten, we must also remember that Hawaii businesses face other challenges than just the tax systems here. The Jones Act uniquely punishes Hawaii. It increases the prices of goods here (and the cost to send goods elsewhere) as it “protects” American shipping from competition. Think of it as the Jones Act tax. Hawaii’s education system is a shambles, one of the worst in the country. Land use regulation, and regulation in general, is excessive. It is no surprise that manufacturing accounts for only 2% of the state’s GDP, as compared to 12% countrywide.
Our paradise appears quite different from the perspective of an entrepreneur, deciding where to open a new business. And it is new businesses that grow economies. We say we want to diversify away from our reliance on tourism and military installations. Yet, our irresponsible tax, spend, regulate politicians do everything in their considerable power to make such diversification impossible.
The Tax Foundation’s annual study is available to Governor Abercrombie and the legislature. Joe Henchman said, “State based organizations and policymakers use the Index to gauge how their state’s tax system compares to others, and as a road map for improvement.” We could fix our bloated tax system. We could slash our public spending. We could seek relief from the Jones Act. We could insist on schools run for the benefit of their customers (students/parents) rather than the teachers’ union. We could repeal the most insane regulations.
But then perhaps that just wouldn’t be Hawaii.
Stephen Zierak, CPCU/ARM, graduated from Boston University with a BA in Political Science in 1969. After a forty year career in property casualty insurance underwriting, Mr. Zierak retired as a Vice President of Swiss Re America in 2010. At that time, he relocated to Hawaii, a move he had always wanted to make, but had delayed due to lack of appropriate professional opportunities here. Mr. Zierak plans to continue his studies in Political Science, never really abandoned even during his professional career, and to write on matters of public policy. Recently, he produced for Grassroot Institute summaries of Hillsdale’s ten part internet course on our Constitution. Stephen Zierak is married to the love his life, Teodora, and they reside in Honolulu.