HONOLULU - Photo courtesy of HTA
Photo courtesy of HTA

Another 50-state report has rated Hawaii among the worst in the nation for its hostile business and tax climate.

The Small Business & Entrepreneurship, in its report Business Tax Index 2012: Best to Worst State Tax Systems for Entrepreneurship and Small Business, ranked Hawaii as 43rd best of 50 states and the District of Columbia.

Some 18 categories of tax measures were included in the evaluation.

The most damaging taxes are income taxes because “they impact incentives for working, investing and entrepreneurship,” the report said. Hawaii has the highest income taxes in the nation at 11 percent.

Jonathan Williams, the Director of Tax and Fiscal Policy Task Force for the American Legislative Exchange Council in Washington, D.C., released a separate report, Rich States, Poor States, just days ago that ranked Hawaii at number 46 and said Hawaii is one of the state’s with the dimmest economic futures.

Williams, who met with lawmakers in Hawaii last year, said: “With Oregon reducing their income tax, Hawaii stands alone as the state with the highest income tax in America. Based on our research in Rich States, Poor States, we find the states with the highest income taxes continually lose economic development, population, and jobs to the states with lower taxes. As policy makers look for ways to get Hawaii’s economic outlook out of the bottom 10 nationally, policies that enhance competitiveness will be key.”

Hawaii, which has a General Excise Gross Income Tax levied on all goods and services, also ranked worst in the category of Sales, Gross Receipts and Excise Taxes, including taxes on tobacco, alcohol and insurance.

“High consumption-based taxes can re-direct consumer purchases, and, especially if combined with other levies like income and property taxes, can serve as real disincentives to productive economic activity. In addition, gross receipts taxes (such as those in Hawaii) present problems because, unlike other consumption-based levies, they are largely hidden from the view of consumers, and therefore, are easier to increase,” the report said.

Hawaii is 45th in Unemployment Tax Rates, a tax the report calls “another burden on entrepreneurs and business.” For Corporate Income Tax, Hawaii fared better with a 21 ranking.

Hawaii ranked near the poorest for Gas Taxes at number 48. As the report notes, every business is impacted by the costs of operating motor vehicles. For Diesel Tax, Hawaii’s ranking drop further to number 50 of 51.

Senate Minority Leader Sam Slom, (R-Hawaii Kai – Diamond Head), who also serves as president of the small business advocacy group, Smart Business Hawaii, said he is surprised Hawaii is only ranked 7th from the bottom this year, but maintained the ranking can and should be improved.

“The fact that Hawaii is always ranked near the bottom of each annual list should be a wakeup call to our majority lawmakers, but it is not,” Slom said. “Most of them have never met a private payroll in their life so they can’t comprehend how difficult it is to be in business and the impact of a high tax burden.”

Slom said this year, in lieu of major new or increased taxes ——although there are several pending——the Hawaii Legislature is offering more and higher “fees.”

“The impact is the same: tax or fee, our residents continue to bear a high burden, lower standard of living, and a hostile business climate,” said Slom, a supporter of, and occasional columnist for, Hawaii Reporter.

House Minority Leader Gene Ward, (R-Hawaii Kai), who co-chairs the Legislative Small Business Caucus, said while the issue is taxes, fees are getting a free lunch with this report.

“Take the increase in the vehicle registration and weight tax increases of the past year that have created ‘sticker shock’ for my constituents.  So too this year, fee increases in the banking and insurance sectors are going to be astronomical and the price of paradise will go up again in a few months, while politicians brag that there were no tax increases in the 21012 Legislative Session.  Shakespeare said it best, ‘A rose by any other name is still a rose’……….fees are simply taxes, but spelled differently,” Ward said.

Lowell Kalapa, president of the Tax Foundation of Hawaii, said Hawaii’s high taxes, costly regulations and mandates, and burdensome permitting process, has made it all the more difficult to survive in Hawaii’s business arena. It is even challenging just to open a business here, said Kalapa, whose weekly columns appear in Hawaii Reporter.

With Property Taxes, which are different in each of the state’s four counties, Hawaii ranked at number 10. Kalapa said unlike most states, Hawaii counties do not fund public education, welfare and healthcare. These programs are paid for through the state General Fund, which impacts taxpayers at the state level.

In addition to state taxes, the report said the nation’s economy is impacted by federal regulations, mandates and taxes that are slowing economic growth and ensuring the economy is “grossly under-performing.”
“Very real threats” to businesses – such major tax increases on personal income, capital gains, dividends, and assets at death plus new mandates and taxes in the Affordable Care Act (Obamacare) – which are being debated in the public arena, impact risk taking, economic growth and job creation, the report said.

New regulatory burdens on the private sector particularly in health care, energy, and the financial industry; federal leaders resistance to reduce trade barriers and enhance international opportunities; and the nation’s monetary policy that has expanded in an unprecedented rate since 2008 reducing the dollar value, increasing inflation and pushing prices higher, are also problematic.

The bottom 15 states in the report are 37) Nebraska, 38) North Carolina, 39) Illinois, 40) Oregon, 41) Rhode Island, 42) Connecticut, 43) Hawaii, 44) Vermont, 45) California, 46) Maine, 47) Iowa, 48) New York, 49) New Jersey, 50) Minnesota, and 51) District of Columbia.

The 15 Best State Tax Systems are: 1) South Dakota, 2) Texas, 3) Nevada, 4) Wyoming, 5) Washington, 6) Florida, 7) Alaska, 8)Alabama, 9) Ohio, 10) Colorado, 11) Mississippi, 12) Michigan, 13) South Carolina, 14) Tennessee, and 15) Missouri.

The 18 measures evaluated in the report include 1) state’s top personal income tax rate, 2) state’s top individual capital gains tax rate, 3) state’s top corporate income tax rate, 4) state’s top corporate capital gains tax rate, 5) any added income tax on S-Corporations, 6) whether or not the state imposes an alternative minimum tax on individuals, 7) whether or not the state imposes an alternative minimum tax on corporations, 8) whether or not the state’s personal income tax brackets are indexed for inflation, 9) property taxes, 10) consumption-based taxes (i.e., sales, gross receipts and excise taxes), 11) whether or not the state imposes a death tax, 12) unemployment taxes, 13) whether or not the state has a tax limitation mechanism, 14) whether or not the state imposes an Internet access tax, 15) “Amazon” taxes, 16) gas tax, 17) diesel tax, and 18) wireless taxes.

“In the end, though, all taxes matter, whether imposed at the federal, state or local level of government. They matter to consumers, entrepreneurs, investors and businesses. They matter in terms of a state’s competitiveness. And they matter when it comes to economic growth and job creation,” the report summarized the impact of its findings.

Hawaii House Speaker Calvin Say, D-Palolo, and Senate President Shan Tsutsui, D-Maui, declined to comment on this report.

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