When it comes to taxes, as shown by a recent compilation of information from government data banks; Hawaii is one of the very best at taxing and spending among the 50 states.

The Bureau of the Census reports that, on a per capita basis, Hawaii, in 2005, was the number 1 state for collections of general sales tax, and in 2006, had the fifth highest percentage (11.7 percent) of state and local tax burden as a percentage of state income.

These numbers are statewide and do not consider the January 2007 implementation of the 12.5 percent GET surcharge increase on Oahu.

For example, the 2006 ranking below shows the top five states with the highest percentage of state and local tax burden as a percentage of the 2006 state income:

• 1. MAINE @ 13.5 percent with state income ranked #31 @ $34,935

• 2. NEW YORK @ 12.9 percent with state income ranked #5 @ $44,571

• 3. OHIO @ 12 percent with state income ranked #26 @ $36,054

• 4. MINNESOTA @ 11.9 percent with state income ranked #9 @ $41,363

• 5. HAWAII @ 11.7 percent with state income ranked #19 @ $38,269

Looking at the information above demonstrates that life could be a lot worse if one lived in Maine or Ohio, especially after considering the weather. The point of the ranking, however, is to show where the burden of taxation falls most heavily on wage earners.

For example, Hawaii has the nation’s 19th highest income per capita and, by percentage, is the fifth highest tax collector. Imagine living in Maine or Ohio where incomes are 10 percent to 15 percent lower than Hawaii and yet residents are taxed higher than Hawaii.

Relatively speaking, taxpayers may be better able to survive a life in New York or Minnesota where wages are 10 percent - 20 percent greater than Hawaii even if the percentage taken by taxes is greater than Hawaii.

With a little investigation into the data, however, one learns that Hawaii not only is a high tax state but the taxes collected are among the most regressive (e.g. hit hardest the lower the income) in the nation.

The 2006 state individual income tax rates for Hawaii has the top tax rate being applied to household incomes of $40,000 and greater. That $40,000 threshold is only 5 percent above the per capita income in Hawaii. Glancing at the tax rate tables of other states one finds that there are three states whose 7.8 percent (or higher) tax rate applies to incomes less than $40,000:

• Oregon 9 percent @ $6,500

• Maine 8.5 percent @ $17,700

• Idaho 7.8 percent @ $23,178

• District of Columbia 8.7 percent @ $40,000

• Hawaii 8.25 percent @ $40,000

• California 9.3 percent @ $41,476

• Iowa 8.98 percent @ $57,106

When one combines the highest and most comprehensive sales tax collections in the nation (includes rent, food, medicine, services, etc.) with the third highest marginal tax rate on incomes of $40,000; it is easy to understand why low to average income earning residents of Hawaii have less after tax discretionary income than most citizens in the 50 states.

Again, a regressive tax structure is a tax structure that takes, as a percentage, a greater amount of income from lower income earners than high income earners. The tax structure in Hawaii is designed to impact, most significantly, those whose incomes are used primarily for housing, food, medicine, or services, instead of savings or investments. Furthermore, the highest marginal tax rate (8.25 percent) is set so low that any family of four at the median family income level ($71,320) is immediately taxed at the highest marginal rate.

Data on median income can be viewed at: http://www.census.gov/hhes/income/4person.html

The information compiled by the National Tax Foundation and available at http://www.taxfoundation.org/publications/show/2181.html is full of additional information that can illustrate how the total tax burden in Hawaii (even before the implementation of the GE tax surcharge in January 2007) is the fifth highest in the nation. Also, information like that listed below is available:

• Second highest beer tax ($0.93/gallon) in the nation;

• Hawaii has the 14th highest debt and the 15th highest state and local spending per capita;

• Hawaii receives the 5th highest level of federal expenditures, per capita, of all the states and these expenditures exceed federal taxes paid by Hawaii by $2,300 per capita and;

• Hawaii property taxes paid are among the 10 lowest in the nation since most taxes in Hawaii are collected by GE (sales) tax and state income tax.

Summary

Hawaii tax policy, with a reliance on the general excise, income, and property tax is protected from erosion by inflation. In fact, inflation of prices, wages, and property brings a windfall increase in tax revenue to state and city coffers when tax rates are not adjusted to retain balance. Legislators, at all levels, have rarely changed rates and/or deductions to recognize the impact of inflation.

The result of turning a blind eye to inflation is an increasingly regressive tax structure that exacerbates the difficulty for residents to find affordable housing, medical supplies/services, and sufficient food.

Couple the always increasing tax burden with a regulatory environment that slows down the development of affordable options (housing, insurance, shipping, etc.) and Hawaii ends up with a market place that has continually poorer consumers chasing fewer and more expensive goods.

The only beneficiary of such a system is the state and county tax collectors who benefit from rising prices and get reelected by creating government programs to give back to the taxpaying consumer what should not have been taken in the beginning.

*Paul Smith is a Hawaii resident and member of the National Tax Foundation and a Director of the Tax Foundation of Hawaii. He is CoChair of LET HONOLULU VOTE (http://www.lethonoluluvote.org). He owned and managed a Hawaii manufacturing business for twenty years and now licenses innovative construction and packaging technology to firms around the world.

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