Competition for People

by Tom Yamachika, President, Tax Foundation Hawaii

Over the past 10 or so years that I have been in the seat, I have seen legislature after legislature consider many, many bills to increase taxes. Every year. Without fail.  At the Foundation, we keep a list of the tax bills that are introduced and that get at least one hearing. The list is usually six or seven pages long. During the legislative process, most of these are weeded out, like most other bills, but there still is a two- or three-page list of tax and public finance bills that is sent up to the governor. Income tax. General excise tax. Transient accommodations tax.  Death tax. Conveyance tax. “Sin taxes” on fuel, liquor, cigarettes. The list goes on.

And when it comes to the level of tax, Hawaii is up there. We are tied for the top estate tax rate. We have the second highest income tax rate (and we would’ve beaten California if one of this session’s bills became law).  Our general excise tax is applied to far more things than any other comparable tax in any other state.

When these facts are brought up to lawmakers, they don’t seem to care. Why?  Probably because they don’t realize, or don’t want to realize, that Hawaii needs to be competitive. For people.

Hawaii used to be an island kingdom, a world unto itself.  That is no longer true. We are part of a much bigger country, and that country is a part of a much bigger world.  Throughout the years, improved forms of transportation and technology have been obliterating the barriers between one state and the next, or one country and the next.

Our government, like most in this world, relies upon tax revenue to stay afloat. Those taxes aren’t paid by government, they’re paid by people. If you don’t have the people, you don’t have the tax. This COVID-19 emergency showed us what that meant in no uncertain terms.

We recently wrote about an economic study that showed that people, specifically the rich people who pay most of our taxes, had their limits. If taxes went too high, people would pack up and leave, taking with them money they would otherwise have spent on sales and income taxes.

This is not a possible problem. It’s a current problem. As we wrote in an earlier article, we are losing people now and we have been losing people for some time. Even the University of Hawaii Economic Research Organization (UHERO) recently told our lawmakers that “our models are generating big outflows of population bigger than we have seen, certainly in my lifetime.”

What does that mean? People who are packing up and moving out are moving to somewhere else, because that somewhere else looks better to those people. We can’t delude ourselves into thinking that people who are born here or live here will love our islands so much that they’ll never leave. Instead, we need to see ourselves as competing with other states or countries. For people.

Certainly, states don’t compete for people simply on economic terms like tax rates. We do have a relatively clean and healthy place to live, and that is worth something. But it’s folly to assume that everyone who is “lucky to live Hawaii” will be able to pay the price of paradise, especially if that price keeps going up without corresponding improvement in the quality of services that our government offers its residents.

Overall, our lawmakers absolutely need to realize that, whether we like it or not, we are competing for people. We need to plan our government functions and services, and how our residents and visitors pay for them, with that in mind. The status quo, with our people packing up and leaving, is telling us we are losing the competition and we need to do better to survive.