by Lowell L. Kalapa, Tax Foundation of Hawaii

A recent survey of the business climate on a state-by-state basis ranked Hawaii as dead last as a place that would be desirable to do business, slipping from its rank of 49th place to 50th among the states.

The local daily newspaper’s editorial staff noted the drop in ranking to the bottom of the pile and chalked the poor ranking up to the burden of the general excise tax, citing its broad base and its imposition on every transaction. And while the general excise tax is pervasive, rippling through all sectors of the economy, the editorial failed to point out that good tax policy prescribes that a good tax is one that has a broad base and that allows a low rate to be imposed yet produces substantial revenues. The broad application of the tax, that is to nearly all transactions regardless of the type of business activity, insures accountability for the tax as there are more taxpayers who must pay the tax. In this case it is not only the customers, but the business on whom the tax is levied.

While the general excise tax is indeed onerous by comparison to the retail sales tax that it is often compared with, it is by no means the only reason for the dower business outlook. The plethora of fees that various departments of state and county governments impose on businesses ends up costing those businesses more to do business in Hawaii, but those costs must be recovered in the cost of the goods and services purchased by the customers of those businesses. It is not uncommon to hear that every time a business turns around, a permit or license is needed to conduct business in the state. In addition to the fees and charges levied for these required permits and licenses, there is the time that it takes to secure many of these permits and licenses.

For example, one organization was told that because the structure they wanted to occupy for a group home did not have a sprinkler system, they needed to install a fire hydrant within 75 feet of the structure. Unfortunately, the sidewalk where the fire hydrant had to be placed abutted a federal highway and needed department of transportation approval as it administers the federal highway funds.

The professional consultant hired to help shepherd the permit application through the Department of Transportation estimated that it could take as long as 18 months to secure the necessary approvals. Until those approvals could be secured, the facility could not be occupied. Meanwhile interest on the loan used to purchase the structure would accrue. Luckily, this was a nonprofit organization and they appealed to the powers that be and lo and behold the permit and approvals for the fire hydrant were forthcoming in a matter of a few months.

Imagine if the organization was a for-profit company that was subject to the idiosyncrasies of the “system.” The cost of the lost time plus the interest would have had to be recovered in the use of the facility or through the sale of the facility if it was ultimately sold.

Another case in point was that of a developer of an affordable housing project that met all the criteria of the law accorded to such affordable housing projects. However, the permitting process was arduous and took longer than necessary. Those potential owners of the units in the project began to drop out of the program because the permitting process was taking so long even though they had qualified for the loans necessary to buy those homes. When the developer volunteered to sit his professionals, including the architects and engineers, down with the planners who oversaw the permitting process, none of the planners offered to explain why they had not approved the permits.

Again, another breakdown of the system that stalls what would have been a benefit for the community, a development of affordable housing. While the state statute provides that such an affordable housing project shall get special consideration, it appears the bureaucracy operates to its own beat and certainly on its own schedule. So much for setting policy by lawmakers, the public bureaucracy will do as it always has.

For many a small business and budding entrepreneur, these roadblocks can be daunting, if not frustrating. No doubt, there have been those who have attempted to set up a new business in Hawaii with all the hopes of being a success and end up throwing their hands up in disgust and move out of state. In those cases, it is truly a loss for the state and the community as a whole and a loss of economic activity, job creation and, oh yes, more tax revenues for the state and county coffers.

When and if public policymakers decide that Hawaii needs a brighter economic future, they may just start by cleaning out their own back yard.

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