What Will It Take to Grow GDP? (Part 1)

by Tom Yamachika, President, Tax Foundation Hawaii

(This article is derived from a presentation I made at the Hawaii Economic Association. Thank you for the opportunity, HEA!)

We have elections coming up next month. We will be going to the ballot boxes to choose those who will lead us forward in government.

But let's not kid ourselves. Elections are happening every day. People are constantly voting, with their dollars and with their feet. If you provide a good or service that people want, and they buy it, they have voted those dollars for you. If you provide customers a bad experience and they walk away, they have voted against you with their feet.

For Hawaii to grow its Gross Domestic Product, or GDP, people have to be voting for Hawaii with their dollars and not voting against Hawaii with their feet. People vote all the time, as I mentioned before, and they vote often. Recently the state of Washington was in the news because last year they promised Boeing about $9 billion worth of tax incentives if they located their 777X production line in their state. This year, Boeing announced that it would be relocating a substantial portion of that line to Missouri and Oklahoma. That is an example of Boeing voting with lots of dollars and lots of feet.

Many factors go into people's votes. Of these, we need to consider the things that we can influence and the things we can control. People may be concerned about crime. We can influence the crime rate. Similarly, we can influence the unemployment rate, and we can influence the poverty rate. But we control the tax rate. If we want to change any of these, which do you think we can change more quickly, the factors we can influence or those we can control?

Some months ago, the Tax Foundation in Washington, D.C. did a study comparing the tax systems in the fifty states. They ranked Hawaii #30 overall. In the bottom half, but not the worst. We received a very good ranking for our corporate income tax (#4, behind three states that don't have a corporate income tax). This happened because our 6.4% corporate rate is relatively low, we have only a few tax brackets, we follow federal tax laws to make it easier for people to comply, and we don’t have a corporate alternative minimum tax to add complexity to our system.

Next, we received relatively high marks for property tax (#12). Our real property tax rates are reasonably low. We don't have a personal property tax, intangibles tax, gift tax, or a capital stock tax. We do have transfer taxes, namely our estate and conveyance taxes, and those cost us a few rungs down the ladder.

We received relatively good marks (#16) for sales tax, primarily because our rate is low and we don't allow local government units like counties and school districts to pile a large surcharge on top of it. The folks who conducted the study know very well about our general excise tax’s broad base and how it applies to business-to-business transactions, and they did deduct points for those features. So we didn't get that ranking by pulling the wool over someone's eyes. We also had points deducted because we have very high excise taxes on special products, such as our fuel tax, tobacco tax, and liquor tax. Our "sin taxes" on beer and tobacco were the fourth highest in the nation.

But now we turn to the two areas in the rankings where Hawaii really got clobbered: individual income tax and unemployment tax. These, of course, present the best opportunities for change. We will talk about them in the next two weeks.

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