The 2015 State Business Tax Climate Index

by Tom Yamachika, President, Hawaii Tax Foundation

Just a while ago we spent a few weeks discussing how Hawaii can grow its Gross Domestic Product, or GDP, and we mentioned that the tax system is something directly under our control so we can act on it relatively swiftly. We analyzed our tax systems based on a study called the 2014 State Business Tax Climate Index that is put out by the Tax Foundation in Washington, DC.

The Tax Foundation just released its 2015 State Business Tax Climate Index. So let’s see if we have any new or improved recommendations for our lawmakers now that the fever pitch of the general election is now subsiding.

First, let’s look at the overall ranking. They ranked us #30. Last year they ranked us #30. Twenty-seven states’ rankings were unchanged from 2014, and we were one of them.

Now let’s look at the individual components of the ranking.

For corporate income tax, we dropped to #9, down five slots from last year. We got good marks 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. It seems that we dropped in the rankings not because we did anything bad, but because other states enacted reforms and therefore climbed the ladder over us.

For property tax, we ranked #12, same as last year. Our real property tax rates are still 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 tax and conveyance tax, and they did not change from last year.

For sales tax, we ranked #15, up one rung from last year. Our rate is relatively low, which gives us points, but our base is extremely broad, which costs us in the study. We also have very high excise taxes on special products, such as our fuel tax, tobacco tax, and liquor tax. Our taxes on beer and tobacco were the fifth highest in the nation. We also earned points because we are one of five states that don’t exempt gasoline (which makes the system fairer in their opinion).

We now turn to individual income tax, where Hawaii ranked #37, down two rungs from last year. Individual income tax has the heaviest weight in the states’ overall scores in the study. We didn’t do anything particularly bad last year, but other states have been active with reforms and we haven’t. One of the most glaring items is our top rate. At the snapshot date of June 30, 2014, our 11% top individual rate was second only to California (which took the #50 spot in this category both this year and last). That 11% rate is scheduled to expire at the end of 2015…we’ll see.

The final area in the study was unemployment tax. There, Hawaii ranked #28, an improvement of ten slots over last year, primarily because our fund got healthier and, as a result, tax rates went down. However, in the overall score, unemployment tax had about one-third of the weighting of individual income tax and about half the weighting of corporate tax, so the large gain in this component didn’t quite make up for the losses in the income tax components.

Between all of these tax issues, not only those raised this week but also in the previous articles, there is certainly a lot for our lawmakers to think about as they approach the upcoming 2015 legislative session. People just voted at the ballot box and won’t be doing that again for a couple of years, but they are constantly voting with their dollars and their feet, and we should be mindful of this.

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