Hawaii's 2017 ranking for Business Tax Climate includes a lesson for the legislature

From Grassroot Institute, September 30, 2016

When I tell you that Hawaii's ranking changed in the Tax Foundation's 2017 State Business Tax Climate Index, you will probably brace yourself for bad news. After all, there are things that one gets used to after a while ... like death, taxes, and the Aloha State faring poorly in national competitiveness indices.

Today, however, I have good news. Hawaii improved its position in the Index, moving up from 30th to 26th overall. Sure, it's not where we most want to see our state (e.g. the top ten), but it's a step in the right direction. More significantly, it points to what we must do to continue that positive trend.

Despite our state's reputation as a difficult place to do business, it isn't the corporate tax rate that hurts us in these rankings. In fact, Hawaii's corporate tax rate is reasonably competitive, ranking 11th overall in the Tax Foundation's comparative index. Rather, the individual income tax rate, sales tax, and unemployment insurance tax are judged to hurt us most.

Income tax in particular is often cited as a negative in surveys of Hawaii's competitiveness. So it's no surprise that changes to the income tax are responsible for the state's sudden rise in the Tax Foundation ranking. After the expiration of temporary tax increases eliminated the top three individual income tax brackets and lowered the top marginal rate to 8.25%, Hawaii's rankings in this category rose from 37th to 31st. That change was enough to bump the state up four positions in the overall rankings.

Of course, there are any number of caveats that can be added here--it's an examination of business tax climate, not business climate or competitiveness in general; red tape and bureaucracy are a bigger barrier to business and entrepreneurship in Hawaii than corporate tax rates; there are other taxes not accounted for here that also affect the tax climate. Those are all good points, but there is also a valuable lesson here for state policymakers.

Every year, we see the legislature consider a number of different tax increases, many of which come with the promise that they will serve some great social or governmental good. However, if Hawaii's leaders really want to encourage growth, they will examine how to make Hawaii more competitive by lowering taxes on its citizens as a whole--not just provide tax cuts and credits for businesses.

From our high personal income tax to the regressive general excise tax, Hawaii demands too much from its taxpayers. If Hawaii can improve its business tax climate by doing nothing (i.e. allowing the tax increases to expire), imagine what we can do by reducing the individual tax burden across the board.

E hana kakou (Let's work together!),

Keli'i Akina, Ph.D.

President/CEO