Hawaii gets low marks in business tax ranking

by Merrilee Gasser, The Center Square May 2, 2023

(The Center Square) – Hawaii’s individual income tax scored among the poorest in a new report.

As a part of the Tax Foundation’s 2023 State Business Tax Climate Index, states’ individual income taxes were one of five major components examined across the board.

Hawaii ranked 46th, where it has stayed since 2021. It ranked 47th in 2020.

“States that score poorly on this component tend to have high tax rates and very progressive bracket structures,” the report said, adding those poor scoring states also tend to fail to index their brackets, exemptions, and deductions for inflation, among other shortcomings.

For its overall business tax climate, Hawaii scored fairly well for its corporate tax and sales tax. However, it was in the bottom half of states for property taxes, unemployment insurance taxes, and individual taxes.

“High marginal rates adversely affect labor output and investment and can influence location decision-making, especially in an era of enhanced mobility, where it is easier for individuals to move without jeopardizing their current job, or without limiting the scope of their search for a new one,” the report said.

Many states can’t afford to lean into policy that harms their labor force as many are dealing with severe workforce shortages, the U.S. Chamber of Commerce reported this week.

While Hawaii’s labor shortage is far less severe than other states, it still only has 78 available workers for every 100 open jobs, according to the chamber.

The state currently has 37,000 job openings, 23,584 unemployed workers, and a labor force participation rate of just over 60%. The hiring rate is sitting at 4.3%, the U.S. Chamber of Commerce said.

“There is a national worker shortage affecting the nation, and many states are feeling the impact,” said the chamber. “The vast majority of states have more job openings today than it had before the pandemic, while labor force participation remains below pre-pandemic levels.”

Hawaii has a graduated-rate income tax that ranges from 1.4% to 11%. Its state and local individual income tax collections per capita is $2,327, according to the Tax Foundation.

Other states that received the lowest scores for individual income taxes were New York, California, New Jersey, and Connecticut. High-ranking states included those with no individual income tax, like Alaska, Florida, South Dakota, and Wyoming.