Not Even Beautiful Hawaii Is Immune to ‘Tax Flight’

The Aloha State is finally facing the problem.

by Kelii Akina, Grassroot Institute, via Foundation for Economic Education

If you’ve ever been to Hawaii, you might wonder why anyone would leave the state. Its beauty and fair weather are world-renowned, and it’s not for nothing that the place has often been called the “Paradise of the Pacific.”

The reality, however, is that the Aloha State’s population has been decreasing every year since 2016, and most observers believe it’s because of the state’s high cost of living, of which taxes are a significant part.

Indeed, the concept of “tax flight” has been in the news a lot in recent years.

Tax flight is when the residents of a state with high taxes leave to go live in a state where the tax burden is lower. The extent to which tax rates directly influence migration patterns is a matter of debate. But the data do demonstrate that people tend to leave higher-tax states in favor of states with lower taxes.

For fleeing Hawaii residents, a popular destination is Las Vegas, Nevada, which has no state income tax and now is often called “Hawaii’s Ninth Island,” due to its high number of former Hawaii residents.

Other high-tax states which have experienced consistent population loss include California, New York, and Illinois. Conversely, low-tax states such as Texas, Florida, North Carolina, and Nevada have all seen their populations grow.

Moreover, jurisdictions that don’t act to reduce their tax flight will likely soon be looking at more of it. That’s because as residents leave, a state or county’s tax burden falls on ever-smaller numbers of taxpayers, which in turn will mean tax increases for those who stay behind, which further incentivizes people to leave, and so on.

It’s easy to see how this can lead to a state, county, or city budget crisis, especially for jurisdictions that have racked up large pension liabilities or other long-term debt.

But there is something states can do to stop the bleeding, though it might be painful to those who aren’t used to it: Cut taxes and rein in spending.

In Hawaii, lawmakers have finally come to terms with this idea. Going into 2024, Hawaii families making the median income paid the second highest income taxes in the country, after Oregon, a state with no sales tax. But during the state’s 2024 legislative session, the governor and legislature unanimously enacted the largest personal income tax cut in state history.

By the time the 2024 cuts take full effect in 2031, the average Hawaii family making the median income will have seen its taxes reduced by more than 70 percent and cumulatively saved more than $19,000, or about $7.6 billion statewide.

As Hawaii prepares for its next legislative session, starting this month, the governor has pledged to secure the cuts by reducing spending and balancing the budget. In fact, his proposed budget for fiscal 2026 is actually 1.8 percent lower than the current fiscal year’s budget.

Time will tell whether local lawmakers ruin the rosy outlook by getting back on the tax-and-spend bandwagon. And, of course, it would be naive to expect that Hawaii’s historic tax reduction will solve all of its population-loss problems overnight.

Significant reforms are still needed to bring down the state’s housing costs; healthcare regulations continue to add to Hawaii’s high medical costs and limit access; occupational licensing severely limits job opportunities; and the federal Jones Act continues to add to the cost of all goods imported by ship from the US mainland.

Still, the tax cuts signed into law earlier this year are a promising start, and they demonstrate an understanding of a very simple principle: If you want people to stay in your state, then you need to reverse the economic policies that are inducing them to leave.