By Stephen Zierak
Hawaiiis overtaxed and overregulated, a threat to our growth, our prosperity, and the self-reliance of our citizens.
Periodically, the State Tax Working Group of the Tax Foundation meets to review tax happenings in the states. While these meetings often cover states other than Hawaii, they provide valuable information about tax reform efforts around the country—efforts that provide ideas of what might be done here. This report, first of a series, presents some of the topics discussed in the most recent meeting. We believe in citizen responsibility. We expect a dialogue with our readers: How do we best get the word out to politicians and opinion leaders? We seek your creativity. Simply talking about taxes among ourselves gets us nowhere. We must find ways to broaden our message and act to change the political status quo. Come on readers! Get involved! What should we do? How should we do it? The future of Hawaii depends on all of us!
Tax Drag On Hawaiian Economic Growth Potential
The American Legislative Exchange Council (ALEC) has just published its fifth annual edition of Rich States, Poor States, a national study of state tax policy and the effects on economic growth potential. There are clear correlations among the 50 states that show economic drag from high taxes and several other variables. Data are as of the end of 2011.
Top marginal tax rates matter. For personal income taxes, Hawaii’s 11% is second highest in the nation. For corporate income taxes, Hawaii’s 6.4% is more competitive with a ranking of 18th. The overall sales tax (gross receipts) burden per $1,000 personal income is $44.68, again second highest. The overall burden from all other (non-sales) taxes is $21.68 with a ranking of 39th. The added total tax burden in 2010 and 2011 is $7.21 with a ranking of 45th. Hawaii is definitely not going in the right direction.
State estate and inheritance taxes are a negative for growth, as is lack of a state right to work law. Hawaii falls into both of those categories. Hawaii’s debt service as a percentage of tax revenues is 9.9% with a ranking of 36th. So Hawaii suffers from a high percentage on a high revenue burden. Moreover, Hawaii has significant unfunded public pension liabilities, estimated in a range of $5 billion (Pew) to $18 billion (American Enterprise Institute). ALEC’s study considers the higher estimates sounder actuarially. To provide a frame of reference, the entire state budget is under $6 billion.
Hawaii’s unemployment rate at March, 2012 is 6.4%, ranked 14th. There is no question that Hawaii does benefit from the lack of contiguous state competition. Moreover, the two major contributors to the economy, military installations and a mature tourism industry, have been less affected by the national recession than industries in other states. Real estate prices have not fallen to the same extent here as in other markets, particularly high priced markets. The state economy, as it is, has held up reasonably well in its ocean surrounded cocoon.
Our real concern must be how taxes and regulations affect our potential for broadening our economy beyond brigades and beaches. While population has grown in Hawaii over the past decade, this has come from immigration and internal population growth, and not from mainland relocations. Net domestic migration into Hawaii over the decade has been a negative 30 thousand, ranked 34th. Our young people are fleeing the state for opportunity faster than we can attract mainlanders to our island paradise. If we have hopes of diversifying our economy by attracting mainland business expansions into Hawaii, this is unlikely given tax, regulatory, and cost of living conditions. Honolulu is the second highest urban cost of living in the U.S., according to Kiplinger’s. The differential in higher per capita income is less than half the differential in higher cost of living, when compared with national averages. Even with the “protection” of excessive shipping costs (due to the Jones Act), our farmers cannot produce competitively. Unless we are willing to be forever reliant on military and tourism (as we once relied on sugar and pineapple), Hawaii’s future requires redoubled efforts at reducing barriers to economic development, whether taxes or regulations.
Inform yourselves about the effects of tax structure on state growth. Rich States, Poor States is available to you for free on line at ALEC’s website. Then inform all the people you know of how poorly Hawaii does in achieving growth-oriented tax policies. Hawaiian politicians continually talk about diversifying our state’s economy, but the actions they take lock us into our current brigades and beaches economy. And our brightest young people continue to seek opportunity elsewhere.
A Sad Story From Nebraska
Winning elections is not sufficient. Citizens need to keep the pressure on. Governor Dave Heineman had promised significant tax relief to Nebraskans during his campaign. He submitted reductions of $327 million over three years. These included reductions in both personal and corporate income tax rates, and the elimination of the inheritance tax. Nebraska’s unique unicameral and non-partisan (officially, but dominated by Republicans) Senate chopped the reductions down to under $100 million by dropping the corporate and inheritance tax changes, and reducing the changes to personal rates. The governor signed the heavily revised bill, but promised to come back for more.
In a separate bill, the Senate allowed the maximum sales tax collected by municipalities to rise from 1.5% to 2.0%. This will probably offset most of the effect of the personal income tax reductions. The governor vetoed the bill, but it was passed over his veto.
How did this happen? The people of Nebraska had shown their support for substantial tax relief by the results of the election. Every government-reliant interest group in the state, including lobbyists from local governments, showed up to the hearings to make their pro-tax views known loudly and clearly.
Governor Heineman followed through, while Republican legislators caved to the pressure. The moral of the story: People must organize during legislative sessions just as they do during elections. Otherwise, they end up with empty promises from craven politicians.
Stephen Zierak, CPCU/ARM, graduated from Boston University with a BA in Political Science in 1969. After a forty year career in property casualty insurance underwriting, Mr. Zierak retired as a Vice President of Swiss Re America in 2010. At that time, he relocated to Hawaii, a move he had always wanted to make, but had delayed due to lack of appropriate professional opportunities here. Mr. Zierak plans to continue his studies in Political Science, never really abandoned even during his professional career, and to write on matters of public policy. Recently, he produced for the Grassroot Institute summaries of Hillsdale’s ten part internet course on our Constitution. Stephen Zierak is married to the love of his life, Teodora, and they reside in Honolulu.