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Why is Hawaii so expensive?

Hawaii residents enjoy one of the most beautiful places on earth to live, but they pay a high price to do so.

How high is the “price of paradise”?

Hawaii’s cost of living is the highest in the nation. The national Tax Foundation found that the real value of $100 in Hawaii is worth less than $85, meaning residents get less value for each dollar spent.

It’s so expensive to live in Hawaii that the U.S. Department of Housing and Urban Development considers a family of four in Hawaii making under $93,000 a year to be “low income.” At the other end of the spectrum, $100 in Mississippi is worth $115.74, or 15% more than their incomes suggest.

Living in Hawaii is so expensive that more people have been leaving Hawaii during the past five years than moving in.

So why is Hawaii’s cost of living so high? There are three primary reasons, all of which have to do with poor public policy.

High taxes

Hawaii’s state budget per capita is the third highest in the nation at $12,896.

That total included unfunded state liabilities totaling about $97 billion at the end of 2020.

Unfortunately, the excessive government spending and liabilities come at a cost to Hawaii residents, who pay thousands of dollars annually in all kinds of taxes. In fact, Hawaii residents bear the highest per-capita state tax revenues in the country.

For example, Hawaii has the second highest individual income tax rate in the nation.

It ties with Washington state for the highest maximum estate tax rate, otherwise known as the death tax.

And, though its property tax rates are low, the values of homes in Hawaii are so high that the amount of money paid by the average resident is similar to the national average.

The state’s general excise tax, when considered as a sales tax, is the most burdensome in the nation. And it’s regressive. One study found that Hawaii’s lowest-income residents spend 10.5% of their meager incomes on the GET, while residents in the top 1% income bracket pay only 1.2% of earnings. It’s also estimated to add $222 million annually to the state’s healthcare costs alone.

Land-use and zoning regulations make housing unaffordable

Houses in Hawaii are the most expensive in the nation.

The median cost for a single-family home in Hawaii is over $1 million, making Hawaii the most expensive in the nation for housing. It is why many residents live with roommates or multiple generations of families — or are leaving the state altogether.

There are many reasons for the high costs of housing in Hawaii, but one of the primary causes is the land-use and zoning regulations of the state and counties.

State land-use laws determine the general use of a property, such as agriculture, conservation or urban. In the urban districts, county zoning regulations specify where and what people can build on their properties.

According to many sources, Hawaii has the strictest zoning regulations in the U.S. Only 5% of its land is zoned urban, which is the only classification that allows most types of residential housing like neighborhoods and apartments.

But not all urban-zoned land is even used for housing. For example, on urban lands, shopping centers are generally restricted to areas zoned business, and homes generally in areas zoned residential. Within those areas, there can be further restrictions on what types of stores or homes can be built, in terms of lot size, building heights, setbacks and so on.

Essentially, Hawaii severely limits the supply of land available for housing, which is a main reason the median housing cost per square foot in 2018 was $547 on Oahu, $548 on Maui, $456 on Kauai, and $282 on the Big Island — all much higher than the national figure of $114 at the time.

In the fourth quarter of 2021, construction costs for multifamily residential units in Honolulu were between $250 and $420 per square foot, according to Rider Levett Bucknall’s “North America Quarterly Construction Cost Report.

If Hawaii were to increase the amount of land available for housing by just 1 percentage point, from 5% to 6%, that would equal a 20% increase in land available for housing; a 2 percentage point increase would be 40%; and so on.

The Jones Act increases shipping costs

The Jones Act is a federal shipping law that increases the costs of all goods in Hawaii.

Shipping merchandise from the West Coast to Hawaii can sometimes cost up to 300% more than shipping the same cargo to Australia.

That’s largely because of Section 27 of the Merchant Marine Act of 1920, otherwise known as the Jones Act, which requires goods shipped between U.S. ports to be transported on ships that are U.S. built and flagged and mostly owned and crewed by Americans.

For example, a Taiwanese ship may not drop off some of its cargo in Honolulu while en route to Los Angeles. Instead, it must carry those goods all the way to L.A., where they can be transferred to a Jones Act ship and shipped back to Hawaii. Similarly, a Taiwanese vessel may not drop off goods in Hawaii when taking goods back to Taiwan from L.A. That leaves Hawaii residents footing a much larger bill for their imports, since most goods are imported via ships and competition is limited.

Particularly unfortunate is the law’s requirement that all Jones Act ships be built in the U.S. Ships built in U.S. shipyards typically cost three to five times more than ships available on the world market. This increases capital costs and discourages competition even among Jones Act carriers.

According to a 2020 Grassroot Institute of Hawaii study, the Jones Act costs Hawaii about $1.2 billion a year, or about $1,800 per average family. It found that eliminating the U.S.-build requirement could save the state $531.7 million annually and add 3,860 jobs.

Conclusion

There are many other factors that affect the cost of living in Hawaii. But these three issues — high taxes, excessive land-use and zoning regulations, and the federal Jones Act — are some of the most important in explaining why Hawaii’s cost of living is so high.

Sure, there is a price to pay for living in the most isolated islands in the world, but state, county and federal government policies increase the price even further.

Hawaii would be better off if lawmakers would remove the barriers that prevent entrepreneurs and citizens from freely exchanging goods and services and solving the state’s problems. Then perhaps people would not be priced out of paradise.

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PETITION: Exempt medical services from Hawaii's excise tax!

To the Hawaii Legislature:

Hawaii families face skyrocketing healthcare costs and a shortage of doctors. Exempting medical services from Hawaii’s general excise tax would result in millions of dollars in savings for residents and help bring doctors back.

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