By Stephen Zierak
Results of the 2012 elections for state legislature ensure that Hawaii’s economy will continue to over-rely on military facilities and the tourist trade. While the pressing need to diversify our economy continues to enjoy lip service, our electorate continues to send the same old same old to the House and Senate. Incumbents won almost all of their contests, and Hawaii remains a one-party state as the moribund Republican Party only managed to hold its one Senate seat and actually lost one of its eight seats in the House. With a similar cast of characters, we can expect continued fiscal irresponsibility—and the resulting lack of new industry interest in Hawaii.
The November issue of Site Selection Magazine ranks state business climates based on opinions of site selectors (50% weight), demonstrated success in attracting capital investment (30% weight), and the Location Matters publication by the Tax Foundation and KPMG Consulting (20% weight). How doesHawaiistack up as a business magnet? (Hint: It didn’t make the list of the best 25 states.)
Site selectors are interested in state and local taxes (high in Hawaii), transportation infrastructure (Hawaiian remote location and Jones Act costs), utility infrastructure (expensive and limited here), land/building prices and supply (high and low), ease of permitting/regulatory procedures (discouraging here), existing work force skills (poor educational system), local/state economic development strategies (what are those?), and incentives.
Tax Foundation/KPMG measures the total effective tax rate (TETR) for businesses in each state. Last February, Location Matters rated Hawaii the worst state in the union. The low property tax burden here is more than offset by a high corporate tax and the highest excise tax burden and second highest unemployment insurance tax burden. The TETR for mature capital intensive manufacturing is 26.2%, more than double the national average of 12.7%. The TETR for mature labor intensive manufacturing is 33.1%, almost double the national average. The TETR for new operations is 40.6%, double the tax burden of second worst California.
Taxes on individuals are not much better. Tax Foundation measures the total amount of state and local taxes paid by residents of a state divided by total state income. This excludes taxes on non-residents and adds back in taxes paid by residents to other states. On this measure, Hawaii is 14th worst at 10.1%. It is also interesting that as much as we soak the tourists, Hawaiian residents end up paying roughly a quarter of their taxes to other states, not much different than the national average of payments to other states. While site selections are more focused on business taxes, there is also some attention to what tax burdens will be for employees, particularly managerial employees. It is not all that easy to attract talent to a high cost, high tax state.
Perhaps Governor Abercrombie will talk sense to our legislative barons? Unlikely. Cato Institute’s 2012 ranking of the state governors (based on tax and spending policy) has Governor Abercrombie rated F with a score of 32 (fourth worst in the nation). General Fund spending increased a whopping 12% during his first year in office. Taxes were increased on income and rental cars, and excise taxes also rose. Our governor proposed some additional taxes that were not enacted—on pensions, soda, and alcohol. Governor Brownback of Kansas received an A rating and score of 69 for his success in achieving a fairer, flatter, and simpler income tax (top rate now 4.9%), saving the people of his state over $800 million a year. Hawaii governors have not always been so low rated. Governor Cayetano won a B in 1998, and Governor Lingle a C in 2010.
Hawaii tax burdens are likely to rise, not fall. State Budget Solutions, in their 2012 report based on 2010 data, estimates state debt in Hawaii(mainly from pension and retiree health obligations) to be $40 billion. This is $29 thousand per capita (second highest), $89 thousand per private sector worker (highest), and 79% of the private industry gross state product (highest). Government is funded by the private sector. Hawaii is now in a spot where nearly a year’s worth of private production would be needed to pay off the ever increasing public debt, acknowledged and unacknowledged.
If you had alternatives, would you bring a new industry toHawaii? I thought not. Perhaps our electorate has not yet noticed, but military spending is likely to be on a significant downward trajectory for at least the next few years. Tourism tends to be cyclical, and can be strongly discouraged by worsening economies and international turmoil—both of which may now be on the horizon. Diversification of our bullets and beaches economy will remain a pipe dream until the people wake up and demand a more business (and people) friendly fiscal policy. Incumbents will need to change—or be changed.
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 Grassroot Institute summaries of Hillsdale’s ten part internet course on our Constitution. Stephen Zierak is married to the love his life, Teodora, and they reside in Honolulu