Taxpayers on a hook
Hawaii's tax structure leaves many residents with a crippling financial burden
HOW does it feel to be the best? Or, as "no ka oi" says, how does it feel to be "the best with none better"?
When it comes to taxes, as shown by a recent compilation of information from government data banks, Hawaii is one of the very best at taxing and spending among the 50 states.
The Bureau of the Census reports that, on a per capita basis, Hawaii in 2005 was the No. 1 state in collections of general sales tax and in 2006 had the fifth-highest percentage (11.7 percent) of state and local tax burden as a percentage of state income. These numbers are statewide and do not consider January's implementation of the 12.5 percent general excise tax surcharge increase on Oahu. For example, the 2006 ranking below shows the top five states with the highest percentage of state and local tax burden as a percentage of the 2006 state income:
1. Maine -- 13.5 percent, with state income ranked No. 31 at $34,935
2. New York -- 12.9 percent, with state income ranked No. 5 at $44,571
3. Ohio -- 12 percent, with state income ranked No. 26 at $36,054
4. Minnesota -- 11.9 percent, with state income ranked No. 9 at $41,363
5. Hawaii -- 11.7 percent, with state income ranked No. 19 at $38,269
Looking at the information above demonstrates that life could be much worse if one lived in Maine or Ohio, especially considering the weather! The point of the ranking, however, is to show where the burden of taxation falls most heavily on wage earners.
For example, Hawaii has the nation's 19th-highest income per capita and, by percentage, is the fifth-highest tax collector. Imagine living in Maine or Ohio where incomes are 10-15 percent lower than Hawaii and yet residents are taxed higher! Relatively speaking, one might be better able to survive a life in New York or Minnesota where wages are 10-20 percent greater than Hawaii even if the percentage taken by taxes is greater than Hawaii.
With a little investigation into the data, however, one learns that Hawaii not only is a high-tax state but the taxes collected are among the most regressive, meaning they hit hardest the lower the income, in the nation. The 2006 state individual income tax rates for Hawaii has the top tax rate being applied to household incomes of $40,000 and greater. That $40,000 threshold is only 5 percent above the per capita income in Hawaii. Glancing at the tax rate tables of other states one finds that there are three states whose 7.8 percent or higher tax rate applies to incomes of less than $40,000:
1. Oregon -- 9 percent at $6,500
2. Maine -- 8.5 percent at $17,700
3. Idaho -- 7.8 percent at $23,178
4. District of Columbia -- 8.7 percent at $40,000
5. Hawaii -- 8.25 percent at $40,000
6. California -- 9.3 percent at $41,476
7. Iowa -- 8.98 percent at $57,106
When one combines the highest and most comprehensive general excise tax collections (incorrectly referred to as a sales tax) in the nation with the third-highest marginal tax rate on incomes of $40,000; it is easy to understand why low- to average-income residents of Hawaii have less after-tax discretionary income than most citizens in the 50 states.
A regressive tax structure is one that takes, as a percentage of income, a greater percentage from lower-income earners than high-income earners. The tax structure in Hawaii is designed specifically to affect most significantly those whose incomes are used primarily for housing, food, medicine or services, instead of savings or investments.
Furthermore, application of the highest marginal tax rate (8.25 percent) is set so low that any family of four at the median family income level ($71,320) is immediately taxed at the highest marginal rate. Data on median income can be viewed at www.census.gov/hhes/income/4person.html
The information compiled by the National Tax Foundation and available at www.taxfoundation.org/publications/show/2181.html can illustrate how the total tax burden in Hawaii (even before the implementation of the Oahu general excise tax surcharge in January) is the fifth highest in the nation.
In addition, one can find information in the Tax Foundation reports such as:
» Hawaii has the second-highest beer tax ($0.93/gallon) in the nation;
» Hawaii has the 14th-highest debt and ranks 15th highest in state and local spending per capita;
» Hawaii receives the fifth-highest level of federal expenditures per capita of all the states, and these expenditures exceed federal taxes paid by Hawaii by $2,300 per capita;
» Hawaii property taxes paid are among the 10 lowest in the nation since education costs in Hawaii are paid by general excise tax and state income tax.
Hawaii tax policy, with a heavy reliance on general excise, income and property taxes, automatically collects more taxes as inflation increases wages and prices. In fact, inflation of prices, wages and property assessments produce an annual windfall in tax revenue to state and city coffers with no adjustment to tax rates. Lawmakers at state or county levels have rarely changed rates or deductions to recognize simple inflation.
The result of turning a blind eye to inflation is to create an increasingly regressive tax structure that makes it more difficult for residents to find affordable housing, medical supplies and services and well-priced food. Couple the always-increasing tax burden with a regulatory environment that slows the development of affordable options (housing, energy, insurance, shipping) and Hawaii ends up with a marketplace that creates progressively poorer consumers chasing fewer and more expensive goods.
The biggest beneficiary of such a system appears to be state and county lawmakers who spend the increased taxes for more government programs that increase the role of government instead of returning to the taxpaying consumer the windfall that should not have been taken in the first place.
Paul E. Smith is a member of the National Tax Foundation and a director of the Tax Foundation of Hawaii. He is co-chairman of Let Honolulu Vote (www.lethonoluluvote.org
). He owned and managed a Hawaii manufacturing business for 20 years and now licenses innovative construction and packaging technology to firms around the world.