Scrutinize isles' tax laws


POSTED: Friday, September 25, 2009

Hawaii is not as hostile to business as some claim, but it is losing ground compared to other states as new and higher taxes on employers are imposed.

The Washington-based Tax Foundation, a nonprofit, nonpartisan research group, issues its annual State Business Tax Climate Index as a tool for lawmakers and policymakers to compare how the laws and rules they enact enhance or erode their state's economic competitiveness. Hawaii lawmakers should closely review this wealth of data as the state struggles toward economic recovery.

The 2010 index, which depicts each state's tax system as it stood on July 1, 2009, ranks Hawaii 24th overall. South Dakota was deemed the most hospitable to business and economic growth, and New Jersey the least.

The index doesn't rely solely on the total tax burden of a state, but also looks at how the state and local governments take in that money. It rewards tax policy that is simple, transparent, neutral and stable, favoring states that impose broad-based taxes at low rates. It penalizes states that rely on tax credits and incentives, which the foundation says complicate and undermine the tax system and can lead to corruption.

States are graded in five areas (No. 1 is the best): individual income taxes (Hawaii ranked 44th), corporate taxes (10th), sales taxes (11th), unemployment insurance taxes (12th), and property taxes (8th).

Hawaii was faulted this year for enacting the highest tax rate in the nation on personal income, 11 percent when income exceeds $200,000, and also was dinged for raising sales taxes on cigarettes.

And despite the relatively high rankings in four of the five categories, Hawaii has lost ground overall compared to other states since 2006, when it also ranked 24th. It moved up to 16th in 2007, but fell to 18th in 2008 and 22nd in 2009.

It might fall lower next year. The ranking on the unemployment insurance tax rate, for one, is likely to be worse in next year's index, as an expected deficit in Hawaii's unemployment trust fund triggers a huge tax rate increase.

But other states face similar crises, and that's one advantage of the Tax Foundation's index: It gives decisionmakers comparative data to help them make smart choices that will speed economic recovery as states compete for the businesses that create jobs.

“;Now is the time for states to undertake fundamental tax reform and not short-run tax gimmicks. A tax system based on sound principles will be the best way for states to ensure long-run, stable growth in the future,”; Tax Foundation economist Kail M. Padgitt wrote.

He also acknowledged that many non-tax factors affect a state's business climate, none of which are included the index.

Hawaii can capitalize on these less tangible but also important “;quality of life”; factors, including its diverse population, mild weather and proximity to Asia, while also improving its tax system.