Hawaii has been inching up the report cards of an advocacy group called the Small Business & Entrepreneurship Council but remains difficult terrain for small company owners. Legislators on the verge of increasing taxes should look for ways to improve the climate for small business.

The group ranks Hawaii 37th among states for its tax system, up from 40th last year. Its more familiar Small Business Survival Index, which dings states for such things as being friendly to organized labor and awards high marks to right-to-work states, last year ranked the islands 40th. Hawaii had the distinction of being dead worst in 2001.

The Business Tax Index is more objective, sticking to actual rates in such areas as property, personal income, corporate and gasoline tax rates.

Hawaii's business-friendliest category is corporate capital gains tax rates, ranking second among the 44 states that have such a tool to reduce the rate of return on investment and entrepreneurship. The islands place eighth best — or lowest — in local property tax rates, which is modest when considering that Hawaii is the only state where property taxes are not used to operate school systems.

However, it has the eighth-highest personal income tax, which the small-business group points out raises the cost of working, saving, investing and risk-taking. It points out that 90 percent of businesses file taxes as individuals, such as sole proprietors and business partners. It also has the 11th-highest capital gains tax rate on individuals. Hawaii's adjusted unemployment tax rate ranks 25th.

Hawaii has the highest local sales tax, in the form of the general excise tax, at 6.35 percent, when including tobacco and alcohol taxes. The organization points out that “;high, consumption-based taxes can redirect consumer purchases and, especially if combined with other levies like income and property taxes, can serve as real disincentives to productive economic activity.”;

Gasoline taxes are not included as excise taxes but are themselves among the nation's highest — 33.6 cents a gallon for gasoline, sixth-highest in the country, and 46.2 cents for diesel, higher than any other state.

The report was released on Wednesday — tax day — as Hawaii legislators are reviewing areas where they considering raising rates. Other states are doing the same as they cope with the severe recession, but that should not encourage them to indulge in pushing the state to a lower tier of tax hell.