In Fiscal Year (FY) 2013, Hawaii collected $8 billion in state and local taxes. While this is an impressive sum of money, it tells us little about whether or not the average Hawaii taxpayer can afford this level of taxation.
As shown in the Chart 1 below, Hawaii’s state and local tax burden (tax collections divided by personal income) was the fourth highest in the nation for FY 2013 at 12.8 percent—or 25 percent above the national average of 10.3 percent. As shown in Chart 2, Hawaii’s tax burden has grown over time by 34 percent to 12.8 percent in FY 2013 from 9.8 percent in FY 1959 (the first year Hawaii was a state).
Hawaii’s high tax burden is driven by a very high sales tax burden (5.1 percent, highest in the nation), and a high all other tax burden (2.6 percent, 9th highest). This is offset by a lower than average property tax burden (2.1 percent, 42nd highest), and corporate income tax burden (0.2 percent, 41st highest).
This tax structure is not surprising given Hawaii’s reliance on tourism as its primary economic driver. A large sales tax burden would be “exported,” or paid by, tourists. As a result, the residents of Hawaii enjoy a lower than average property tax. Of course, exported or not, a high overall tax burden is still bad for the economy.
Additionally, Hawaii’s sales tax is actually a gross receipts tax meaning that it is levied on very broad-based number of goods and services and leads to tax pyramiding. Tax pyramiding results from taxing business-to-business inputs and creates all kinds of very bad economic distortions (pdf) by imposing higher effective tax burdens on some industries, but not others—especially industries that are near the end of the value-added chain.
For example, a hammer could be a consumer good if bought by a homeowner, but it could also be a business input if bought by a carpenter (who would then use it to build final consumer goods like a house). Taxing the carpenter results in tax pyramiding because the carpenter will pass the tax onto the consumer in the form of a higher price on the house. The new homeowner is unaware of this added tax burden that they paying which also violates tax transparency.
Overall, a good tax system would avoid tax pyramiding. Of course, that is easier said than done under Hawaii’s gross receipts tax which actually maximizes tax pyramiding. Hawaii would be better off sending their gross receipts tax to the ashbin of history and adopting a true consumption such as my proposed Business Flat Tax.
Of course, the tax burdens for local government can vary just as much as they do among the 50 states. As such, we have also calculated the local government tax burden for every county in Hawaii—this includes every taxing jurisdiction within the geographic county borders whether it is a city, a special district, or county government itself.
The Hawaii counties with the highest local government tax burden include: Hawaii County, HI (4.1 percent), and Kauai County, HI (3.9 percent). The Hawaii counties with the lowest local government tax burden include: Maui + Kalawao Combined Counties, HI (3.8 percent), and Honolulu County, HI (2.9 percent).
J. Scott Moody has nearly 20 years experience as a public policy economist with a specialty in tax policy and has over 180 publications. He has worked for numerous national and state-based think tanks such as the American Conservative Union Foundation, Federalism In Action, Tax Foundation, Heritage Foundation, and The Maine Heritage Policy Center.