In Fiscal Year (FY) 2016, Hawaii collected $9.2 billion in state and local taxes—or $6,455 for every man, woman, and child. 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?
To better answer this question, this analysis will calculate Hawaii’s tax burden relative to the private sector. Ultimately, it is the private sector that creates new wealth and income. A high tax burden means a state is hobbling its private sector relative to other states and reducing their long-run economic growth potential.
Unfortunately for taxpayers, as shown in Chart 1, Hawaii’s state and local tax burden (tax collections divided by private sector personal income) was the second highest in the nation for FY 2016 at 20.8 percent—or 46 percent above the national average of 14.3 percent.
As shown in Chart 2, Hawaii’s tax burden has increased over time by 33 percent to 20.8 percent in FY 2016 from 15.6 percent in FY 1959 (when Hawaii became a state).
To put Hawaii’s tax burden into perspective, let’s compare it to size of major industries in the state (as a percent of private sector income). As shown in Chart 3, Hawaii’s 20.6 percent tax burden is greater than these combined industries: construction (9.6 percent), retail trade (7.1 percent), manufacturing (2.1 percent), and utilities (1.3 percent).
Hawaii’s high tax burden is driven by a very high sales tax burden (7.8 percent, highest in the nation), individual income tax burden (4.8 percent, 7th highest) and a high all other tax burden (4.2 percent, 6th highest). This is offset by a lower than average property tax burden (3.6 percent, 15th lowest), and corporate income tax burden (0.2 percent, 9th lowest).
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 can enjoy a lower than average taxes in other areas, such as the property tax. Of course, exported or not, a high overall tax burden is still bad for the economy.
More troubling, 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 are 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 (pdf).
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.
Hawaii only has 4 official counties and are listed below from highest to lowest local government tax burden:
Note: Kalawao county has a very small population and is a judicial district of Maui County.
Finally, don’t forget to watch our exclusive time-lapse video of state and local tax burdens over the last 66 years! See if your state has been above or below the national average?
Scott has nearly 20 years of experience as a public policy economist. He is the author, co-author and editor of over 180 studies and books. His professional experience also includes positions at the American Conservative Union Foundation, Granite Institute, Federalism In Action, Maine Heritage Policy Center, Tax Foundation, and Heritage Foundation.