| The wire services recently carried a story reporting that Connecticut had the highest per capita tax burden and Hawaii ranked fourth highest in the nation in per capita tax burden. Of course, the latter statistic didn’t come as a surprise to many here in Hawaii.
But the report of Connecticut taking honors as number one in the nation did raise a few eyebrows of some seasoned observers of state and local government finances. While Connecticut taxpayers pay big bucks in terms of actual dollars collected, the per capita collections are certainly overshadowed by a number of other states.
In checking out the background for the story, it was discovered that the statistics reported were for the per capita amount of state taxes paid by taxpayers in each state. The number for each state did not include the local or county taxes paid.
As a result, the statistics did not account for real property taxes which, as in Hawaii, are paid to the local government or in some cases to the local school district. Thus, Hawaii and other states where major functions are provided by state level government as opposed to local governments tend to distort the numbers. For example, here in Hawaii education is provided for at the state level and is funded out of state tax dollars. On the mainland schools are usually operated by a local school district which gets its funding from local property taxes. And while there is a trend across the country to have subsidies provided by state government, the traditional source of educational funding comes from the local property taxes.
To make a more accurate comparison of what a taxpayer in Hawaii pays in total taxes versus a taxpayer in Texas or Connecticut, one has to look at all taxes levied by all levels of government in that state. This means for Hawaii that one has to look at both the state and the county taxes paid by families in Hawaii. In recent years, the “tax burden” statistic has also meant that government fees are factored into this statistic as more and more governments have moved toward user fees to raise additional cash rather than raising politically unpopular taxes.
If one looks at the per capita state and local tax and fee burden, Connecticut falls to third place in ranking among the fifty state and Alaska rises to the top followed by New York and then Hawaii. Although many assume that Alaska should lead the pack because it collects a lot of taxes on the oil that it sells to other states and countries, local taxes are needed to pay for basic services in small towns across that state. Concurrently, New York City alone accounts for a substantial amount in local taxes just to keep that big city operating.
In a state like New York where there is a marked disparity in populations between large cities like New York, Buffalo and Rochester in comparison to small towns in upstate New York, allowing local governments to fund their particular needs as opposed to having the state tax and spend for the needs of each makes more sense and allocates the tax burden more proportionately to those who need those particular services. In that respect, those closer to the services provided can better assess the delivery of those services and hold the local officials accountable.
While it is more accurate to use the state and local tax and fee burden for comparisons, there is one more refinement of that statistic that gives a better picture of how taxpayers here are doing relative to other states.
That statistic recognizes that the economic wealth or prosperity of each state differs. More prosperous states where economic activity is high and cost of living is moderate allows those taxpayers to better cope with the cost of government. This is measured by comparing per capita tax burden to per capita personal income. In other words how many cents of every dollar earned go to pay for taxes.
In the case of Connecticut, which ranked number one in per capita state taxes and number three in per capita state and local taxes and fees, that state drops to number 39 in the per capita taxes to per capita personal income race. Why? Its overall personal income is relatively high by comparison to other states. For example, a lot of highly paid executives who work in New York live in Connecticut which helps to boost the wage and salary income components of total personal income for that state. Thus, when total taxes divided by population is then divided by total income divided by total population, the result is that Connecticut taxpayers pay 13.3 cents of every dollar earned as compared to Hawaii taxpayers who pay as much as 16.5 cents of every dollar earned.
The conclusion? Hawaii taxpayers are paying more of their earnings for government than their counterparts in Connecticut. That is a result of not only the high cost of government but it is also a result of relatively lesser economic prosperity. On a relative basis, Hawaii has a long way to go to mitigate the burden of taxes and fees both by controlling the cost of government and by improving the economic climate.
By Lowell L. Kalapa