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Hawaii’s Ranking Should Always Include Local Government

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By Lowell L. Kalapa

The other day someone in the audience shot up their hand and said, “Eh brah, we lucky we live Hawaii because our property taxes are so low! My sister back east is paying $7,000 a year in property taxes.”
And that’s the problem when various components of state and local government finance are singled out for comparison. For example, during the infamous discussion of the Economic Revitalization Task Force, government bureaucrats liked to single out the fact that Hawaii’s general excise tax – sales tax – rate is only 4%, low by comparison to our sister state California where the sales tax rate approaches 9%.
Of course, those public officials don’t like to point out that the tax base for the California sales tax is about a third of the tax base for Hawaii’s general excise tax with the biggest difference being that the general excise tax is applied to services in addition to goods. Nor do these observers point out that the tax is on businesses for the privilege of doing business in Hawaii as opposed to sales taxes which are a liability of the purchaser or customer.
Indeed, newspaper reporters throw us in a tizzy when they get some wire service report that Hawaii state taxes are the highest per capita in the nation. And indeed they are, but not because the rates are terrifically high or that the state population is so small. No, it is because state government in Hawaii is responsible for many of the services and programs that are provided by local or county government units on the mainland. The most marked disparity is the fact that mainland schools are largely financed at the local level either by counties or by school districts. While this has changed somewhat in recent years where states have stepped in to supplement county financing strategies, schools are still largely financed by local government units.
Again, because most of the services are provided by state government in Hawaii, the burden of taxes imposed by the state mirrors this relationship. About 80% of the services provided in Hawaii are provided by state agencies while the remaining 20% are provided by county or local government in Hawaii. Functions like health and welfare which are handled by local governments on the mainland are the responsibility of state government in Hawaii.
Another unique feature of government in Hawaii is the fact that the benefits for state employees are paid through and accounted for through the budget department. As a result, expenditures by function, like education or welfare, do not reflect the cost of benefits for employees in that department. Big-ticket items like retirement and health benefits don’t show up in a department’s expenditures and, as a result, when polled by department of commerce or other national organizations this cost is not included in the cost of the program or function.
Because of these differences, it makes comparisons of state or state and local governments difficult, if not misleading, especially if one is not aware of the reporting differences. Uninitiated readers of these statistics believe they have a real gem of discovery until it is explained that there are shortcomings to the comparisons.
Even when non governmental statistics are compared, caution should be exercised. For example, when comparing pay rates between Hawaii and other states, few will note that Hawaii is the only state in the nation where health care coverage must be provided for all full-time employees. Prepaid health care adds anywhere from a couple of hundred dollars per employee per month to four or five hundred dollars if there is dependent or family coverage. In many other states, health care coverage is discretionary for the employer and therefore does not figure in the cost of compensation of the employee.
Finally, some observers would like us to believe that in the case of tax burdens, the per capita statistic which relates the total amount of taxes collected in that state divided by the resident population is misleading because it does not take into account the taxes paid by visitors to Hawaii. This is called exporting of the tax burden. That is, some of the taxes collected by state and county government are paid by tourists to Hawaii.
While it is arguable that tourist pay some of the taxes collected in Hawaii, one can also argue that Hawaii residents pay some of the taxes imposed by Wyoming on the copper used in the plumbing for our homes or the Michigan taxes imposed on the manufacture of a new car. And while Hawaii residents have no choice but to pay those Wyoming or Michigan taxes, visitors have a choice of coming to Hawaii or going to Mexico.
So the next time you see an article that blares out at you that Hawaii state taxes are the highest in the nation, exercise some care and question the statistic.

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