Poor climate for business fails to slow economy

By Sean Hao
Advertiser Staff Writer

Hawai'i continues to be rated among the worst states in which to do business, according to a number of recent surveys. At the same time the state has one of the most vibrant economies in the country, underpinned by strong job and income growth.

Jill and Brendan Barry, owners of Bead It stores in Kaimuki and Kailua, find quality of life outweighs the state's poor business climate. Deborah Booker • The Honolulu Advertiser

At the other end of the spectrum, South Dakota ranked No. 1 in both surveys, which ignore each state's economic performance.

So is Hawai'i's widely perceived negative business climate a problem? Not necessarily. However, the strong economy should not be used as an excuse to relax efforts to improve the business climate, economists and business owners say.

"If it's so bad (here), then why is business booming?" asked Paul Brewbaker, chief economist for Bank of Hawaii. "What does it take to get out from the bottom of these things, because it doesn't seem to have any relationship to the economy."

Hawai'i's economic strength, in large part, reflects the general upswing in the global economy. Rising tourism and defense spending far outweigh the effects of business climate issues such as high taxes, healthcare costs and workers' compensation premiums.

In other words, government policies whether good or bad, can't counter prevailing economic trends, Brewbaker said.

"It's always a good thing to improve the efficiency of institutions that govern economic activity and therefore the business climate."

But "in the end they're swamped by these global forces. Business conditions in the end seem to trump institutional conditions," Brewbaker said.

Just because Hawai'i's economy is doing well, doesn't mean common complaints about the high cost of doing business in the state are wrong. It's just that the significance of those problems recedes when times are good, said Mark Elwell, owner of Bamboo Flooring Hawaii.

"This is definitely one of the worst places to do business (in)," said Elwell, adding that about

70 percent of his sales come from the Mainland. "It is difficult to do business in Hawai'i because of the high taxes, workers' compensation and so on."

But, "I think those things aren't as noticeable when things are going well," Elwell said.

Still, such issues aren't going unnoticed by groups that rank the business-friendliness of states. For example, in ranking Hawai'i's business climate No. 49 out of 50, the Washington, D.C.-based Small Business & Entrepreneurship Council this month cited the state's high personal income tax, capital gains tax, general excise tax, electricity rates and workers' compensation premiums.

The Tax Foundation raised the same tax issues in ranking Hawai'i's business climate the worst among all states.

Meanwhile the Great Plains state of South Dakota topped both lists in large part because of a lack of taxes on corporate and personal income, personal property, business inventories and inheritances. Despite such praise, things could be better, said Mary Lehecka Nelson, a marketing specialist with the South Dakota Department of Tourism and State Development.

While Hawai'i still faces fundamental problems such as high healthcare and workers' compensation costs, South Dakota's attention is on developing higher-value agriculture products, building partnerships between educational institutions and industry and diversifying the agriculture-based economy into high-tech and biotech businesses.

"We're not taking anything for granted," Nelson said. "We've got a strong business climate. I think that has helped our economy over the years."

But "we're still looking at ways to improve South Dakota for our citizens."

Despite South Dakota's edge on business climate issues, Hawai'i's economy is pumping out a greater percentage of new jobs and retains an edge in other economic measures, including jobless rates. Meanwhile South Dakota can claim having a lower business bankruptcy rate and a decline in business closings in 2003, according to the Small Business Administration's Office of Advocacy.

Hawai'i has an advantage in its perceived high quality of life, which includes moderate year-round temperatures, and a large, but untapped, opportunity to market the state as a business destination.

In addition to a hospitable tax climate, South Dakota doesn't suffer from the geographic isolation or high cost of living experienced in Hawai'i. For example, the median sales price for a single-family home in South Dakota in 2003 was $123,200 — more than three-times less than Hawai'i's $380,000, according to the National Association of Realtors. In addition, the average price for a gallon of gasoline in South Dakota last week was about $2 compared with nearly $2.40 a gallon in Hawai'i, according to AAA travel club.

Business owner Elwell chalked up Hawai'i's unfavorable business climate and high cost of living to the so called price-of-living in paradise.

"It's all about trade-offs," he said. "I'm sure I could be 50 percent more successful if I were located in Chicago, but this is where I want to live."

State Sen. Sam Slom, R-8th (Kahala, Hawai'i Kai), agreed.

"How many people really want to go and live in South Dakota?" Slom asked. "More and more business owners and their employees are willing to give on certain issues in exchange for other issues.

"Given a choice between South Dakota and their winters I think people would be willing to give a great deal."

However, Slom, who is also president of Small Business Hawai'i, added the myriad of business climate issues that commonly surface in surveys need addressing. The danger is in allowing the good economic times to divert focus from the need for change, he said.

Brendan Barry, who with his wife, Jill, own Bead It stores in Kaimuki and Kailua, doesn't complain about problems such as rising workers' compensation premiums.

"When I hear people complaining about the business climate I just feel it's excuses," he said. "The business climate is what it is.

"Do I want to move my business to South Dakota and deal with the harsh winters? No, I love Hawai'i," Barry added. "It's a fabulous place. I can't think of a place I'd rather be with my family."

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.