Posted on: Thursday, June 30, 2005

Uneven grades for Hawai'i

By Sean Hao
Advertiser Staff Writer

The Washington, D.C.-based Tax Foundation ranks Hawai'i dead last among the 50 states in its annual State Business Tax climate index. However, the Cato Institute, also based in Washington, ranks Hawai'i as the 18th-best tax climate in its Fiscal Policy Report Card on America's Governors.

Comparisons of tax burdens between states are problematic in general and in Hawai'i in particular because Hawai'i funds education at the state level, rather than the city or county level, as is common in other states, said Peter Fisher, author of a new book that looks at the validity of place rankings.

Fisher concludes that several key business rankings don't make good yardsticks for gauging economic potential or developing government policies because they tend to support the political bias of those sponsoring the list. Fisher argues the point in his book, "Grading Places," which is to be released today by the Economic Policy Institute, yet another Washington, D.C.-based think tank. The Economic Policy Institute's founders include Robert Reich, U.S. secretary of labor under President Bill Clinton and Ray Marshall, secretary of labor under President Jimmy Carter.

Fisher's findings appear to support contentions by Hawai'i leaders that such lists are biased and give Hawai'i an unfairly bad reputation.

"I think every index that I've looked at reflects an underlying point of view," said Ted Liu, director of the Department of Business, Economic Development and Tourism. However, "as long as we look at them understanding that point of view, they can be helpful.

"So long as the bias is consistently applied year over year, you can tell whether you're progressing or declining."

According to the book, five major indexes on business-climate issues are aimed at promoting an agenda that favors lowering taxes, cutting government spending and reducing regulation.

"The indexes are designed to promote a particular, usually anti-tax political agenda," Fisher said. "None of them actually do a very good job of measuring what it is they claim to measure."

Apart from any bias, the concept that tax burden is the key factor needed in economic development is false, Fisher added. Better barometers for economic potential include education quality, transportation infrastructure and workforce skill, he said.

Overall, Hawai'i continues to be rated among the worst states in which to do business, even in rankings based on more than just tax burden. At the same time the state has one of the most vibrant economies in the country, underpinned by strong job and income growth.

Hawai'i's current economic strength reflects the general upswing in the global economy as rising tourism and defense spending outweigh the effects of business-climate issues such as high taxes, healthcare costs and workers' compensation premiums, according to local economists.

Liu agreed business-climate indexes sometimes push an anti-tax agenda. However, in Hawai'i such reforms are needed because the cost of doing business is unusually high, he said.

"In the context of Hawai'i I do believe tax relief or a reduction in tax burden would be pro-economic development," Liu said. "In other states, maybe not."

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