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The Honolulu Advertiser
Posted on: Friday, February 10, 2006

Tax burden debate requires sophistication

There's no question Hawai'i residents are heavily taxed.

Most comprehensive studies suggest that when state and county taxes are combined, Islanders face an overall burden among the heaviest in the U.S.

Whether we are overtaxed, however, is a more difficult issue. Is our relatively heavy burden simply that we demand much in the way of services from our government? Or is it that our high cost of living drives up the price tag for government services that are not any different from anywhere else?

Efforts to sort through these questions are not helped by national studies that fail to take local conditions and situations into account.

The latest example is a recent Census report that says Hawai'i has the highest per capita state tax burden in the nation. But this means little unless you understand the factors behind it.

First, the single biggest generator of state tax revenue is the general excise tax, which is paid by visitors as well as residents. By some estimates, tourists pay up to 20 percent or more of the excise tax.

Of course, many other states also have tourists who help carry the tax load, so that may even out somewhat.

A larger distinction is that state taxes in Hawai'i pay for a variety of things that are not covered by the state in other jurisdictions. These include state hospitals, various social programs and most important education.

We have the only statewide, state-managed and state-funded school system in the country. Most jurisdictions pay for schools primarily out of property taxes; we do not. That helps explain why property taxes traditionally have been relatively low in Hawai'i compared with the rest of the U.S.

The Census reports that on average, states spend about 31 percent of their budget on education. In Hawai'i, about half the state's budget goes to education. That alone explains our high ranking.

A debate over our tax burden is worthwhile, and becomes particularly important this year when the state is running a substantial surplus and talk of a rebate is in the air.

But the debate must take place in full context. This Census study is merely one small part of the overall picture.