What is remarkable about comparing Hawai‘i with its colleagues on the mainland is that the atmosphere or climate in the state works against entrepreneurship, that is, it is difficult for folks who have a great idea about starting up a
What is remarkable about comparing Hawai‘i with its colleagues on the mainland is that the atmosphere or climate in the state works against entrepreneurship, that is, it is difficult for folks who have a great idea about starting up a business or new enterprise to actually break into the market.
Bright people, both young and old, find numerous barriers placed before them before they can even open their doors for business. The first reaction would be that taxes are so high in Hawai‘i where the general excise tax is imposed regardless of whether or not a business or enterprise is profitable. So while a start-up business may have to take a minimal mark up on its products or services in order to attract customers for the first time, the general excise tax eats into the mark up to the point where those start-up businesses have little left to reinvest in new products or services.
But before an entrepreneur can open the doors of a new business there is a plethora of forms and applications that must be filed and submitted with a variety of state and county agencies. Even more challenging is the renovation or construction of a facility that will incubate the start-up business, be it getting a building permit or a health permit or a permit to reroute an air-conditioning duct, an eager entrepreneur is faced with challenges from a number of agencies where workers plead that they are short-staffed because of budget cutbacks and where there is no sense that time lost is money lost.
The long and short of noting how difficult it is to start up a new business in Hawai‘i is that it is often a costly and time-consuming process that can prove daunting. These challenges may have well-intended outcomes, such as a safe and sanitary environment if you are a restaurant or that as an employer one has provided for all of the assurances of a safe environment or that workers have health and insurance coverage, but the problem is that the government bureaucracy works against entrepreneurs instead of facilitating the process. By creating these challenges and barriers for entrepreneurs, state and county laws actually work against the creation of new job opportunities as it is these new businesses that have the greatest potential for offering new job opportunities.
No doubt taxes also have a lot to do with whether or not entrepreneurs can really break into the market and those taxes come from every direction, in most cases increasing the cost of doing business in Hawai‘i. As noted in earlier commentaries, this past legislative session turned up the heat on taxes on businesses as well as on consumers.
While cynical lawmakers and observers deny that their actions will have such a negative economic impact, one only has to look across the national landscape to see how many well-established businesses are reacting to the higher burden of taxes imposed by state and local lawmakers trying to cope with similar financial challenges in their states and counties.
Take, for example, the state of Illinois where recently in response to their fiscal crisis, lawmakers raised personal income tax rates from 3 percent to 5 percent and corporate rates were jumped from 4.8 percent to 7 percent. Together with a personal property replacement tax rate of 2.5 percent of income, Illinois corporations now pay a state income tax rate of 9.5 percent. As a result, long established Illinois businesses are talking about finding a more tax friendly environment to relocate their business activities.
Caterpillar Company which makes heavy equipment for construction is considering closing its doors in Illinois and moving to a neighboring state, putting more than 23,000 jobs at risk. Its concern is not so much the rise in income tax rates but the state’s expensive workers’ compensation system, a tax in another form.
Another business is Sears Roebuck which traces its origins back more than 100 years in Chicago. Although both the state and county have offered tax breaks to Sears, those breaks came at a cost to all other taxpayers and now that state tax rates have soared, Sears is not willing to stay in Illinois without an extension of those breaks. The long and short of the story is that if taxes and regulations continue to soar, businesses will look for some other place to locate.
That possibility for Hawai‘i looms large and with that move will go the jobs Hawai‘i needs.
• Lowell Kalapa is president of the Tax Foundation of Hawai‘i, a private, nonprofit, non-partisan, educational organization established to research issues confronting governments in the area of public finance, taxation, and public administration. It is supported entirely by private contributions. Visit www.tfhawaii.org for more information.
