Hawaii's tax environment is under the spotlight as the state grapples with its ranking in the 2026 State Tax Competitiveness Index. The state's position at 41st overall raises critical questions for entrepreneurs, investors, and professionals operating in the islands. This ranking, as highlighted in a recent article from Hawaii Free Press, underscores the need for a closer look at the elements contributing to Hawaii's tax competitiveness.
One of the primary concerns for businesses in Hawaii is the structure of the General Excise Tax (GET). The GET, with its extremely broad base encompassing nearly all business inputs, creates tax pyramiding, where taxes are levied at multiple stages of production and distribution. This can significantly increase the cost of doing business, potentially affecting profitability and discouraging investment. The Tax Foundation notes that Hawaii's tax code is complex and includes all major tax types, contributing to its lower ranking.
The individual income tax system contributes to the complexity. Having 12 tax brackets and a top marginal rate of 11 percent, along with a low standard deduction, makes it challenging. A comprehensive study from Tax Foundation further points out the implications of these tax policies, highlighting their effects on the overall economic environment. For businesses, such a tax structure can mean higher compliance costs and a less predictable financial landscape.
While the state provides favorable treatment for capital gains, as noted by the Tax Foundation, the overall complexity and broad reach of the GET necessitate careful consideration. Understanding how tax policies compare to other states is critical for maintaining a competitive business environment. As Hawaii's Department of Taxation explores in its comparative studies, the relative level of taxation is just one factor, but it is an important one. Proactive strategies and potential reforms could play a crucial role in improving Hawaii's tax competitiveness, fostering economic growth, and attracting investment in the years ahead.
