State Tax Competitiveness
by Tom Yamachika, President, Tax Foundation Hawaii
For several years now, the national Tax Foundation has put out a research report ranking the 50 states and the District of Columbia on “tax competitiveness,” which it previously called a study on states’ business tax climate. It rates not only how heavily a state taxes its citizenry, but also the complexity of the tax system, its neutrality, and several other values. This index also seems to have credibility here in Hawaii, as our very own DBEDT has been tracking the index in the State of Hawaii Data Book.
In this year’s Index, the primary driver of Hawaii’s low ratings are the net income tax and state unemployment insurance (SUI) tax.
Our General Excise Tax (GET) is not the biggest problem because, although the tax pyramids and business-to-business transactions can still attract lots of tax, the nominal rate, at 4.5% including county surcharge, is not very high among states that have a sales tax.
Our net income tax is very complex, with twelve tax brackets including the millionaire’s bracket enacted in this past legislative session. It also comes with a ton of different credits available to lower income taxpayers, many of whom probably don’t understand all of the credits and how to take advantage of them. The chart shows an uptick, to 42nd, in 2025, but the Tax Foundation has warned us in this year’s study that because the rankings are based on the law in effect the previous year (2024), the rankings are based on the 2024 tax cuts. Because those cuts were at least partially reversed in 2025, they said, our 2026 report rankings are likely to drop. (And besides, being 42nd is nothing to brag about.)
The second driver of our low rankings is SUI, where our state typically scrapes the bottom of the rankings and we are 49th this year. This is because we have a reasonably high SUI rate and an enormous (compared with other states) maximum amount of wages that is taxed (called the taxable wage base). Most state SUI systems tax only the first few thousand dollars of salary, as the next chart shows. Only the state of Washington has a taxable wage base above $70,000, and our state is the only one in the $60,000-$70,000 range.
Source: Compiled by Microsoft Copilot from public sources.
If we want to look at tax reform making us more competitive among the states, then, the net income tax and the SUI levy are the places to start.