Worst State for Business: America's Paradise Lost

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By Scott Cohn

Granted, it may be tough to conjure up much sympathy for America's most spectacular state. But strip away the fabulous beaches, palm trees, hula dancers and surfers, and Hawaii is just one state trying to compete with 49 others, while facing a host of built-in disadvantages.

It is in the middle of the ocean, more than 2,000 miles away from the mainland and the bulk of U.S. resources. The same factors that make Hawaii an expensive place to live -- think close to $4 for a loaf of bread -- also make it an expensive state to govern, and in which to do business.

And here we come, ranking Hawaii as America's Bottom State for Business for the second time in three years (Hawaii has never finished above 48th in our rankings). Talk about rubbing salt water in the wound!

The last time we ranked Hawaii at the bottom, in 2013, Hawaii Business -- "locally owned, locally committed since 1955" -- shot back with an article extolling the virtues of Hawaii's business climate.

While acknowledging the state's high costs and onerous regulations, the publication declared, "Some companies could be based anywhere in America, but are based here because they say Hawaii is a great place to do business."

The article quoted a number of business owners who said just that, insisting there is no place they would rather be. And who can blame them, with a quality of life that ranks at the top in our study year after year, including this year?

But by the numbers on just about everything else, Hawaii doesn't measure up, and not only for reasons beyond its control.

"Roughly 40 percent of the state's bridges are rated deficient or worse."

Take Hawaii's infrastructure -- the second worst in the nation behind Rhode Island's, according to our study. While it is true that we consider railroads as part of our Infrastructure category and Hawaii doesn't have any, we also look at roads and bridges. The state has plenty of those, and they are in poor shape.

Roughly 40 percent of the state's bridges are rated deficient or worse by the U.S. Department of Transportation. And when it comes to roads, we're not just talking about Maui's famously beautiful Hana Highway, with its hair-raising switchbacks and one-lane bridges. The nonprofit, nonpartisan Reason Foundation rated Hawaii's urban interstate highways the worst maintained in the nation, with congestion second only to Florida.

As for the regulatory climate, which even Hawaii Business conceded is "onerous," the Mercatus Center at George Mason University, in its annual report "Freedom in the 50 States" goes even further, calling Hawaii "interventionist, with strict workers' compensation requirements, mandatory short-term disability insurance, and no right-to-work law."

Hawaii's unemployment rate is below the national average, coming in at 4.1 percent in May. But in our all-important Workforce category, where Hawaii comes in 46th, the state not only loses points for its heavy union presence -- nearly 23 percent of workers are represented, according to the Bureau of Labor Statistics -- but also because state worker training programs are showing only modest success putting people to work.

Or look at the cost of doing business. Again, Hawaii comes in at a disadvantage because of its location, which helps explain why utility bills and office rent are the highest in the nation -- the average electric bill in Hawaii is four times the rate in Arkansas, and office rent is twice as high.

Location also helps explain why taxes are on the high side. But it doesn't explain the complexity of Hawaii's tax code, with at least a dozen different personal income tax rates, according to the state revenue department's website. The Tax Foundation's annual ranking of state business tax climates puts Hawaii's at No. 30, dinging the state for its multiple tax brackets, its 11 percent top marginal income tax rate and its failure to index corporate taxes for inflation.

And when it comes to incentives to help companies reduce their cost of doing business, such as tax breaks and outright state aid, Hawaii is among the stingiest.

Of course, the state does have some built-in incentives beyond its quality of life -- incentives that make Hawaii a unique place in which to do business. Here is one where location works to Hawaii's advantage: Its time zone is roughly midway between the Pacific Rim and the East Coast, making it much easier to be in two places at once.

The state prides itself on being a hub of innovation, ranking 12th in the nation for start-ups this year, according to the Kaufmann Foundation. The report estimates that for every 100,000 adults, 350 become entrepreneurs every month. And it's not out of desperation. Nearly 89 percent of new-business owners last year were employed and left an existing job to strike out on their own, one of the highest rates in the nation. It helps that Hawaii residents seem inherently happy, healthy and motivated. Probably has something to do with that great quality of life.

But will Hawaii ever parlay those advantages into a Top State ranking? Realistically, probably not. There is just too much working against the state. Still, that doesn't mean it can't unleash a little more of its legendary hospitality on business.
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