Hawaii Is the Worst State for Business in the Country

Traffic in Hawaii.
Philip and Karen Smith | Photodisc | Getty Images
Traffic in Hawaii.

America's 50th state is now 50th in more ways than one. Hawaii finishes dead last in America's Top States for Business 2013, down from 49th in 2012.

How badly did the Aloha State do in this year's study? It is hard to find a category where the state does not finish at or near the bottom.

OK, there is one: Hawaii comes in 1st for Quality of Life.

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To be fair, Hawaii faces some issues beyond its control. Sitting in the middle of the Pacific, Hawaii will never truly be able to compete with its mainland rivals on cost—not when half a gallon of organic whole milk was recently advertised at a supermarket in Maui for $5.99…on sale! On the same day, it was going for $3.99 in suburban New York.

And while other states can point proudly to their rail networks—one of several measures we consider in our Infrastructure category—Hawaii is, well, an island chain ... in the middle of the Pacific.

When we ranked Hawaii 49th in last year's study, some officials turned up their sun-drenched noses at our findings.

The rating should be taken "with a grain of Hawaiian salt," Carl Bonham of the University of Hawaii Economic Research Organization told Civil Beatin Honolulu last year.

Maybe, but there are many areas Hawaii can control, yet still falls short in.

Take taxes.

With a top rate of 11 percent, Hawaii has among the highest individual income taxes in the country. It has the nation's third- highest gas tax at 67.1 cents per gallon. The top corporate income tax rate 6.4 percent is not out of line with most states, but another business tax—relatively unique to Hawaii—draws frequent criticism.

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Most business activities are subject to a General Excise Tax as high as 4 percent. Four cents of every dollar in sales goes directly to the state. The state did suspend some parts of the tax in 2011, but the suspensions expired on June 30.

The tax, instituted long before Hawaii became a state, was a way to capture revenue from agricultural exports. It has survived as the state became more urbanized and the economy turned to tourism. While proponents say the tax is fairer and more broadly based than a sales tax, business groups including Hawaii's Chamber of Commerce say the tax stifles business activity.

All in all, the Tax Foundation says Hawaii's business tax burden is more than twice the national average.

To be sure, Hawaii's government faces the same kinds of cost pressures its citizens do, so choices on taxes are more challenging in Hawaii than in most states. But businesses make choices, too, and they have 50 states—and 50 tax structures—to choose from.

And while railroads may be irrelevant in Hawaii, roads and bridges are not. Neither is safe drinking water. All are among the nation's worst, and are among the factors we consider in computing Hawaii's last place Infrastructure ranking.

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Not everyone in Hawaii is dismissive of the state's perennially poor showing in our rankings.

"The fact that we're at the bottom of everything—we have to address this," Democratic State Sen. Donovan Dela Cruz told Civil Beat following our 2012 study. "We should want to be the best."

Hawaii does offer some unique business advantages, most notably its location as a gateway to China and Japan. The time zone alone is a plus—Honolulu is six hours ahead of Shanghai and six hours behind New York, placing it directly in the middle of two economic capitals.

The state has been moving to diversify its economy, which is heavily dependent on tourism. A generous Enterprise Zone program offers incentives—including relief from that General Excise Tax—for a wide variety of businesses, from call centers to medical research firms.

And of course, there is that legendary Quality of Life. It is not just beaches. We found Hawaii's air and water are clean, the crime rate is low, and Hawaiians are among the healthiest Americans.

Plus, there is always hope for America's Bottom States for Business.

Consider Alaska, which shares many of Hawaii's built-in disadvantages. It finished last every year from 2007 through 2010, then slowly climbed. Costs fell and the economy rose. This year, Alaska posts its best finish yet: 44th.

—By CNBC's Scott Cohn. Follow him on Twitter @ScottCohnCNBC.