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Economic Currents

Keep up to date with the latest UHERO news.

Little relief from Hawaii’s high cost of living

Posted January 21, 2020 | Categories: Hawaii's Economy, Blog

Living in paradise comes at a cost. Hawaii is notorious for its combination of high costs of living and low incomes relative to these costs. These factors impose hardships on Hawaii families of modest-to-moderate income and prompt some to consider relocating to less-expensive mainland locales.

So how expensive is it to live in Hawaii compared with other states? The BEA produces regional price parities (RPP) that allow us to compare consumer buying power across the country. The most recent RPPs show that the price of consumer goods and services in Hawaii—including housing rents and imputed rents of homeowners—is more than 18% higher than the national average. Other high-price states include California and New York, with average prices 15-16% higher than the national average. As in most other high-priced areas, expensive housing is the main driver: Hawaii rents are more than 50% higher than the national average, and higher still in Honolulu. In contrast, the average price for goods in Hawaii is 11% above the national average.

The higher price of goods and services can be explained in part by the distance of Hawaii from mainland markets. Shipping costs are one component. But the physical distance from the mainland also raises the pricing power of local firms due to more limited competition. The high rents reflect the appeal of living in Hawaii, the restrictions and regulations facing developers, and, as we mentioned in our recent Construction Forecast report, building costs that are among the highest in the world. A significant portion of these costs are passed on to consumers.

Even though Hawaii prices are much higher than those across the country, our per capita personal income is only on par with the national average. In 2017, the prices of goods and services were 18.5% higher in Hawaii compared with the US overall, but per capita personal income in Hawaii was only 2.5% higher. As a result, after adjusting for Hawaii’s high prices, the purchasing power of income per person was the fourth lowest in the nation!

Why are RPP-adjusted incomes in Hawaii so low? Partly this reflects the mix of industries here, with a large number of jobs in lower-paying areas linked to tourism. It likely also reflects the same regional preferences that drive up costs: many Hawaii residents want to live here because of geographical and cultural amenities—including family ties—and are willing to accept a lower wage in order to do so.

In coming years, the gap between Hawaii’s high prices and prices nationally is likely to narrow to some degree. With a shrinking population and stagnant job growth, appreciation of rents and other costs will be muted, while they continue to mount across the country, particularly in coastal mainland cities. Having said that, the factors that drive our high costs and modest income are fundamental. We are unlikely to get much relief from the price of paradise.

Per capita personal income for Hawaii and the US
before and after adjusting for the cost of living (2008 - 2017)

- Rachel Inafuku and Peter Fuleky


Tariff Peril

Posted May 8, 2019 | Categories: Hawaii's Economy, Blog

In a Sunday Tweet, President Trump threatened this week to increase dramatically the tariffs he has placed on imports from China. The aggressive trade policies of the administration and retaliation by foreign countries are already having an adverse impact on the US, China, and other trade partners. Further escalation could potentially lead to a broad global slowdown. How large are these effects likely to be?

So far, there have been several rounds of US actions. To date these include tariffs on imported washing machines and solar panels and levies on imports of steel and aluminum. The administration has imposed 10% bilateral tariffs on $50 billion of imports from China, later expanded to another $200 billion of Chinese goods. Levies on imported autos and parts are also under consideration. In this week’s announcement, the President threatened to go ahead on Friday with a previously announced hike to 25% tariffs on Chinese goods, citing the unwillingness of China to move forward with structural changes demanded by the US in ongoing negotiations.

In each of these cases so far, other countries have retaliated in kind, often choosing targets for maximum political effect, including Harley Davidson motorcycles and Kentucky bourbon. In some cases, the possibility of levies has forced partners into trade agreements or at least negotiation. Threatened tariffs on auto imports from the European Union have been held off for now pending trade negotiations. Under threat of further trade restrictions, Canada and Mexico have agreed to a new deal to replace NAFTA. And President Trump has suggested that an expansion of tariffs to the remaining $267 billion in US purchases from China might be avoided if a trade agreement can be struck soon.

There is an overwhelming consensus among economists that these restrictive trade measures are harmful to many countries—including the US. Immediate costs include higher prices on imported consumer goods, higher production costs from imported inputs, and decreased access to foreign markets. While there will be some US jobs created as some production is re-shored, the number will be small, and other jobs will be lost as US companies are forced to abandon highly efficient global production arrangements or move offshore. Potential losses could hit business expectations and investment, and financial markets could also be affected, as recent volatility illustrates. In the long run, the US will lose out on opportunities by locking itself out of new trade liberalization agreements.

How large are these costs likely to be? The direct effect of the measures taken so far is fairly small. For example, the New York Times estimates that the appliance and solar panel tariffs and the 10% levy on $250 billion of Chinese imports will cost the average American family $127, about two-tenths of one percent of income. The International Monetary Fund estimates that the threatened hike in tariffs on China to 25%, on top of measures already implemented by the US and Chinese, will still take just two-tenths of a percent off US GDP and half a percent off Chinese output.

But estimates of adverse effects grow much larger if all threatened additional actions are carried out and equivalent foreign retaliation occurs. Throw in knock-on effects on confidence and investment and adverse stock market reaction, and the IMF estimates 2019 losses of nearly 1% of GDP for the US and 1.6% for China. The global economy overall would take a hit of nearly 1% of GDP. The United Nations separately estimates that spiraling trade barriers could cut world growth by more than 1%.

It is unclear how likely it is that all of these actions and reactions will occur, particularly the potential falloff in capital investment and equity markets. But the bottom line is that Trump’s trade policies are already hurting the US. And a full-blown trade war would certainly have enough juice to edge us toward the next global downturn.

Effects of trade policy relative to baseline GDP levels

- Byron Gangnes, Peter Fuleky, and Carl Bonham


Benchmarking for a clearer employment picture

Posted February 6, 2019 | Categories: Hawaii's Economy, Blog

The most widely cited measure of labor market activity in Hawaii comes from the Current Employment Statistics (CES) program, jointly managed by the US Bureau of Labor Statistics (BLS) and Hawaii Department of Labor and Industrial Relations (DLIR). This program surveys a sample of local firms every month to produce an estimate of job counts in a wide range of industries. The CES job counts are available with a relatively short lag of roughly five weeks, providing quick feedback about new labor market developments. However, the program surveys only a relatively small number of firms.

The Quarterly Census of Employment and Wages (QCEW) program produces an alternative set of employment indicators. Instead of surveying firms, the QCEW program relies on unemployment insurance records, and it is able to produce a much more accurate count of payrolls in each industry. But this process is much more time consuming, and the data is released once per quarter with a five to six month lag.

To reconcile these two sets of indicators, at the beginning of each year the BLS produces a comprehensive benchmark revision of the CES job counts. The benchmark process adjusts the CES figures to match the available job counts from the QCEW program. In some cases this can result in substantial revisions, potentially changing our assessment of economic conditions. For example, preliminary CES figures indicated that payrolls in the local construction industry had edged down slowly over the course of 2017, but the benchmark revision made it clear that job losses had been much more substantial. The benchmarked industry job count for the fourth quarter of 2017 was 1,400 jobs lower than preliminary figures suggested.

To anticipate changes that will likely be made in the official benchmark revision, UHERO has developed a continuous in-house benchmarking process. Each quarter as new QCEW data is released, we use the historical relationship between the CES and QCEW job counts to obtain an early estimate of the benchmarked CES job counts. These internally benchmarked job counts allow us to produce a more accurate assessment of recent developments in the local labor market and improve our near-term economic outlook.

We are predicting fairly substantial changes in the upcoming benchmark revision. We expect that most industries will see a slight positive revision for 2017 and a negative revision for 2018. As a result, benchmarked job growth for this year will be much slower than currently reported in official statistics. Our internal benchmark suggests that through the fourth quarter of 2018, year-to-date nonfarm job growth has averaged only 0.7% compared with 1.7% according to the official preliminary figures. We expect downward revisions in the healthcare industry and in accommodation and food services, where job gains remained lackluster throughout 2018.

Benchmarked job growth for this year will be much slower than currently reported in official statistics

- Peter Fuleky, James Jones, Ashley Hirashima, and Rachel Inafuku


Raising Property Taxes to Improve Public Schools

Posted February 3, 2017 | Categories: Hawaii's Economy, Blog

Hawaii’s public school teachers’ union (HSTA) is back at the State Legislature this session to ask lawmakers to help find more money to pay teachers and other education expenses. HSTA was at the Legislature last year to lobby for a 1% increase in the State’s 4% general excise and use tax (GET) to fund K-12 public education. That effort failed. HSTA is back again with a new plan. The plan calls for an amendment to the State’s Constitution that would allow the State to impose an “education surcharge” on the counties’ real property taxes on residential “investment property”. Hawaii’s Constitution currently only allows the counties to levy a property tax. The proposed amendment includes a daily room tax on tourist accommodations which State lawmakers can enact without a constitutional amendment.

The proposed amendment (SB 683) reads as follows: “Shall the Legislature fund a quality public education for all of Hawaii’s children, including the recruitment and retention of teachers; lower class sizes; special education program; and career and technical education, art, music, Hawaiian studies, and Hawaiian language instruction by establishing a surcharge on residential investment property and visitor accommodations?” HSTA estimates that the two taxes would generate $500 million in revenues each year. (By comparison, data from the State’s Comprehensive Annual Financial Report for fiscal year 2016 show State tax revenues collected from all sources totaled $6.454 billion and expenditures on lower education was $2.522 billion.) That money would be set aside in a special fund for education. The real intent is to generate more money to pay teachers in order to address a teacher shortage crisis, which HSTA President Corey Rosenlee said is “…going to make it very difficult to attack a lot of those other problems that are affecting education.” The proposed amendment requires the approval of voters; thus, lawmakers can escape blame for raising taxes. Pretty clever. But lawmakers will still be on the hook for passing bills to implement the proposed amendment. Senate bill SB 686 specifies what will be taxed and at what rates. It is a highly discriminatory bill.

Unfortunately, the current proposal put forth by HSTA to tax investment properties and visitor accommodations is seriously flawed. Consider the property tax surcharge proposal. What are residential “investment properties”? HSTA defines residential investment property as any residence that doesn’t have a homeowner exemption. To qualify for a homeowner exemption, the residence must be its owner’s principal residence. U.S. Census data (American Community Survey) show that in 2015, 56.9% of the 450,572 occupied housing units in Hawaii were owner-occupied, and 43.1% (181,028 units) were occupied by renters. The average household size in occupied rental units was 2.83. Thus, there are a lot of renters living in HSTA’s “investment properties.” A property tax surcharge on investment property is also a tax on renters in Hawaii.

Authors of SB 686 recognized the potential negative impact of their plan on renters. SB 686 states: “This part shall not apply to property rented for an amount no greater than $1,500 per month, not including any applicable maintenance fees, utility fees, and services charges.”

U.S. Census data show that in 2015, the median monthly gross rent in Hawaii was $1,438. Forty-seven percent of the occupied rental units, or 84,562, had a gross monthly rent of $1,500 or more; those units housed about 240,000 people. However, property values and rents vary among the counties, with Honolulu at the top. Home ownership is also lower on Oahu compared to the Neighbor Islands. Thus, the education surcharge will have a disproportionate impact on Oahu renters.

There’s more. The tax on rental properties priced above $1,500 per month will drive up their monthly rents; but it may also drive up the rents of exempt units as some renters switch out of the higher priced units into the lower priced units.

SB 686 requires the counties to administer and collect the education property surcharge. It won’t be easy for the counties to sort out which properties qualify for this exemption. Counties don’t have information on which properties without homeowner exemptions are rented and for how much. And rents also can change periodically requiring constant adjustment to the $1,500 exemption threshold.

The education surcharge tax rates, set on a sliding scale, are not modest. For example, for FY 2016 to FY2017, the Honolulu County property tax rate for “residential” properties is $3.50 per $1,000 net taxable property for all properties except Residential A properties (valued at $1 million and above) which are taxed at a higher rate of $6 per $1,000 net taxable property. In SB 686, the lowest property tax rate is $3.50 per $1,000 for properties valued at below $500,000. Thus, an owner of an investment property in Honolulu worth less than half a million dollars can expect to see his (her) combined City and State property tax bill double. For an investment property valued between $500,000 and under $750,000, the combined property tax bill will be 2.29 times the previous County-only tax bill. SB 686 is also silent on whether the valuation thresholds will be properly indexed to allow for changes in housing prices. In the absence of indexing, more and more investment property owners will be pushed into higher tax rates as housing prices rise.

Taxes are sometimes levied to discourage certain kinds of behavior—e.g. smoking and drinking. We call them “sin taxes.” But the most important reason to levy taxes is to raise revenue to pay for public services that we desire. The tax is the price of the services consumed. Households whether they own or rent and send their children to our public schools consume a public service that is not produced at zero cost. HSTA’s education tax surcharge proposal gives homeowners with exemptions a discount on the consumption of public education services. What is the rationale for that? Is it because owner-occupants can less afford the additional tax than renters? A good tax system should be equitable as well as pay for public services that we collectively value the most. The HTSA proposal is patently unfair.

The education surcharge on visitor accommodations is arguably even more bizarre than the property tax surcharge. SB 686 states: “The education surcharge on visitor accommodations shall be imposed statewide on all visitor accommodations, regardless of occupancy.” In other words, it is also levied on vacant units. Rates are set at $3 per day for units that rent for less than $150 per day, and $5 per day for units that rent for $150 per day or more. Thus, the visitor accommodation tax is not an occupancy tax like the State’s transient accommodation tax (TAT); it is essentially a property tax.

Hawaii’s TAT is a tax on consumption even though it is levied on sellers (hoteliers); the TAT is passed on to consumers/tourists. A property tax is a tax on capital (including land). In my own research on the distribution of the burden of the hotel property tax, I came to the conclusion, that an increase in hotel property taxes in Hawaii cannot be fully passed on to hotel guests. With the TAT, hotel guest bills include a separate line item stating the amount of TAT payable by the guest. If hoteliers wish to visibly pass on the visitor accommodation tax to guests in the same way, what is the appropriate amount to list on the guest bill since the tax levied per occupied room varies from hotel to hotel depending on the hotel occupancy rate?

Finally, HSTA’s plan puts the cart before the horse. Ideally, one should first have a detailed implementation plan for what is needed to create a “quality” state-wide public education system then figure out how best to fund it. HSTA’s current proposal seems to say, “Give us more money and we’ll figure out how best to spend it.” Apparently, HSTA is hoping that voters will be more willing to raise taxes that appear to target tourists and wealthy property investors. Hawaii’s public schools may need more money, but HSTA’s plan is not the way to raise it.

- James Mak and Carl Bonham

Addendum (2/5/2017):
HSTA does have a report (Schools Our Keiki Deserve) that articulates many reasons why public schools need more money.

How Many Tourists is Too Many?

Honolulu Star Advertiser columnist, Lee Cataluna, recently asked: “How many tourists is too many tourists?”1 Apparently, she already knew the answer. To her, the 8.5 million plus tourists coming to Hawaii each year is way too many. She laments that nobody seems to be talking about limiting the number “…like maybe we’ve all become accustomed to being crowded. Like maybe we lost the fight.” Tourists used to stay in designated tourism zones like Waikiki, but now they are everywhere. Indeed, Hawaii Tourism Authority’s (HTA) 2015 study of vacation rental units “show that there were vacation rentals available in almost every zip code across the state.”2 We are receiving record number of tourists, but 2016 visitor spending per Hawaii resident is expected to fall 31% below its 1988 peak, after adjusting for inflation. Cataluna concluded: “It would be one thing if the explosion in tourism meant better living for everyone, nicer schools, cleaner parks, spiffy roads, but we’re getting all the tourism problems without the tourism benefits.”

Recent surveys show a growing percentage of Hawaii’s residents agree with Cataluna. Still, most people in Hawaii “strongly/somewhat agree that tourism has brought more benefits than problems.”3 HTA’s 2015 Resident Sentiment Study noted that 66% of Hawaii’s residents surveyed felt that way. But the percentage of residents who agree with the quote has been slipping in recent years. The percentage used to be in the 70s, going as far back as 1975. However, the percentage of respondents who perceive “Tourism has been ‘mostly positive’ for you and your family,” has slipped quite a bit from 60% in 1988 to 40% in 2015. The less positive responses at the individual/ family level might be explained by the fact that we are much less dependent on tourism than we were 25 to 30 years ago as tourism’s imprint on Hawaii’s economy—measured by its share of the state’s gross domestic product (GDP)--has declined. Tourism’s (direct) share of Hawaii’s gross domestic product peaked in 1988 at 24.7%4; by 2010 it had fallen to 12.3% (16.4% in 2010 if tourism’s indirect effects are included, and 16.7% in 2015).5

The surveys show a more disturbing trend; the majority (58%) of the respondents to HTA’s survey in 2015 agreed with the statement: “This island is being run for tourists at the expense of local people.” The first year this happened was in 2005. Yet, no follow-up studies have been done to find the reasons for the response and hence how to reverse the perception. If residents in growing numbers feel their wellbeing is not the state’s priority in developing tourism, how might that affect the “Aloha Spirit” which is so important to the industry? HTA conducts a resident sentiment study almost every year; I wonder how many people pay any attention to them.

Cataluna is not the first to inquire about Hawaii’s tourism carrying capacity. In the late 1960s and the entire decade of the 1970s, many in Hawaii felt that tourism was growing way too fast.6 The average annual rate of increase in visitor arrivals in Hawaii was 20% in the 1960s and nearly 9% in the 1970s. In response, the Legislature passed Act 133 (The Interim Tourism Policy Act) in 1976 which required the State to craft a 10-year strategic plan to chart the course of tourism development for the next ten years. It became part of Hawaii’s first (overall) State Plan in 1980. In 1980 Hawaii had 3.9 million visitor arrivals compared to less than 300,000 in 1960, and the number kept rising. As the count of visitors approached 7 million in 2000 the 2001 Legislature directed the Department of Business, Economic Development and Tourism (DBEDT) to conduct a tourism sustainability study “to begin looking to how Hawaii can better monitor and manage future growth in tourism.” The $1.2 million study was completed in 2006.7 By then the number of visitors had increased to 7.5 million. Except during the Great Recession (2007-2009), even more visitors would come. Hawaii Tourism Authority (HTA) announces the ever-increasing numbers of tourists with pride since HTA is charged with promoting tourist travel to Hawaii. With the Great Recession, attention has focused more on how to bring more tourists in, and not how to keep them out.

Even if we wanted to, Hawaii has few weapons available to control the inflow of visitors. We can raise taxes on tourism to make it more expensive to visit Hawaii; spend less on tourism promotion; tighten and enforce land use and zoning laws; or make Hawaii a less attractive place for tourists (and, unfortunately, for us as well!) Unlike in some countries, Hawaii cannot (on our own) limit the number of people who can travel to Hawaii. An entry tax, imposed in many countries, would not be legal here.

Indirectly, Cataluna recognizes that there is no magic number of tourists that’s best for Hawaii. Eight million visitors might be o.k. “if the explosion in tourism meant better living for everyone, nicer schools, cleaner parks, spiffy roads.” We might welcome more tourists if we can increase tourism’s benefits and reduce its problems. In my 2004 book, I discuss some of the tools that can be used to achieve this.8 However, the burden is on us collectively to get it done. Hawaii doesn’t have nice public schools, clean parks and public bathrooms, and spiffy roads not because tourism has failed us, but because we have, for too long, come to accept that nothing works here. Ainokea! A term (meaning “I don’t care”) that columnist David Shapiro once described as “our official state attitude—not only in popular culture but also in officialdom.”9 What state and local governments everywhere are supposed to do well (i.e. the core functions of government), they are not done well here. Limiting the number of tourists won’t change that.

Money, or lack of it, is frequently given as the main reason why things don’t get done in Hawaii or why it takes so long to get things done. The U.S. Census Bureau reports that in 2014 Hawaii’s state and local governments received $14.5 billion in general revenues, or $10,239 per resident.10 (That amounts to nearly $9,300 available to spend on every man, woman, child and tourist present in Hawaii on a given day.) Hawaii ranked 10th among the 50 states and the District of Columbia.11 As a group, Hawaii’s state and local governments are not poor when compared to other states. According to the Tax Foundation, Hawaii has one of the highest state-local tax burden as a percent of state income among the 50 states and the District of Columbia. Why aren’t we getting more for our tax dollars? Some residents who find the “price of paradise” too high choose to leave. Even as more tourists are pouring into Hawaii, there is a net (and growing) exodus of Hawaii residents to the mainland even though the local economy is humming along and structural unemployment is non-existent.12

Lee Cataluna reminds us that in developing tourism the wellbeing of residents must come first. What should be done about tourism’s problems? Rather than trying futilely to limit the number of tourists, a better strategy is to attack the problems directly. That requires leadership and effort.

- James Mak 

1Honolulu Star Advertiser, "Foundering canoe is full already, yet more get in,” January 11, 2017.

2Hawaii Tourism Authority, 2015 Visitor Plant Inventory.

3Hawaii Tourism Authority, 2015 HTA Resident Sentiment Study.

4Andrew Kato and James Mak, “Technical Progress in Transport and the Tourism Area Life Cycle,” in Clement A. Tisdell (ed.), Handbook of Tourism Economics: Analysis, New Applications and Case Studies, 2013.

5Eugene Tian, James Mak and PingSun Leung, “The Direct and Indirect Contributions of Tourism to Regional GDP: Hawaii” in Clement A. Tisdell (ed.), Handbook of Tourism Economics: Analysis, New Applications and Case Studies, 2013; also 2015 State of Hawaii Data Book.

6James Mak, Developing a Dream Destination: Tourism and Tourism Policy Planning in Hawaii, 2008.

7DBEDT, Planning for Sustainable Tourism, Project Summary Report, 2006.

8James Mak, Tourism and the Economy: Understanding the Economics of Tourism, 2004, Chapter 11.

9Honoluluadvertiser.com, “Why you should care about ‘ainokea,’” January 4, 2010.

10U.S. Census Bureau, State and Local Government Finances by Level of Government and by State: 2013-14.

11DBEDT, 2015 State of Hawaii Data Book, Table. 9.11.

12Honolulu Star Advertiser, “Census: Growing exodus of residents to mainland,” December 22, 2016.

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