The Paradise Tax: What Is It and What Are Its Implications?
Price of Paradise · Hawaii Public Radio · aired 1993-11-06
Guests: Paul Brewbaker (economist, Bank of Hawaii); Joanne Punu (Assistant Dean, University of Hawaii School of Law); James Mak (Professor of Economics, University of Hawaii)
Duration: 0:30:26

[0:00:00] Randall Roth: Today's topic is the Paradise tax, and with me to discuss it are Joanne Punoo from the Richardson School of Law, Jim Mack from the UH Economics Department, and Paul Brewbaker, an economist with Bank of Hawaii. Joanne, you co-authored a chapter on the so-called Paradise tax. Can you briefly tell us what the term means?

[0:00:19] Joanne Punu: I certainly hope so. But I should preface my comments by saying the chapter was written by four individuals who are not economists. The idea of the chapter was to give a concept, not to be completely precise. As we're talking about it, the Paradise tax has two components. One is the cost of living differential between Hawaii and the average on the mainland. And that figure that we were looking at was provided to us by Paul Brewbaker, who's here with us today. And it's approximately 39-40% in 1992. However, there's another factor that we wanted to take a look at and talk about, too, for for the individual, comparing the the the possible income differences that might exist by level of education attained.

[0:01:04] Joanne Punu: So for example, one of the things that we were taking a look at is the fact that for the the better educated in Hawaii, it's it may be an additional sacrifice to to remain here on top of this cost of living figure that we were looking at.

[0:01:21] Randall Roth: I see. Paul, since you're the fellow who told us it costs about 40% more here in Hawaii, can you tell us, is that fairly standard across the board? Does everyone pay 40% more here in Hawaii than someplace else, or does it vary from individual to individual?

[0:01:35] Paul Brewbaker: Well, the figure is going to vary from individual to individual depending on the kind of housing they have, depending on the lifestyle that they lead. The figure that we calculated is based on an arbitrary living standard that was designed many years ago to be reasonably, a reasonably accurate reflection of an intermediate living standard for a four-person family. Through time, the definitions of that standard have changed and and because of the way the measure is is structured, it may bias the result upward somewhat, as you move away from that point in time when you define the family. So it's going to vary a little bit from person to person and place to place or family to family. Also, it's probably biased a little bit upward, and has been through time. So, 40% might be a little high.

[0:02:27] Randall Roth: Jim Mack, what do you think? Is 40% a little bit high?

[0:02:31] James Mak: I think 40% is a little high, but I don't have any other magic number to offer you.

[0:02:37] Randall Roth: What about what about that 22% cola cost-of-living adjustment that the federal government pays its workers here in Hawaii?

[0:02:45] James Mak: That number was estimated many, many years ago by the federal government to compare the cost of living for a federal employee in Hawaii versus what that same employee would be paying if he were living in Washington, D.C. and living in private rental housing. And at that time, that was back in the early '60s, I guess, the estimated difference between Washington, D.C. and Hawaii was 22.5%. I would suspect that ratio is probably less than 22.5% today. Because housing costs on the East Coast are also very high, just like Hawaii's.

[0:03:24] Randall Roth: Paul, is it your sense that maybe it's less than 22% if we're comparing it to Washington, D.C.?

[0:03:30] Paul Brewbaker: Yeah, I think the Washington, D.C. comparison, in fact, in general, if I could just jump ahead, I think if you compare Honolulu to a half-dozen other metropolitan areas—LA area, San Francisco, New York, Boston, maybe in addition to Washington, D.C.—you would find that whatever cost-of-living measured you structured, it would be a smaller differential between Honolulu and those cities than it is between Honolulu and the US urban average.

[0:03:54] James Mak: In fact, my sister, who lives in New York City, comes visit us every year at Christmas time, and she notes how cheap it is to buy things here in Hawaii.

[0:04:04] Randall Roth: Now Joanne, you're our official non-economist. Is it your impression that 40% is high, that really the added cost of living in Hawaii is significantly less than that?

[0:04:16] Joanne Punu: I think there, it does seem a little bit high to me. You know, as a layperson, a person out there who who regards these things in terms of daily living and not in in a textbook sense, it does seem a little bit high. But there's there's no doubt, no one is disputing the fact that there are reasons why things cost more in Hawaii. Whether we decide it's 28% or 42%, it is completely explainable. That land use policies and and have made land issues more expensive. That we do have labor issues that factor into the equation. We've got logistics issues, such as transportation, inventory and spoilage. So, there's no question that it's it's substantially higher.

[0:05:06] Paul Brewbaker: I should add, Randy, that back at the beginning of the economic boom that began around the mid-1980s, the differential as measured by this index was only 22 or 23%. So, part of the reason the number is so high now is that housing costs rose so much more rapidly here in Hawaii than they did nationwide, and because the tax burden, as a result of some changes in the federal code, the tax reform in '86 in particular, taxes in Hawaii rose relative to income taxes in other states.

[0:05:37] Randall Roth: So, we can quibble about what the differential is, but everybody agrees that it costs more to live in Hawaii than on the average on the mainland.

[0:05:45] Paul Brewbaker: And that it got worse during the last 6 or 7 years of the economic boom prior to the recession.

[0:05:50] Randall Roth: I see. Well, Paul, you're the the source for this cost of living differential that we started with. Joanne mentioned that there's also an income differential, and in the 'Price of Paradise' volume two, we have some data on that. Did you find that surprising at all?

[0:06:04] Paul Brewbaker: Not so much surprising as intriguing. I I can't quite figure it out, and I've been trying to figure it out ever since I saw it.

[0:06:13] Randall Roth: Can you tell us in your words just what the data seems to be saying?

[0:06:17] Paul Brewbaker: Well, it suggests that for persons with higher educational attainment, that their incomes tend to be lower than their mainland counterparts and that that differential increases the greater your education. So for persons with, say, a high school diploma and no further education, the differential is not as great as it is for somebody with say professional or advanced university training.

[0:06:45] Randall Roth: So while people with a better education earn more money, when you compare what they make to what their counterparts make on the mainland, it's as if our economy is providing some sort of benefit to people with less of an education, but some sort of burden if you will, in the form of a lower income to people with a higher education?

[0:07:03] Paul Brewbaker: That's one way to interpret it, but another way to interpret it is that people with higher educational attainment may be more willing to give up the income to live in Hawaii than those without. I don't know which one is a better. There's probably another interpretation that I can't think of.

[0:07:20] Randall Roth: Evidently, living in Paradise is worth it for all of us because we're paying the price.

[0:07:24] Paul Brewbaker: And for everybody else that's here despite these differentials. Again, however you measure them, we observe that people have voted with their feet, they're here.

[0:07:32] Randall Roth: You're listening to the 'Price of Paradise' radio show. I'm Randy Roth, and my guests are Joanne Punoo from the Richardson School of Law, Jim Mack from the UH Economics Department, and Paul Brewbaker, an economist with Bank of Hawaii. Jim, just a moment ago, we were talking about this income differential that seems to vary according to a person's level of formal education. Do you have any explanation as to why that might be the way it is?

[0:07:56] James Mak: I think to a large extent, it reflects the differences in the structure of our economy versus the structure of the economy on the mainland. It reflects the kind of demands we have for labor in Hawaii, vis-a-vis the demand for labor in other places on the mainland. The fact that we are an agricultural-oriented society, the fact that we have an economy that's heavily tourism service-oriented, suggests that our demands for skilled labor is not as great as it is elsewhere. And hence, the wages for the demand for skilled labor to the extent there's not as great here as it is elsewhere, is reflected in the lower wage differential, the lower wages here in Hawaii for skilled labor.

[0:08:38] Randall Roth: So, tourism provides relatively low paying jobs?

[0:08:44] James Mak: The answer is, uh, yes overall.

[0:08:48] Randall Roth: Is that bad?

[0:08:51] James Mak: Well, other things being equal, you'd rather have higher paying jobs than lower paying jobs. And the answer is, uh, if you ask most people, the answer is yes.

[0:09:00] Randall Roth: Is is there reason to be concerned though, that based on a person's education, there's either an economic incentive to stay here or an economic incentive to leave here? Are we worried about a brain drain of sorts, because of the way our economy is structured?

[0:09:16] James Mak: I don't know if we're worried about it. Some people are worried about it. I I would like to feel that for young people, each person should attain the level of achievement that that person like to aspire to. And we still have to provide the educational opportunities and give the kids the option of either living here or moving elsewhere. And um in some sense, my feeling is that it's good for us, our young children, our young children have the ability to move to the mainland.

[0:09:54] Randall Roth: Paul, what do you think about the possibility that this is the cause of what some people call a brain drain?

[0:10:02] Paul Brewbaker: Well, I think the concern is really that as we raise our children here in the islands and hope that they will have the opportunity that we had to stay here, that we're concerned that we don't see that kind of opportunity in the future in terms of the direction the state's economy's structure has traveled in previous decades and where it seems likely to be headed in the future. So, it's more a, it's a problem that's very difficult to establish for instance, in the in the data. But I think the real concern is, is about where the future lies for those kids who are growing up now.

[0:10:44] Randall Roth: Joanne, I know your son left for college this year.

[0:10:47] Joanne Punu: Yes, he did.

[0:10:48] Randall Roth: What do you think the chances are of of his returning?

[0:10:52] Joanne Punu: Well, if if you ask him, he will definitely be returning. However, as I look at the the the area in which he's planning to study, I'm very concerned about it. And he's at the moment talking about chemical engineering, and I'm very concerned that he may not be able to to utilize that effectively for the benefit of this state. He would very much like to come back and do that, as would most of his peers. There is lurking in all of their the backs of all of their minds something of a fear that they may not be able to, as Jim said, have the choice, pursue the higher education, pursue it in fields that intrigue them, pursue it in fields that they think can be a benefit, and turn back home to find out that they will either have to be educationally underemployed or revise their educational strategy in order to or their their earning potential strategy for for living in Hawaii.

[0:11:47] Joanne Punu: I think it's a very big problem. I think we can all be complacent and sit here and say, 'Well, obviously, we agreed to stay and so it can't be that bad,' and I'm not concerned about us. We're not new starters. We're not the youth of of the State of Hawaii. And if this cost of living differential keeps increasing as it has been, from 1970 when it was approximately 20% to possibly 40% as high as 40% today, where does it go? And this is my concern. I'm looking beyond. I'm not looking at what sacrifices I'm making today. It's a difficult choice for me day by day to to continue to stay.

[0:12:26] Paul Brewbaker: If I can go back to something Jim pointed out, I think it is one of the great features of contemporary society that we do have the mobility that all of us have today, to migrate to where the opportunities exist for us. That's a plus, so we shouldn't necessarily interpret the fact that children do move away from Hawaii in their adult lives as necessarily a bad thing. But as Joanne says, what's bad is if they want to live in Hawaii and don't have those opportunities, that choice no longer becomes available to them. Then they're condemned to live somewhere else, even if they would rather have been here.

[0:13:08] Joanne Punu: But beyond even the the issue of my child or your child, there's an issue of the impact on social quality in the state that concerns me. And if I can just play out something for you, we can't exactly measure. I don't think even the economists have told us whether we really have a very serious problem with trained, middle-income brain drain in the state, but we suspect that that is happening. And my concerns are, I think Leroy Laney pointed this out in 'Price of Paradise', the first volume, his cost-of-living issue, that if in fact that's true and it becomes serious enough, what we will have are the poor and the rich, as he said, talking across the fence at each other.

[0:13:55] Joanne Punu: Hopefully they are talking. I have a concern from a social issue that if the value systems, the needs, the wants, and the desires of the poor and the rich are very, very different, without the middle group, the educated middle class helping to frame public policy, helping to frame social policy in the state, I don't know how you reach a consensus. I'm also concerned about social divisiveness that could result from that. So in a larger, broader sense, I'm worried not just about mine, my child and and Randy's child and yours and Jim's, but all of them put together and the large impact that could have.

[0:14:29] Randall Roth: So what do we do about it? If if we can agree that this Paradise tax is a bad thing, from a societal standpoint, if not from an individual standpoint, what do we do about it?

[0:14:39] Paul Brewbaker: Well, to the extent that we have contributed to the cost-of-living differential by channeling our economic development in a direction that gives rise to this problem of few opportunities for highly educated or or higher skilled individuals. Or to the extent that we've contributed to the problem of things costing more—housing for instance—as a result of the kinds of policies we've adopted that have an impact on housing, then yes, we should seek to remediate those problems, to remove as much as possible those extraordinary sources of the cost of living differential because there are many factors at work over which we have no control.

[0:15:28] James Mak: Jim, is is there any reason why we wouldn't as a society, do everything that we can to make it easier for people to afford an attractive lifestyle in Hawaii? I can't see of any compelling social reason that we would not attempt to make life in Hawaii as good as possible for our people. I can't think of any compelling social reason.

[0:15:54] Randall Roth: What about population? If it became affordable to live over here, if people didn't have to make such a great sacrifice, is it conceivable that that traffic and everything else that we complain about now would become so bad that we would stop calling this Paradise?

[0:16:09] James Mak: Well, we still have to make the effort to mitigate those problems. The fact of the matter is that I think it's a bogus argument to to argue that we shouldn't try to make our life better just because if we made it better, it's going to be a self-defeating effort because all these people from California will move to Hawaii and lower again the quality of life. I think every effort we make to make the quality of life better for our people is something that each one of us would benefit from.

[0:16:45] Joanne Punu: Of course. But what we will have is a massive debate as to what constitutes the quality of life and and fair enough and and we need to discuss that. I guess my my viewpoint is, yeah, I think we definitely can do something about it, and and I I realize some economists would say, 'Let pricing do its job.' You know, let the market forces play out, so be it. If this place is high-priced and very expensive, that will help to control migration, let the market play that out and everything will be taken care of. We do have an environmentally sensitive infrastructure. We are clearly a restrained system by being an island. But at the same time, I agree with Paul, there are certain things that we should be doing to make this this place a little more affordable for the people who live here without making it, you know, a cheap product that everybody buys two for a dollar.

[0:17:39] Joanne Punu: I would say though that one thing we need to do with related back to this drain of of of our education educational resources, and I mean human beings by that, is to think about maybe slaughtering the sacred cow. I'm not sure what's so good about tourism. It's just that it's what we've got and we get stuck on it, and we keep throwing all of our resources at making it better. But I think we have a leadership crisis in terms of thinking about this state. What could we be doing here as an economic base? We moved from military to agriculture to tourism, what's the next thing? We need to be thinking about that.

[0:18:19] Randall Roth: You're listening to the 'Price of Paradise' radio show. I'm Randy Roth and my guests are Joanne Punoo from the Richardson School of Law, Jim Mack from the UH Economics Department and Paul Brewbaker, an economist with Bank of Hawaii. Well, Paul, what what's the economist have to say about Joanne's question?

[0:18:35] Paul Brewbaker: Actually, I was going to raise another issue. I'm, I'm reminded, uh, from conversations we've had privately, that part of the reason why we observe a differential in living costs may very well be that those of us who are here are willing to pay that in order to be here. And that that differential

[0:19:00] Speaker 1: serves as a natural buffer. Um, one that you would expect to emerge whether or not you did anything about it. Um, so I'm not sure we can go, I'm not sure how far we can go to eliminating the differential, or even if we would want to.

[0:19:17] Speaker 2: So maybe we can't eliminate it. And even if we could, perhaps we shouldn't.

[0:19:22] Speaker 1: If we can identify how we've shot ourselves in the foot in recent years and take those things away, that's probably a good idea, but I don't think you're ever, you're ever going to totally eliminate it. And I'm reminded uh talking to the state's statistician Emeritus uh Bob Schmidt, uh a conversation with him uh some years ago uh in which he said, look, this differential's been here forever. I've been measuring these things since the 1940s and it's basically the it was the same then as it is now.

[0:19:52] Randall Roth: Jim, if if you could do one thing to change our economy, what would it be and and is there some way that that could actually be done by someone?

[0:29:45] Paul Brewbaker: [unintelligible — audio glitch]