Starting a small business in Hawaiʻi carries a lot more risk than in most other states. Hawaiʻi has a 25.4% first-year business failure rate, the fourth highest in the country (Martin). Geography, taxes, labor shortages, and the high cost of living all make it harder for local businesses to succeed.

Hawaiʻi’s Cost of Living Index sits at 183.9, nearly double the national average (Martin). For business owners, this affects much more than just their own expenses. Entrepreneurs, employees, and residents all have to deal with high housing, utility, grocery, and transportation costs, putting pressure on businesses to offer higher wages. At the same time, many workers leave Hawaiʻi for the mainland in search of better pay and a lower cost of living (Kaneko). This shrinks an already small labor pool.

The effects are especially visible in Hawaiʻi’s restaurant industry. Businesses such as Yakitori Hachibei and Jinya Ramen Bar have closed as owners dealt with rising wages, food prices, rent, and an unpredictable tourism market following the COVID-19 pandemic (Kaneko). For restaurants in Hawaiʻi to stay afloat today, many have to operate with smaller staffs, cut hours, raise prices, or turn to technology to keep costs under control.

Taxes are another hurdle. The Tax Foundation ranks Hawaiʻi 41st in overall tax competitiveness (Fritts et al.). Hawaiʻi has a progressive income tax with rates as high as 11%, which can affect small business owners who report business income on their personal taxes. The state also limits Section 179 business deductions to $25,000, much lower than the federal limit (Fritts et al.).

Then there is Hawaiʻi’s General Excise Tax, or GET. Unlike a typical sales tax, the GET applies to many types of business activity, including services and some business-to-business transactions. This means taxes can be added at multiple stages before a product or service reaches the customer, increasing costs for small businesses that may already have tight profit margins (Fritts et al.).

Geography amplifies many of these problems. Hawaiʻi depends heavily on ocean freight for food, fuel, building materials, equipment, and other goods. This has made the Jones Act a long-running point of debate in Hawaiʻi. The federal law generally requires cargo moving between U.S. ports to travel on American-built, American-owned, and American-crewed vessels.

Many argue that these requirements increase shipping costs for an island state thousands of miles from the continent. One example is Hawaiʻi’s refinery, which has at times imported crude oil from thousands of miles overseas even though the United States is one of the world’s largest oil producers. Critics argue that the cost of Jones Act-compliant transportation can make importing some products from foreign countries more practical than shipping them from another U.S. port. However, the Jones Act’s effect on Hawaiʻi’s cost of living is debated. Shipping industry research argues that it has little effect on consumer prices and that costs like housing, electricity, taxes, and local business expenses play a larger role. This makes it difficult to determine exactly how much the Jones Act contributes to Hawaiʻi’s high costs.

Businesses also operate in an economy heavily influenced by tourism. When visitor arrivals and spending are strong, restaurants, retailers, tour companies, hotels, and the businesses that supply them can benefit. However, when tourism falls, the effects can quickly spread beyond businesses that deal directly with visitors. This relationship became especially clear during the COVID-19 pandemic, when the sudden drop in tourism drastically affected businesses and workers across the state (Wilkinson).

Smaller accommodation operators may feel these pressures differently than major resorts. Families and individual property owners who depend on rental income have fewer rooms and less ability to spread rising costs across a large operation (Wilkinson). At the same time, supporters of visitor taxes argue that tourists contribute to the environmental and infrastructure pressures the state must prepare for.

This reflects a larger problem facing businesses across Hawaiʻi. There is rarely one expense responsible for making business difficult here. Instead, owners deal with several at once. High housing costs affect workers. Worker shortages raise labor costs. Shipping increases the price of supplies. Taxes add another expense. Tourism brings in customers but also leaves businesses vulnerable to changes in visitor spending.

For Hawaiʻi’s small businesses, the challenge is not just learning how to compete, but how to compete in one of the most expensive and geographically isolated markets in the country.

Sources

• Fritts, Janelle, Jared Walczak, Abir Mandal, and Katherine Loughead. Hawaii Tax Rankings (2026 State Tax Competitiveness Index). Tax Foundation.
• Kaneko, Tokuji. Severe Labor Shortages in Hawaii
• Martin, Chris. ECIKS.org: Hawaii news: State economy faces inflation pressures, small-business failure rate hits 25.4%. Chamber of Commerce Hawaii.
• Wilkinson, Jennifer M. L. Responsible Resiliency Planning Must Not Burden Hawaiʻi Small Businesses. Honolulu Civil Beat.