John Butler is The Harold and Sandy NoborikawaDistinguished Professor of Entrepreneurship at the University of Hawaii’s Shidler College of Business. We talked to him about the small business climate in Hawaii, how challenging it is and whether anything is changing.

We hear so often that this is one of the worst places in the nation to do business. Is that fair?

I think it’s fair. There’s one agency–the Small Business and Entrepreneurship Council–they rank the states, and usually Hawaii is down in the 40s. Business tax is high here, personal income tax is higher, capital gains tax is high. On corporate income tax we’re not so high, but of course that just benefits the big players. So for the small and medium-sized businesses, the kinds of things that really affect them, Hawaii is tough. On the local sales gross receipts tax, we’re 51st.

We have a big tax burden, and then small business owners wonder, what do they get for those taxes? People I talk to say that licensing [for new businesses] is slow, the permitting process is slow, the public school system is not the greatest–pretty far from the greatest, obviously–so it’s difficult to get quality employees. And it’s a high cost-of-living state. It’s a tough place to be in business, it really is.

Yikes. Is there any sign that the business environment is changing? Anything happening at the regulatory level or in the Legislature that offers hope?

Things were getting better for a while. There was a lot of enthusiasm about high-tech, with the tax credits and so forth. I do think in alternative energy, even medium-sized firms could make a nice contribution. Maui government in particular is being very supportive of alternative fuel efforts.

It seems like we have a culture that is more comfortable with big government and big business than with entrepreneurship. Growth is more likely to come from something like Ward Center than to rise organically, for example.

Many people are becoming much more entrepreneurial. People see starting their own businesses as a way to have a control over their security. Near where I live there are Korean markets–they open early, they’re open late and they’re there seven days a week. That’s what it takes.

And then the farm bureau has farmers markets. The Waipahu Community Center has a whole floor allocated to smaller firms. Where there’s opportunity, some of the smaller and medium-sized firms are moving in.

So the culture is changing?

It takes a while to build an entire culture. When I got out of school, you wanted to work for a big firm. I think the culture is changing. Many of our students’ grandparents worked on plantations. Their parents wanted jobs at big firms, and now they are starting to look at going out on their own.

Is the commercial real estate market part of the challenge? People talk about exorbitant rents, and even in Chinatown, where our offices are, you see what look like viable commercial spaces sitting vacant for years on end.

I hadn’t heard that. It may be that the way you make money in real estate here is flipping or land banking rather than renting. I don’t know enough about that market to say.

Are legislators focused on addressing the problems confronting small business?

I think they are in the sense that we have a big budget crisis. You can do one of two things: You can raise taxes, or you can engage in policies that encourage people to start business that will employ people who will pay taxes. In the long run, that will pay more dividends. I suspect many legislators do understand this, and gubernatorial candidates as well, but it takes a long, sustained vision to pull it off… You don’t make more money by raising hotel room taxes, you make it by filling hotel rooms.

To be fair, hotel tax increases are popular across the United States right now, no doubt in part because local officials don’t have to face visitors at the ballot box.

If a visitor cuts their visit by even one day because you’ve raised the tax too high, you lose so much more money than you make up. It’s like airlines raising the bag fee–it misses the long view.

Anything else on the small business climate in Honolulu?

I’m an optimist. I think things will improve.