 Talking tax with Tom, that's our show today, and it's a given Wednesday already, September 4th. I get that right. Best Tom Yamachika with the Tax Foundation of Hawaii is the president there. Welcome back, Tom. Thank you, Jay, for having me on the show again. Sure. Well, we want to have you all the time. We think you're a very important player in sort of appreciating the community and appreciating our lives together in these islands. And if people aren't interested in tax, they're going to pay a terrible price. So he wrote for Hawaii Free Press recently, which caught my eye, because I do get that on Sunday nights. And he wrote about the changes in the tax law over the past 30 years. And, you know, the think tank is really into that, but what we love to do is connect the dots and see the changes, the seed changes, the trends in our lives. Otherwise, you know, everything is of the moment, and we don't really have an idea of where we come from and where we're going. So when you make an analysis like that, it's really important. So in a general sense, what were you writing about? I was writing about some of the taxes that were fundamentally different between 30 years ago and 1989 versus now, 2019. And there were at least three big tax types that have undergone, you know, tremendous change. One in them wanted to talk about them. One of them is Transient Accommodations Tax. One of them is the Barrel Tax. And the third one is the Convian's Tax. That's kind of my top three for today. Wow, good. I'm interested in all three, and I've seen all three evolve, as you have, and I want to connect the dots for all three. So let's take the first one. What was the first one out of the Transient? Transient Accommodations Tax. Yeah. Okay, it started... That didn't exist a few years ago. It seems like yesterday. It was actually, originally enacted in 1986, it was supposed to be temporary. At that time, it was supposed to be for the purpose of building a convention center, which we didn't have at the time. So... What are those taxes that was identified for a specific purpose or project that got to be in the general funding anyway? Yeah. My friends at the West Maui Taxpayers Association were quick to correct me once the news article broke, and they said there was an agreement that the Transient Accommodations Tax be 2% and temporary to, again, finance the building of the convention center, but instead, what happened? I believe the first version of the tax, as enacted, was 5%, and there were no earmarks for the convention center, although we do know it was being built. That was 5% back in 1986. Today, it's 10 1⁄4, so there are some significant differences between then and now. So what was the juxtaposition between the TAT and the gross excise tax? There wasn't any. So you just added it on top? That's right. It was layered on top of a hotel bill. So the GET was payable anyway, and the Transient Accommodations was on top of that. That's nice for the FISC, I suppose. I suppose. Back in 1990, it wasn't even supposed to be the state's FISC. The idea was for it to be to the counties. So at that time, in 1990, the tax was kind of transformed to say, OK, well, this tax is for the counties, OK, it'll be shared with the counties. The state will retain 5% for general administrative purposes, because they were running and collecting it. That was the idea. Pushback from the hotels? I'm sure there was. I'm sure there was. There apparently was a deal for a hotel room tax of 2%, but that got scuttled quickly. Surprise. Surprise, surprise. No man's life or property is safe while the legislature is in session. That's right. These days, what the counties get from the tax is a fixed number. It's 103 million. Despite the fact that the tax takes in, I think it's, what, half a billion dollars? Really? 500 million? I think 550 million. It's not like a grab for the state general fund. Another grab for the state general fund. Well, it's not only the state general fund. There's lots of stuff that's being fed by the Transient Accommodations tax. There is tourism marketing. There is state land development. There's total being. What does that have to do? These things are not necessarily related to the original purpose or the conceptual purpose of the TAT. But they require money. They require money. That's the bottom line. That's the bottom line. Take it where you find it. That's right. Not a special fund. There were a lot of special funds being fed through earmarks off the tax. A lot of them still exist. Transient Accommodations is one of the more heavily earmarked taxes that we have. I don't want to get in the way of your thought process, but it just strikes me that whenever you do, and we'll talk about the barrel tax in a little while, whenever you do these kind of special, dedicated taxes, you're asking for trouble. You're asking for the legislature to step in and do irrational things. And this is one good example of that. I don't know what you mean by irrational things, but... Well, take it a different path than it was originally intended. And furthermore, a different path from what the public perceives it is now being used for. The public doesn't know where this money's going. Yeah. I mean, that, I think, was the whole idea behind the special funds in the first place. The idea being, if it goes into a special fund that's for a certain purpose that you know about, then at least there's some assurance that those monies will be spent for that purpose and won't be mushed in with the general budgeting process as is everything else. Of course, as a tax foundation, we're not happy with that because we have a process that our constitution has set up. It's called the legislature and budgeting. And they are supposed to be the stewards of our public dollars, set priorities and fund them with the tax money that we give from our hard-earned dollar. We have to give it to them. And it should be totally transparent. Right. And special funds tend to bypass the legislative process all together. How transparent is that, right? Not. Not. And yet they keep happening. So what's the status? I mean, how has it evolved from its origins till now, this VAT? It sounds like that cap or rather that, what is it, the county cap of $106 million is still the case? 103, yeah. 103? Yeah. There have been like big fights between the state and the counties about how much gets shared with them. Counties said, well, let's get a percentage, right? And that's how it was for a period of time. And then one mayor kind of made the mistake of saying, we want predictability and stability. So the legislature said, okay, fine, we'll give you a fixed number. Mistake. Mistake, tactical mistake. And fixed numbers don't change from year to year, although the county's budgets change for the worse. And if you want to go get it changed, you got to go back to the legislature, that's not going to be easy. Yeah, with hat in hand and bigging posture and that kind of thing. And now today, the rate of the TAT is what? 10.25. And that's another negotiated number. What I mean to say is that nobody ever sat down with a sharp pencil and figured either what the hotels could afford, what the industry could afford, or what was necessary to support the projects that were related to the hotel and the hospitality industry. It's just thrown it on the wall number, am I right? Yeah, and over the years, the TAT has been asked to bear more and more costs and for more and more things. Natalie, is this supposed to support sharing of revenue with the counties? It's supposed to support tourism marketing, the convention center authority. It's supposed to support Honolulu Rail, that's part of it now. I don't see the relationship myself. And the Turtle Bay conservation easement purchase. I don't see any connection there either. So what's happening is it's getting drained off into things that the legislature might otherwise pay out of the general fund. That's right. And the average guy in the street, you and me, we could go down on 4th Street and ask them if they know this, but I don't think we really have to do that. They don't know this. Yeah, that would be very surprised if they did. So what's the bottom line here? What do you predict for the TAT? It sounds like it's a great way to raise money, but it's not a great way to fund the right project. Yeah, and it seems like it's not going down any time soon. Well, taxes ever go down? Yeah, sometimes. We'll have to have a show about that. It's going to be a short show. You know, our income tax rate did fluctuate for a while. Yeah, OK. But now it's kind of right back to the highest point. We'll have to pay more because there's more. The government needs more to do the things people expect of government, except in Washington. So OK, so that's number one. Is there any message you want to leave to our listeners exactly about the TAT? I mean, how they should see it, how they should feel about it? My message to them is you have to watch this stuff. If you don't, things tend to explode. And if you don't watch out, you're going to be on the receiving end of the explosion. Yeah, OK, fair enough. That applies to all the things we're going to talk about. Right. So the next thing we're going to talk about is, what, the barrel tax? Barrel tax. My personal favorites, because it has energy written all over it, but maybe not necessarily in how it's spent. That's absolutely right. It was enacted in 1993. So 30 years ago, there was no barrel tax. But around 1989 or such, there was, of course, the Exxon Valdez accident, which kind of left people wondering about something similar happening here. And they wanted to do something about it. So they enacted a tax of 5 cents per barrel of imported petroleum product to establish a revolving fund to finance a response to an environmental disaster. And the act, as it existed back then, it required that tax collections stop once the revolving fund reached 7 million. Like, that's the same thing as what happened with the TAT, isn't it? It was temporary. And it was a limited amount, limited tax. Then what happens? Yeah, whenever you hear the word temporary coming from those guys, you've got to wonder sometimes, you know? And interestingly enough, when the bill to introduce the barrel tax wasn't even a tax bill. It was the Hawaii emergency planning and community right to no act. It wasn't a tax bill at all, as introduced in the House. That is so strange. That is like hiding it. And then when it went over to the Senate, Senate Ways and Means Committee popped the tax in. Boom, surprise. One of those slights of hand that you see in the legislature. Yep, exactly. There's a significant tax that affects everybody in the state. It is ultimately, don't you agree, regressive? Because, you know, everybody who drives a car is paying. Rich or poor? Oh, it's worse than that. And let me kind of tell you a little bit about what happened to it. You know, like I said, we started off as five cents of barrel with an automatic stop, right? In 2010, the tax was increased from five cents of barrel to $1.05 for barrel. With a stroke of a pen. Yeah, 21X. 21X. 43% of the revenues from the fund were spent to special funds to support energy security, energy systems development, agricultural development, and food security. Not all at the same time, but that's what happened over the years. So all of these things weighed on the barrel tax. And of course, the remaining 57% went to the general fund. It's like a whipping boy. Yeah. It's like a whip, it's like a pinata. And then, of course, the provisions turning off the tax when it hit the $7 million, those just went, well, it disappeared. Repealed. Yeah, disappeared. So now, you know, there's just a word on that, though, is that the Energy Policy Forum, which is just a forum kind of organization, it doesn't take primitive advocacy-type positions on things. And only then, when it makes a statement, it usually gets either a consensus or a very high vote of confidence within its members on a given thing. That was a favorite thing in those years, the Energy Policy Forum, because it was supposed to encourage energy. It was an incentive to clean energy, which was all the rage. Well, little by little, as you have described, it went somewhere else, the things that really didn't have any connection with energy. And it went much higher without any particular benefit to energy, per se. And I think there have been changes since that time. Oh, yeah. Since it was increased. There was a big change in 2015. What was that? And that was when the tax was made applicable to things other than fossil. I mean, other than petroleum products. Yeah. OK. It was made applicable to all fossil fuels. Yeah. And also, at some point, it became, maybe this was a bill that didn't pass, but I recall that there was a big attempt to take a part of it, a substantial part of it, and apply it to the Department of Transportation for the highways. Well, that's the fuel tax, generally. I'm talking about the barrel tax. Yeah, the barrel tax is a little bit different. I mean, it's in the same chapter, but it goes to a different plane. Yeah, OK. But you're correct in that there were several attempts by the Department of Transportation to raise the fuel tax, among other things. So they were looking at the. They had the fuel tax. They wanted to raise the fuel tax. And they wanted to apply part of the barrel tax on top of all of that. I don't know whether it passed or not. I don't think it did. It was a raid on the barrel tax. The barrel tax is a pinata. I mean, everybody wants part of it. And they have the weirdest arguments to claim that they get part of it. Yeah, but just to kind of give you an idea of how fast it's ballooned, in fiscal 1995, the tax brought in $2 million. And in fiscal 2018, have any guesses as to how much it brought in? 50 million. Oh, and not quite. 27 million. 27 million. 27 million. That's a lot of bread. That's a lot of coal. It's a lot of oil. And it's regressive. Yeah. Oh, yeah. It's regressive so that everybody, rich or poor, they pay on the barrel tax. So you can have somebody who can barely afford to drive a car. He's paying more to the barrel tax. And you have somebody who is wealthy, who pays the same for a barrel, for a gallon, all that. You drive, you pay. I mean, that's kind of what it is. There's no good rationale for that. I'm not sure why we have these strange taxes. Was it pushed back against the barrel tax? I'm not sure. I'm sure there was. But that was kind of like before my time, really. If you could look back now to the original purpose of the barrel tax, that is to encourage the development of clean energy, because we were all going to sweat about clean energy at the time. No, he wasn't even to do that. It was to create the environmental spill fund. OK, environmental issues. Yeah, I mean, it was supposed to be temporary. It was supposed to take, create the cleanup fund, and it was supposed to stop. Why don't we just take this out of the general fund? If we need a tax increase, why don't we just increase the tax, the income tax? And notice how I excluded the gross excise tax, because I don't think the gross excise tax should ever increase to get, or possibly the property tax. But why do we have to create these little pockets of tax and get away with saying, well, we're not really increasing the other taxes? It's a special tax for a special purpose. And I think you hit it on the head. If you try to increase the GT, try to increase the income tax, people are going to understand what that means. People will understand what that means, and they will push back. I mean, the last time, I think it was in the 1990s that they tried to raise the GT, there was just an incredible amount of pushback from all corners of the public. This was, I think, during Ben Kaitano's time. Well, because they know it affects them in their pocket book every day. Yeah, they know about it. They know about it, right? Yeah, they don't know about the barrel tax. They don't know about the T-18. They went out on the same visit at the street, and on Fort Street Mall, you and me, and we tried to find out from people where the barrel tax goes, or even exactly how much is being charged. They wouldn't know. Nobody would know. Wonder if they know what it is. Right, thank you, right. Even what the process is, it's just one of those grabs. And it's unlikely to go away, just as you said about the GT. It's not going to go away. Yeah, I mean, once you kind of start down that path, it's hard to go back. Yeah. OK, we've got one more to cover now. This may be controversial. Hold on to your seats. This may be controversial. What's the third one? The third one is the conveyance tax. No, it's not going to be controversial. Nobody knows about that either. But it had a dramatic increase, didn't it? It did. What was it at first, I mean, historically? As enacted, it was $0.05 per $100 of consideration. So if I, in those days, if I bought a house for $100,000, what would I pay? I think $50. It's almost like a closing cost. Nothing much, like a notary fee. Yeah, nothing. I mean, at that time, it wasn't really supposed to be a tax. It was supposed to be a method whereby the state, which was then administering the real property tax, could get information on how much houses were being bought and sold for, because they had to update the appraisals. They needed the market data. And they couldn't just look at the conveyance documents, because they were all $1 in good and valuable consideration. They didn't say anything. Easy, just factor it in. It's like the notary fee. Yeah. I can see somebody, somebody with a green eye shade, and they taxed off it. We have to find another tax. We're going to look around for a tax that can be exploited, that can be expanded, a tax that we can grab onto, because it exists, and then we'll load up that big. That's what happened. I'm sure it did. I mean, a couple of tax review commissions ago, we have a tax review commission that is supposed to examine the tax structure that we have and report on it every five years or so. Well, about five, six years ago, the commission that then existed was pretty much given the mandate to, hey, you guys, you've got to raise money. Go find it. Figure out how we're going to do this. This was a kind of sleeper. It was small, but it was a tax. It said, conveyance tax. They said, hm, tax. Yeah, well, like I said, that was 30 years ago. Over the years, the tax rate was hiked again and again. Now what it is. Somewhere along the line, people stopped thinking that it was merely an administrative charge. It became a real tax. It became a real tax that had real fiscal implications because whereas it started off as $0.05 on $100, now it goes up to $1.25. Let me do the math on that. That's 23 times? 25x. 25 times. 25x. More of an increase than the barrel tax. Yes, right. That's a dramatic increase. It's like, well, we weren't watching. That's very dramatic. So the primary earmarks in that tax are the Land Conservation Fund and the Rental Housing Revolving Fund. I mean, I'm not. What has that got to do with the transfer of properties in general? Very little. It just has to do with property. That's the connection. It's not anybody. Nobody would expect that. Nobody would guess it. And maybe my word irrational is too strong, but it doesn't have a connection, a rational connection, if you will. Well, let me ask you this. This tax, the conveyance tax, 30 years ago brought in about $3.5 million. What do you think it brings in now? Well, you've got two factors working. One is you've got that 25 times factor. And then you get the fact that real estate and the state of Hawaii value, the value that is used in the formula to determine the tax, has gone up by more than 25 times, I think. Anyway, so OK, you say $2.5 million to start with. $3.5, yeah. $3.5. Well, it's got to be more than $50 million now. In fiscal 2018, $100.6 million. Oh, my god. OK, I can't do these calculations for you, Tom. But that is stunning, stunning. That's a lot of bread. That's a lot of bread. Think what you could do with $100 million every year. That's a lot of bread. That's a lot of money. So these recipient organizations really need that? Is this gravy for them? Well, there's always people who say they need housing assistance. And the rental housing trust fund is supposed to help with that. And then, oh, there's, of course, land conservation, which requires a lot of money. We need that. We need that. But there's no way that this fund is going to be the sole source of funds for land conservation. I mean, we need much more than that to conserve the environmental land. So something must be coming out of the general fund. I'm sure there is. So you've picked only three here. Oh, what messages do you want to leave before we go? On the barrel tax, how should people see that? And on the conveyance tax, as it exists today. Well, again, my message is, be aware. This is happening. This is happening to you. Don't think it doesn't affect you because it does. All of these tax increases and explosive growth in governmental exactions, they drive up the prices of everything. And if you don't think so, take a look at what you pay for a glass of milk, or what does it take to buy a house here in Hawaii? It's sort of a creeping thing. Joe Schmoe does not go down to legislature because he's offended by these taxes. He may not even know that he's offended by these taxes. He's not going to go and visit his representative or his senator and say, you've got to do something about this. So it's a tax foundation. Goes down there and says something about it. Who else? Well, that's not our purpose. Our purpose is to tell people that this is what's been happening. And if you, Joe's citizen, Jane's citizen, are unhappy, you have to make your sentiments known. We're not a partisan political organization, so we can't go down there and say, this is bad. This is horrible. You're an educational organization. Yeah, we just provide the information so that people like yourself and John Q. Public, even lawmakers, we provide information to lawmakers so they understand what it is they're voting for. Well, one thing is clear, Tom Yamachika. We've got to keep on having these discussions so that people at least they know what's going on and they can make judgments about it. Thank you, Tom. Thank you so much. Thanks for coming down again. We'll do this again soon. Thank you so much.