 Aloha, and welcome to Business in Hawaii with Reg Baker. We broadcast live every Thursday from 2 to 2.30 from the downtown studios of Think Tech Hawaii in the Pioneer Plaza. Normally, we have beautiful weather in Hawaii, but the last few days have been rainy and almost like wintertime. Imagine that. Winter weather in December. This is the last show of the 2017 year, and it's a quarterly commentary, and I've got a guest today by the name of Ray Tsuchiyama, who you've seen probably many times on Think Tech Hawaii shows, and is including my own. He comes with a very interesting perspective that he's gotten over the years from a lot of experience domestically and internationally, so it's always refreshing to hear a different perspective, and we're going to have a little dialogue and talk about some of the main stories that occurred during 2017. Ray, welcome back to the show. Thank you very much. This is the end of the year of the rooster, and next year will be the year of the dog. The dog? Yes. I hope that doesn't mean it's going to be a bad year. No, no, no, no. But we're coming to the end of a year that's been a very exciting one for the state of Hawaii. Business is booming. It is. It's doing very well. And I've been very excited about some of the recent announcements that have just come out in the past week. All the different banks are coming out with bonuses to their employees and pay raises. It's exciting times. I think it was Hawaiian Airlines just a few days ago, and the headlines in the Pacific Business News said that we're booming, that the economy is doing very well. So it's been a good year for us, and I guess there's a number of reasons for that, and we'll get into some of that here shortly. But I guess one of the things that I think has been in the news a lot the last week or ten days, particularly in the last ten days, but even more so during the years, tax reform. It's been an interesting process. And just to lay a little groundwork, you probably know this as well as I do. When I was going to college back in the 80s, and I was going to accounting school 101, they were talking about tax reform back then. So it's taken us about 30, 35 years to get to where we're at today. And we finally have, I don't want to call it tax simplification, because there's nothing simple about this, but it is a new way of approaching taxation. As a layperson, and I'm a CPA, so I've got a little bit more insight into this, but as a layperson, what's your thoughts on the tax reform? Well, I think that's a very significant perspective that you just brought in, because very few people know that taxes and the structure of taxes, paying taxes, have not changed that much since the 80s. And of course, one of the things that we look for when we look at economies globally is what does tax rate for corporations or individuals? That's the first thing you ask, is it high, like 30 something percent or more for individuals similarly, or is it lower? Like in Hong Kong, there's a 15% flat tax, for example. 15%. Yeah, 1.5, 1.5. So in Saudi Arabia and other countries in the Gulf, very similar tax regimes. And so you get a sense that, wow, they're focused on growing their economies and growing business. And it's worked very well for them. That's right. Ireland has a very favorable tax environment. Correct. A lot of companies are set up over there. And of course, there are other countries that set up specifically like some places like the Bahamas or even states like New Jersey or Nevada and so forth. So you're correct that this is the foundation of a business climate. And I think what's significant to put it into perspective in case the audience or the listeners haven't seen this yet is that the corporate rates have dropped from 35% down to 21%. That's a huge drop. And that does put us maybe not at parity with other countries, but certainly moving us a lot closer. And so that's one of the reasons is because now all of a sudden the taxes are 30% to 40% less than what they were before starting in 2018. That's why the companies are coming out and they're doing a little happy dance and they're giving bonuses to people. And of course, what should happen is that corporations with extra cash or money invest in innovation to make better plants, to expand and hire more people overseas to sell more of their products and to have more product development all the above. Right. Now, it's a great opportunity for the businesses in 2018, but it's also going to be beneficial to individuals. The individual rates are dropping. The brackets of when the different rates kick in have expanded. There's in some, this is a component that gets a little complicated, but the standard deduction has almost doubled. And that impacts a lot of people, particularly in the older retired group and those that are just starting out where they don't have a lot of itemized deductions and they always take the standard. When now all of a sudden, instead of taking say $6,000 or $12,000 standard deduction if you're married, now all of a sudden it's $24,000, so it just doubled. So people could save potentially $2,000 or $3,000 a piece just from that one component of the report. In the United States, one of the things that distinguishes the United States from other countries like Japan is that people don't save or can't save because of taxes. Now we hope that it leads to higher rates of savings and also people have more cash to buy things, to invest in their futures, education, more house renovations and cars and so forth. And that also accelerates the economy. It does. There's a multiplying effect in this that you give people more, they get to keep more of what they're making. They've got really two options, either they're going to save it or they're going to spend it. And for whatever reasons, we have a tendency to spend it more than we save it. So that's really going to accelerate the economy and get things going, not only in Hawaii but throughout the entire country. And of course Hawaii has a major tourism industry where people on the mainland throughout the world, Japan and China and so forth, hopefully people will come more to Hawaii because the tourism has had a banner year, maybe over 8 million this year. Well particularly when the companies that are in the business are generating higher profits now because of lower taxes, now all of a sudden maybe they can do some more renovation work, maybe they can do some add-ons to their properties that's going to make it more attractive for people to come, which could trigger a little bit more tourism, which would be a good thing. We've got really two primary economies or components of our economy here. One is going to be tourism, the other one's going to be the military. And that's pretty much what drives our state right now and we've got to keep both of them as healthy as we can. So what you're saying though is the recent Trump initiated tax reform is a good thing. It's a positive for Hawaii, generally speaking. I think it's good not only for Hawaii but for the entire country. I think it's going to put more money into the company's pockets, which they've already begun to share with their employees, which is very positive. But as you mentioned there's also going to be now resources for reinvestment, for expanding product lines, for growing the business and maybe even moving the employment scale up a little bit to higher paying jobs. I think it's going to be positive all the way around. Because one of the things that people talk about tourism, it's a great industry but there aren't that many high paying jobs as opposed to software or e-commerce or other industries of finance in the United States. Unfortunately the nature of the business I guess, not a lot we can do about that. But as we add on to some different maybe venues it would be attractive to the tourists. Maybe there's an opportunity there for us to move those average wages up a little bit. I know this may be a silly analogy but I think Disneyland or Disney World are the different high tech type of experiences that people can have. We've got one of the Disney properties out here and there could be some opportunities to have an experience that people can't get anywhere else. There could be an interactive type of ocean experience that could be very high tech. There could be things that we can develop with this extra money. What you're saying is that with extra cash they can do more R&D, more innovation in our tourism plan. Which is when you look at Waikiki it is old, it is aging and there hasn't been a major property there for many, many years. It's so small, the land base, you can't really build any major projects anymore. Yeah and it's hard to go much higher than they've already gone. It's going to be interesting but we've got I think an exciting 2018 looking forward to. The tax reform I think is going to provide some opportunities, it's going to give individuals and businesses some extra money. What's interesting that for the state, the Department of Taxation, they've had some particular challenges in their IT area that I think is pretty pumped in common knowledge. They've had three I believe different tax systems they've tried to get up and running. They're working on the third one. I think they're starting to get close but they just changed the rules. For those that don't know, a lot of the rules at the state level mirror what's happening at the federal level. So that's how they try to keep it in sync and so if you're preparing certain tax forms one way at the federal then they try to make it consistent at the state. So now the state's got to go back and re-examine everything to make sure that as soon as we finish 2017 under the old rules we better start changing things for 2018 which is just going to be another layer of complication for the current software that they're working with. It's going to be interesting to see how that has an impact in our state. Well it's also coming back to a project management which is is it a taxi department initiative or a technology IT initiative or is it both? And having said both, then you really have to work with the people who are going to be using the software, people at the taxi department and also people who are going to be customers of that also and the people who are going to implement the coding. So it's a very complicated project wherever you look at it. Well and it's also important to remember that there's nothing easy about taxation. You know this bill that they just passed is 500 pages thick and all that does is set a direction. It doesn't tell anybody how to get there. So now they've got to write all the regulations for 500 pages. So it's not complete. Well it's complete in that they know where they want to go. But how they're going to get there is going to be the regulations. So now the IRS has got to come out and write the regulations which could be another three to five thousand pages. Now once the regulations are written and I don't know about you but I'm not that good at reading Regulation Ease. So there's going to be rulings and interpretations on this and that's going to add another test cases like this or that. And every jurisdiction in the country and I think there's about what 12 of them every jurisdiction can have a challenge and have a different finding or result. So depending upon the jurisdiction that you're in you can have different ways of doing the same thing which is again another layer of complexity. And all I'm saying is that they've got the bill now they've got to do the regulations and they're going to do the interpretations and the rules. It's going to be a while before this all gets figured out and then the state has to stay up to speed on all of this to make sure that what they're doing at a state level is consistent with the federal level. Now some of the news reporting last week when the tax reform bill was going through was that it will impact high tax states, Hawaii included, California, New York, others. And that it's going to be a mess dealing with this and it will be less of an impact with states that have no tax or very little like in Nevada or Washington state. What do you think about that? You know it's a very good point. I think they're correct but it may not be as bad as everybody seems to think. And let me, we need to take a quick break right now as soon as we come back from break then let's reopen and we'll go into that in a little bit more detail. This is Business in Hawaii with Reg Baker. I'm here with Ray Tsuchiyama and we're going through a quarterly commentary. We're going to take a quick break and we'll be back in about 60 seconds. It's RB Kelly. I'm your host of Ad in the Comfort Zone where I find cool people with cool solutions to problems that all of us face. Now the thing is we're really cool and I only invite really cool people but the thing is I think you're kind of cool too so I think you should come and watch. That Thursdays at 11 a.m. here on OC16 television with Think Tech Hawaii. I'm RB Kelly, host of Ad in the Comfort Zone and I will see you next Thursday. It's going to be a long time before it gets all sorted. Hi, I'm Ethan Allen, host of Eligible Science on Think Tech Hawaii. Every Friday afternoon at 2 p.m. I hope you'll join me for Eligible Science where we'll dig into science, dig into the meat of science, dig into the joy and delight of science. We'll discover why science is indeed fun, why science is interesting, why people should care about science. They care about the research that's being done out there. It's all great, it's all entertaining, it's all educational so I hope you'll join me for Eligible Science. And welcome back. This is Business in Hawaii with Reg Baker. We're doing a quarterly commentary today with Ray Tsuchiyama. Talking about some of the big stories of 2017. This is the last show of 2017 so I want to wish everybody a merry Christmas and a happy new year and let's get right back into a really exciting topic of taxes. Ray, you had mentioned before the break that there was some discussion out there about high tax dates, getting hurt a little bit, a little bit more maybe, and the lower taxes. It's an equal impact, let's say, and it's true. Well, there is some truth to it but as in most tax questions, it's not always going to be an easy answer. If you're talking about businesses or individuals, you might have two different answers. Individuals, one of the components of reform is that the income tax and property tax, that piece, those two components, are going to be capped at a $10,000 deduction. So you're only going to be able to deduct $10,000 of income tax and real estate tax starting next year. Now, there are some states that that's not going to be an issue at all and the individuals are not going to be hurt by this at all. So that's okay for them. For the states that do have high property values, high real estate taxes, and high income taxes, it adds up, it adds up. I would think that there's only going to be a few states that are really going to be in that area where you've got very high property taxes and high income taxes, Hawaii, California, New York, or probably the two that come to mind the quickest. They may have some issues for the individuals. Now, one thing to keep in mind is that for people who have taken these deductions before, okay, they're capped out at $10,000. There may only be $1,000 or $2,000 that they lose. But if it's not enough, if it doesn't exceed the standard deduction, which now goes up to $24,000, they still may end up okay because there's a lot of retired individuals and maybe people that are just starting out that they don't have big mortgages. They don't have high value houses. They don't have a lot of income tax. It all depends on your circumstances. Exactly. So for those individuals where these things only add up to maybe $5,000 or $10,000, they're not going to get hurt because now all of a sudden their standard deduction is $24,000. So it's offset by the major element of the Trump tax reform. I don't want to use the fake news phrase, but there is some misinformation or misunderstanding out there that there may be some isolated cases where people are hurt by it. But there's also other components that's going to offset some of that. The standard deduction being one, but also income tax rates themselves are coming down and the brackets where the higher rates kick in are wider now. And so there's some offset and not everybody is going to be hurt by this. So you have to focus in and not be kind of misguided by what you hear. Well, and that's probably my most important message that I want to send to people is that get engaged in this because the savings can be huge. You can save a lot of money if you have just a little bit of awareness of what's going on. Stay on top of it. Communicate with your preparer. Make sure that they're giving you the straight information, not necessarily what you're hearing around town because people have different agendas. And so talk to the preparer. They have only one job and that's to take care of you and your tax situation. And they're going to be doing it to the best of their ability. So make sure you've got communication with them and that you're staying on top of this. And the savings could be quite large. So let's move on. We've kind of beaten the taxes up a little bit. One that you have, I think, some experience with, at least conceptually is the Amazon situation. We had heard that Amazon was looking for a new place to build another headquarters or a new facility. Share some thoughts with Amazon. For the last year, Amazon has been on a hiring spree, first of all. It's been hiring hundreds, maybe thousands of bright young MBAs to really work in e-commerce. Also, because Amazon is not only software, it's also about delivery. They have to have warehouses, product, all kinds of things. They look to establish what's called fulfillment centers. And they've been establishing them by the dozens all around in regions, North, East, West, Southeast, Midwest, and so forth. For example, there's five in Ohio. But the biggest news was that 283 cities and regions proposed to Amazon to be their place to be the Amazon next headquarters. As you know, Amazon grew from Seattle. That was their birthplace. Now they're looking for a second one. It may be in the middle of the U.S., it could be in the Northeast, it could be in the Southeast. Wouldn't it make sense for them to not have them too close together? That's correct. There needs to be some distance, you know, geographically. But they need a lot of land. They need a lot of people. Because they're going to invest $5 billion and hire maybe 50,000 people. 50,000. That's right. Well, that rules Florida out. They'll sink the state. But this was the biggest, I guess, economic opportunity for many, many cities. Well, nearly 300 that they applied for. This was the biggest news of the last year. Now, real touchy question, but I'm going to ask it. Did Hoy ever have a chance in this at all? No, not. First of all, it needs a hub, a major airport hub, like in Atlanta, like in Dallas, like in Chicago, and so forth. The hub is the key to it. And also, they need a lot of land near the hub. Right? Because they can't be 100 miles away from the hub to have the warehouse. It has to be near somewhat. And they also want to have trucking capability. That's right. Not just airport. And it's all about logistics. How to get something from here to there in the quickest amount of time, very efficient, and so forth. And then you have workers who look at this, computerized, and so forth. Right. It's just, it would be great to have them here, but it just wouldn't make sense for them to do that. Because logistically, they need to have the hub near an airport, near rail stations, near trucking roads. All the above, all the above. It just doesn't work here. So, you know, but a great opportunity. Maybe someday we'll have another opportunity to diversify the economy. But, you know, we still have the Department of Defense. We still have the visitor industry, two very strong components of our economy right now. What sort of diversification do you think might be possible? Well, that's the $64 billion question. And there was a recent Hawaii News article that said the Hawaii economy is booming. We have 2% unemployment, which is the lowest in the U.S. Tourism has brought in year on year, you know, $14 billion in 12 months. So, what's there to worry about? But there are people who have been thinking about this for the last three decades. Well, to have everything in one pot, to have a three-legged stool that we had in the 80s, agriculture, tourism, and military is now down to two, plus government. The rise of local city-state federal government. Government doesn't create anything. They don't have revenues that bring in customers. But it's a hiring center of its own, also. So, that part is still has become larger through the years. You were saying that a third of our unemployment... Probably, you know, one out of three, maybe 35%. So, this is unlike any state in the Union. Look at Washington state, or Oregon, or Nevada, or even California. They have far more private sector jobs. And even parts of China, communist countries, have more private sector jobs. Percentage-wise. So, we are unique, and it's scary for some people to go look at the future and see only tourism even grow larger and larger. But, you know, back... I was on the board of directors for the Chamber of Commerce 25 years ago. And we were wrestling with these issues back then, too. So, you know, not a lot has changed over the years. But I believe we missed two opportunities. And I'd like to share your thoughts on this. But the two areas that I think we could have done better if we had started 25 years ago, or maybe even longer, education and healthcare. I mean, I think back in the 50s when we just got statehood and into the 60s, if we had identified healthcare and education as two primary sources for us to focus on, we could have set the bar very, very high and really benefited not only Hawaii, but the entire Pacific Rim if we had done that. What's your thoughts? Well, you're correct that some opportunities like medical tourism would have been... People paying, you know, five, ten times more per person coming here for, you know, the first class global medical treatment would have been another industry for Hawaii. You're correct. Now, we have people flying in from Maui to Oahu, and people from Oahu and Hawaii flying to the mainland for medical care. That's one area that we still have to work on. And because of the lack of diversification, we've had outright migration. Younger people, especially on movies from mainland, we are one of only eight states in the Union that has population decline. And as you lived in Vegas, there's probably 80 to 90,000 former Hawaii residents living in Nevada, working at hospitality, hotel jobs, maybe some same salary, but because of lack of state income tax, you know, 30%. A lot of retirees. Retirees also, and excise tax, and things are cheaper there, real estate, gas, milk, and so forth, groceries. So it is not a good statistic to have. No, it's actually, I think, depressing in a sense that, you know, I mean, I've got three sons. One opens on the mainland, two of them are here, so I'm very fortunate, but one of those two is thinking about going to the mainland. You know, and primarily because they can buy a house. You know, in this scenario, is that they go to the mainland, they increase their salary by 20 or 30% because they pay better, and they can buy a house for half or less the cost, and the cost of living is 20 or 30% less. It's hard to argue with the logic of that. And, you know, it's just, we need to just accept the fact that, you know, things are going to be more expensive here, and there's more benefits than negatives, but there are people that will never buy into that. You know, and so it's a problem that I think we're just going to have to learn to deal with. But like you say, it's not a new discovery. Chamber and others, and people in the business community, I've been wrestling with this for 30 years, and it's something that, you know, they're really a change, and of course, we're losing a lot of people in high technology or biotech or finance who want to have a career in those fields leaving for the mainland. Well, you know, believe it or not, we have just finished our episode this week. We're going to wrap up, but I would think it's fair to say that 2018 is going to have some interesting challenges ahead of us, just like 2017. That's right. There's this rail project we didn't talk about that we got to figure out how that's going to progress, and then it's the implementation of tax reform that just got started. So it's going to be an interesting year. Well, maybe President Reagan is right. A rising tide lifts all boats. Well, that's the theory. I just hope my boat doesn't have a hole in it. But this is a business in Hawaii with Reg Baker. I was here with Reis Uchiama today talking about some of the issues that happened during 2017. We broadcast live every Thursday from 2 to 2.30. I sure hope to see you next week. But until then, have a great happy new year and be safe. Aloha.