 Think Tech. Here we are at the one o'clock. And we're talking about community matters. We're talking with Tom Yamachika, who is the president of the Tax Foundation of Hawaii, a very important institution. We'll talk about that. And the title of our show is The Effects, the results of the 20, in tax terms, the tax effects of the 2017 legislature. It's a short show. I think we're about over. Well, there's a lot of stuff that happens. We're talking about that. Tell us about the Tax Foundation first. Well, the Tax Foundation is a government watchdog agency. We try to be there at the legislature monitoring what's going on over there, so taxpayers can know what's happening to them before they receive notice in the new tax forms or whatever. We're there to inform people, especially the legislators, about what the effects are of what they're doing. And your view of it. I say you, I mean the Tax Foundation. I mean, do you think that Hawaii, traditionally, say, since statehood has been well run from a tax point of view, a tax and benefit point of view, or not? And if not, what is the sea change that may trouble you and what we need to do about it in a conceptual way over time? Well, one of the things that I think is very troubling is how we've managed our government labor, especially in terms of the post-employment benefits, and what we promise to pay them. For example, if you retire after so many years of service, not only do we give you a defined benefit from the employee's retirement system, but we also have a medical plan that basically covers you for life after you leave the government for medical expenses. That's a huge benefit, huge, worth in inestimable amounts. Yeah, which we all have to pay for. That's the thing. I mean, did everybody think about how much this cost? Did anybody think that once, you know, that people would get older and that they would get sicker and the population would increase? I mean, those kinds of things that we are kind of dealing with as we now look at the, you know, what's in the plans, how much money there is, and how much we need to have in there to fund these, you know, the anticipated cost of the benefits when these people retire or get sick or whatever. Huge, unfunded liability, huge. It's unknowable how much it's going to cost us, except it's going to cost us more than most other states, just that one item. But how do you roll it back? How do you get to a balance? How do you get, you know, to actually have money left in the till to build the state, to build infrastructure, to build new programs, you know, to have the community in general enjoy some of its tax money? Well, there's a couple of ways to do it, one of which is very unpleasant, and that is you start taxing the heck out of more people. At some point, poor people, everybody. And at some point, people are going to get fed up and they're going to vote with their feet. And a lot of people are doing that. We're seeing, you know, a net amount of people going outside of the state, leaving, you know, leaving our fair shores. And, you know, probably it's not tax being the only thing that's causing it, but it probably doesn't help. Yeah. Well, it's the one that you can't really argue with. I mean, you have to pay. There was a piece that Kaliyakina wrote in his weekly blog about this very issue. You know, we thought that, you know, the kids out of Punahou, Iolani, the kids out of, I don't know, any number of schools out of UH leave town. They leave town on a regular basis. We have in migration, our population has increased modestly, but we have a lot of talent leaving town. And, you know, we've been talking about that, living with that for several years, maybe decades. But now, this horrible little troubling is because it's the middle class, the lower middle class, the poor people, they leave town. We're losing it at all ends of the spectrum now. That's true. And the population figures have kind of reversed in recent years. Yeah, there's people leaving. Yeah. Well, let's talk about this legislature because, you know, like it or not, the legislature is very powerful. And like it or not, we collectively, the state, rely, we rely on the legislature to do the right thing. And so often our expectations are not met. Going into the 2017 legislature this session, what were your expectations? I mean, if you had any, I mean, sometimes it's hard to have them because there's not enough information. But did you have expectations? What did you expect would happen? I didn't know what would happen. I know this is not an election year. So in years, other than election years, you have big advances being made in the tax policy front, usually that means there are tax increase proposals. And we did not get disappointed on that front. There was a whole bunch of stuff. Matter of fact, as of February of this year, there were so many tax proposals circulating in the legislature that we just almost couldn't keep up with that. That's really interesting because you're differentiating this year against other years and saying that there were more tax proposals in 2017 than earlier years. In the beginning of the year, we put out a digest and used the digest to seven or eight pages long at the beginning of February. This year was 14. Tells us something. Why? I mean, is it something in the weather, the water, sunspots? What is it? Why all of a sudden this year do we have all these, did we have all these proposals for changes and increases in tax in Hawaii? It's just a very good question. Seemed like it was popular or something. Somebody got the idea and everybody ran with it. Yeah. So, but does it mean, does it reflect the fact that we're in trouble financially and the legislature or the operatives in the legislature felt that they needed to raise money? That's why all the tax changes? Well, a lot of changes were proposed, not a whole lot got through. Lots and lots of things died. That digest, the start of this 14 pages is now three. Does that mean that lots of stuff dropped by the wayside? Passed? Well, yeah, I got three pages of stuff that passed the legislature as on the way to the governor. Well, let's talk about some of the bills. The bills that you followed, the bills you thought were, oh, I don't know, threatening to the taxpayer or that would have some profound effect on the economy or the tax structure. Okay. Well, let's start with that one then. There's House Bill 209. We talked about that a little bit earlier offline. And that is basically an individual income tax hike. Okay. In which? In rates. So remember the 9%, 10% and 11% tax rates that we thought we got rid of a couple of years ago? They're back. Effective 11 2018. Those rates kick in again, assuming this legislation is approved to do things like providing poverty relief programs. There's something called the low income household renters credit. It increases that there's something called the food excise credit, which is for low income people and continues and increases that we enact the federal earned income tax credit. Or we have a state analog to it, it's 20% of the federal amount. But ours is non refundable. So that's in the bill as well. And it's being financed with tax increases on the quote unquote wealthy. So we do have tax increases already this year. Yes. That's how serious, how large, what is the dimension of that tax increase in money? For me. For us. Well, the tax increases kick in at starting at $200,000 for marriage. So $200,000 is the 9%, $300,000 for 10%, and $400,000 for 11%. So that for singles half that for head of household, it's 75% of that. I remember, I mean, it's not hard to have this memory that Hawaii's income tax is one of the highest in the country. When we initially enacted the, you know, those rates back in 2009, you know, right after the recession, we were the top of the country. And then, you know, California felt that it didn't need to be didn't want to be outdone. So they beat us. A little competition. Yeah, a little competition there. And I think also, either tax at you sets or Connecticut or New Jersey, what one of those. But they don't have a draconian gross access tax like we do. No, they don't. And that's totally me. I say it again, totally regressive. It hits the little people on the head and they don't realize it. Well, it's funny, you should say that because because this bill 209 is supposed to be the antidote to that. It's supposed to make our tax structure more progressive. Well, I suppose, well, we didn't get an increase or rather an extension of the gross excise surcharge, but we still have the gross excise surcharge for a while. And we still pay this, you know, high gross excise rate to for everything. We can go to most of the states and there are exact exceptions and exemptions that you that don't apply to go to Oregon. I love it. You go to Oregon and you buy something, you know, and a cash register in a store and and it's the exact price that's on the label. There's no tax. How about that? And it's like, wow, having a having a shower and feeling good. You don't have to pay any gross excise at all in Oregon. Well, it's very easy to big big it into the price. So sure. Yeah. Yeah. So it really doesn't matter that much. So how so how did we come out? I mean, the citizen of Hawaii is going to pay more tax next year. Again. Yeah. That's the way it is. That's the way it is. Yeah. So I guess, you know, I wonder if there's a concomitant increase in benefits for business that came along with the same maybe a reduction for taxes on business, some kind of incentives to incentivize young people to go into business anything like that come along this session. Oh, well, there are there are a lot of credits proposed, none of which none of which are passed. Yeah. So in a conceptual way, except except the movie credit, we extended the movie credit for another five years. Yeah, that's peanuts. Sorry. I mean, what I'm saying is that, you know, they're taking more money. I don't know how they're going to spend it. I could ask you that next, but they're not really giving us the kind of support we need to develop an economy that will generate the tax. So it's squeezing the lemon. And it's what you said before. It's like without consideration of the effects of these changes. Yeah, I've maintained for a very long time that what we should be thinking of, you know, top of mind is, hey, tax is not something that people just cough up, you know, there's an engine that produces the tax and the engine is business, business and commerce. You have to take care of the engine so it can spin spin spin and throw off all this tax. Yeah, they're connected. Yeah, business and tax are connected because you can't pay tax if you don't have business generating income. What about that really strange idea that somebody had this somehow relates to what we're talking about for this 12.5% against the tourists? I thought that was very interesting. You know, we don't want to pay it. Let those guys pay it. Squeeze that lemon instead. What would you think of that on a tax policy basis? I was very surprised when I heard that discussion come up, you know, using TAT as a way to pay the real tax. But, you know, there were actually some good reasons behind it. You know, number one being, okay, you know, Mr. Mayer had said, well, let's use the GE tax as opposed to property tax because we export, you know, a third of GE tax, you know, it's a contention with which we disagree a little bit, but the logical conclusion of that is, okay, fine, you know, let's hoist the TAT and even more that gets exported. Right. Okay, number two, that real project needs money now, not 10 years in the future. So if you extend the surcharge, you only get money 10 years in the future. What about, you know, what about all these overages and stuff that you're dealing with now? There are already billions behind in that project. Oh, yes. So you need money now to help with it as opposed to in 10 years, and TAT would produce the money now. Yeah. So there were some good reasons. What about, what about the, I mean, I don't have any data on this, but what about the effect on tourists? What about the effect on tourism? Would they know the difference? I think somebody was assuming, you know, and structuring that they wouldn't even know the difference. That is painless. You know, you go to another city and they charge you a big sales tax process. You don't know. You think, well, I got, I got to pay it just the way it is here. I just accept it as kind of a Zen basis. Would this tourists accept it on a Zen basis? I'm not, I'm not sure about that. I mean, people were thinking, oh, well, you know, 12, 12% is what tourists pay in many other parts of the country. What I am not sure they were thinking of, though, is we had GT on top of that too. So, so it's not only the 12%, but also the 4.16 or the 4.5. So, so the tourists looking at 16%, you know, off the top. You know, when you say things like that, I get a splitting headache. And when I get a splitting headache, I feel I need to take a break. So, Tom said, okay, we take a break for a minute now. Let's take a break. We'll be right back. Rise to the challenge. We make responsible decisions while we cheer on our heroes and toast their success. Elevate your matchday experience. If you drink, never drive. Okay, we're talking about something that is just as sure as death. Taxes. We're talking, we're talking with Tom Yamachika, who's the president of the Hawaii Tax Foundation, Tax Foundation of Hawaii. And he's our watchdog. He's our advocate, in a way, trying to keep it all rational when people consider sometimes cockamamie bills for tax increases. And he goes down and testifies, takes positions. And the question I put to him during the break was, is there anybody else who does this? Because we need you. You are very important to us. Well, typically the, the, the tax department is down there testifying on tax bills. But they don't, do they address policy? Do they address the effects on the public and on the economy? Do they address those things? Well, sometimes. But it's, it's tough to rely on them, especially once they're billed. Okay. And then a lot of times they, you know, they put forward bills that would, you know, restrict taxpayer rights because they want the job to be easier. Sure. You'll be able to collect. Yeah. Yeah. That's too bad. Well, let's talk about the bills that didn't make it. And that gives us a flavor of how this, you know, the sort of the persona of this session. Okay. So in no special order, here are some of the bills that didn't make it. There was a proposed tax on electronic smoking devices. They wanted to put the tobacco tax on that. That, that died. There were bills. That sounds like it was a good bill. Well, it died. It died. There was the proposal to put a surcharge on real property tax to fund education. So there was a constitutional amendment, as well as the implementing legislation. Both of those went to conference committee, but, but got shot down at the last minute. There was a bill to... Or take it, you oppose that. We, we don't take positions. We just comment. Okay. Okay. I mean, you know, we're a 501C3. That's what we do. We, there was a bill to expand the solar credit to include battery backup systems. That got pretty far. But again, conferees couldn't come to agreement. That died. That's really too bad. That one, we, you know, we studied that one in the capacity of an energy bill. And it was really regrettable that we don't have that yet, because we need to have solar in the state, or rather batteries covered, you know, by this incentive. And batteries are expensive, and people are not inclined to buy them unless they have some nod from the state government. So... Yeah. I mean, certainly, you know, batteries with the solar system, if you, I mean, that would probably qualify under the existing credit. But if you have an existing system and you want to add batteries to it, then... But what's the difference? Yeah. That's batteries, and it's a solar system. I mean, you can't use them except with a solar system. So... Oh, you can use them, you can use them independently. Yeah? Yeah. I mean... Connection with your home? Yeah, you can, you can connect them to, you know, the existing grid, and if the grid goes down, then you can... Oh, I suppose so. I said, emergency. Yeah. Yeah. Yeah, I mean, I was looking at those myself. Yeah. Then, then you have ways to fund the highway fund. So the Transportation Department wanted to hit us with fuel tax increases, vehicle weight tax, vehicle registration. Somebody wanted to change that into a tax on value of the car, sometimes called an add valorem tax. That would be the opposite of regressive, eh? You have a big expensive car, you pay more. Or a big truck. Well, that could be used in business, so that it should be agnostic. Well, but I think it would have a disproportionate impact on the trucks, really. Yeah, because you get more tax on the truck. But the idea, I think, behind that one was that you can deduct personal property tax on your federal income tax return. So you can kind of like shift part of that one over to the feds. But the trouble was none of the counties had any solution for implementing this type of tax. I mean, it would be tough to set up and... Have to hire a lot of people. And their computer systems, I think, are written in cobalt, so it... I'm sorry, Tom. I don't know what cobalt. I'm only kidding. That's really an old language. And it goes back to Neil Apocramby's promise to us that we're going to have a new computer system all around the state. We don't have that. Yeah, well, they're building it now. I mean, parts of it are active at the Department of Taxation. I'm hoping. Yeah. But then, of course, the city governments are independent, and they have to deal with their own technology problems. This goes to the whole thing about not having enough money in the till to do things to keep current, to keep up. You know? I mean, the big risk for an isolated state like ours is that we'll fall behind. We'll become irrelevant in the 21st century. And if we can't keep up with this kind of thing, with government technology, and with the technology of business, we will fall behind. And that needs, that requires money. So I think, you know, part of the SADSAC experience that went down in this legislature, as in earlier legislatures, is they were seeking money to do, at least from a conceptual point of view, to keep up. But they didn't get the money. And then now they're not going to be able to keep up. Well, one of the problems was that the revenue forecast kept going down. Right? I mean, it started off at a certain amount. The council on revenues and all that. Council on revenues knocked it down by 150 million at the beginning of the session. Yeah. And then knocked it down by another 250 million. So lawmakers were scrambling to get behind that because they had to balance the budget with that number under our constitution. Yeah. So why? Why? I mean, I just heard, you know, we have all kinds of room rate increases. We have more tourists. There's nothing happening in Hawaii that suggested our economy. I mean, you wonder about it, but nothing suggests our economy is failing right now. No, no, no. The problem that was cited in that first drop in the $150 million reduction was that they weren't getting enough, or they weren't getting as much as they thought they were going to get out of the construction industry. Because there was a lot of construction activity. There still is. That's really, really hot. And I guess they were expecting a lot of tax revenue that didn't materialize. And, you know, when you kind of think about, you know, the stories that you read about the Department of Labor going down to kind of crack down on the contractors that were paying these workers as independent contractors illegally and not holding, you know, withholding payroll taxes and not doing unemployment contributions and so forth. And bring them in from the mainland on this sort of cash-all kind of technique. Right. And then, you know, they come and they go and the proper tax isn't paying. That probably had part, you know, something to do with that. Well, you know, what you say suggests, and I guess I knew this, is that the council on revenues comes up with a number that is projection. It may be fiction. It may be right. It may be wrong. Sometimes it is wrong. And that's the number that the legislature has to use under the constitutional provision that requires it to balance the budget every year. Right. Sometimes that number is wrong, too high, too low, what have you. It's probably a better guess than you or I could make. Oh, sure. Are you on the council revenues? Could you be or you would have some conflicts or some kind? My predecessor was on it. Was that right? Localapa. Yeah. Interesting. Also an important organization because it dictates, you know, the scope of funding from the legislature. What other bills do you think we should mention today? So there were bills to, I'm sure you heard of the Airbnb bill. It was a bill to withhold tax and vacation rentals. That was passed last year, vetoed last year, came up again this year and this year didn't even pass the legislation. And the party introducing it was Airbnb, right? That's correct. That's really interesting. They wouldn't avoid a problem at another level. They wouldn't avoid, this is a sort of fight, fire with fire thing. Yeah. Perhaps. But I mean, it made a lot of sense for them to be withholding and remitting, you know, tax to the state. From an efficiency point of view. Yeah, because they collect the money anyway. Counties do not have a way to do this. And would put a strain on their administrative resources. Well, no, it's the counties, the ones who are opposing it. Because they have the land use regulations that were apparently being violated. And their remedy is to shut their rentals down. Right. So this is Airbnb's way of, you know, sort of a backdoor approach to increase the number of rentals that Airbnb can do. Or at least making sure that the ones that they have are more legitimate. Yeah. So that failed. That failed. So now, okay, we'll talk about the two-year cycle in a little while. Yeah, anything else? And then real estate investment trusts. There was a... Oh, that's a Mike Fergus bill. There was a bill, and it's been considered for a number of years now, to increase or make sure that real estate investment trusts who own property in Hawaii and are doing business in Hawaii are paying income tax. Because typically, a real estate investment trust doesn't pay income tax, what its shareholders do. Yeah. So, I mean, that seems fair to me. And I've talked to Mike Fergus. In fact, we had a program back a couple of years ago where he was talking about his favorite bill, which he's been advocating for a couple of years. He doesn't feel it's fair that these REITs come in, and Hawaii doesn't get any income tax from them because it's all a federal pass-through, and therefore, by reference, a state pass-through. Result is that the shareholders pay somewhere else, but Hawaii doesn't see any income tax at all from these enormous REITs with enormous revenues. Yeah. They do pay a GET on the rental income that they get. They do pay property tax, but they don't pay income tax. Yeah. So they get a break. I mean, if you were a Hawaii resident or even a Hawaii, well... If you're a Hawaii developer, you got to pay all three. You got to pay all those things. It seems unfair. It's a discrimination in favor of the offshore. And this is what I consider this a matter of managing offshore investment. They're going to come here. You want to manage them so they don't take advantage of the loopholes. It seems to me that Mike Fergus is right, but maybe next year it'll come back. Maybe next year it'll come back. And speaking of next year, let's talk about next year. I mean, this was a very interesting, and I mean that in the Chinese sense, legislature, because people were thrown out of office left and right, and there were arguments between one side and the other that had nothing to do with policy, nothing to do with the merits of the bill, and yet they were who-who at each other, and you know, so bills failed for that reason. And this has happened before. It's not a good statement of the way things work. Yeah, there was certainly a lot of high drama this year. Yeah. It kind of started off early in the year when the house dumped Angus McKelvie, who was head of consumer protection. In the middle of a hearing, in a recess in the hearing, that was really interesting. Yeah, very much. So some people shifted around. So Roy Takumi became head of CPC. Justin Woodson, who was head of higher education, filled Takumi slot, and then McKelvie went to fill Justin Woodson's slot. So make for good policy? I don't know. It certainly changed things around. And then we just found out that Jill Takuda, head of the Ways in the Means Committee, and- It's a very important position and task. Very, very important committee. And budget, yeah. Yeah, and then she got deposed. She seemed to be a very bitter fight and replaced with Donovan Della Cruz. So he'll be the Ways in the Means chair going into next year. And then, of course, a speaker of the house, Joe Suki, he was kind of forced into retirement and replaced with Scott Psyche, who was the majority leader. A lot of drama. Not a high drama. The public doesn't know all the drama, I'm sure, that is under the surface. And unfortunately, I think that does affect the result of the legislature. The drama happened mostly recently in recent weeks, but it reflects a tone and tenor that may have affected these pills as they were going through the pipeline earlier than this kind of drama hit the news. Yeah, certainly one of the things that keeps the literature together is the members coalescing behind their committee chairs. It's part of the process. And so it's the committee chair who has kind of like the ability or the duty to collect their members' viewpoints and come up with some decision that reflects the collective viewpoint. And then the members can go behind the committee chair in the subsequent policy discussions, but apparently something didn't connect this time. Yeah, well, it's happened before, but this is the worst that I can remember. Yeah, and you actually had, like, there were negotiations that had took place on the conference draft of the rail bill. The Senate body basically rejected those and put their own draft in, despite having a broker deal that happened, I think, Monday night. And then Tuesday happens and it's all gone. Yeah, it's not the sound of a function, a properly functional organization. And the question I put to you is, what does this signify for next year? We had a bust this year, I would say, not only in the bills that affect tax, but in a lot of other bills, including social safety net bills and energy bills. How does this affect what do you think is going to happen next year? What should we be looking for next year? Well, what we should be looking for is perhaps a reorganization of the legislature. I mean, you see it every election year because you have new members, they have to get together and figure out who their leadership is going to be. And supposedly that organization should hold through the biennium, right, the two-year period that the legislature's in session. But apparently the organization broke down this year for whatever reason. Yeah. So we only have one minute left, Tom. And I'd like you to take a look at camera one over there. That's the one that's looking at you. And imagine that there's a lot of people out there who would like to hear what you have to say about what they should be doing or not in the period between now and next session. What should the public think about? What should the public do with regard to tax changes? Well, I really do think there should be some thought and discussion about what our policy is going to be, how we're going to take care of the economic engine that runs our state. Once we properly consider where our money is coming from, then we'll probably be in a better position to make wide decisions about what to do with that. Amen to that. Tom Yamachika, president of the Tax Foundation of Hawaii, talking today about the tax effects of the 2017 legislature. Thank you so much. Thank you, James.