 Okay, bingo, you know where you are now. It's Stink Tech Monday, my God. Another Monday. I'm Jay Fidel. This is Community Matters, and my special guest today is Tom Yamachika of the Hawaii Tax Foundation. So, it's so nice to see you come back and talk to us some more about what's going on in the square building, Tom. Yeah, well, thanks for having me on the show, Jay. So, we're going to talk today about tax bills, 2018 Hawaii Legislature. And I guess we should start out by identifying, you know, the tone and tenor, which is dependent so much on the Council of Revenues. What did they say? What does it mean? How should it affect the legislature? How is it affecting the legislature? Well, the Council on Revenues gave us some good news. They said that we're going to get more money than we anticipated. But that doesn't make up for two bad things that happen. One is, when the governor submitted the supplemental budget, it was already $200 million in the hole from the start. I mean, his budget was $200 million short. That's right. Spending $200 million. Why did that happen? How could that happen? Is that a typographical error? Or what? No. That's what they submitted. The administration was $200 million off. I think they intended that. They submitted that kind of budget and total legislature will fix it. Huh. That's interesting. I mean, you know, like it reminds me of Santorum's comment yesterday to the kids in school now. He says, you should learn CPR. And they said, well, what about Congress? Is Congress going to do anything about gun control? And he said, you should learn CPR because you're the first line of defense. And they said, the teachers involved said, CPR is not going to help a kid with 10 bullets in him. That's not going to do it. So what he's doing is passing off Congress's obligation onto the community and in fact potential victims. So here it sounds like, you know, the governor is passing off the obligation to balance the budget to the legislature or whoever is lobbying in the legislature. We have a constitutional requirement here that we have a balanced budget. And to me, it's just unconscionable that they give the legislature an unbalanced budget to start and basically tell them to fix it. That isn't usually the case. Is it? I would hope not. It sounds irresponsible. Just my reaction, yeah. And then after that happened, the actuary for the Employer Union Trust Fund came in and said, oh, you guys were using 2015 numbers? Well, it's 2018 and we're going to update your numbers for you. And by the way, the contribution that you owe this year is $50 million more than you planned. So we're down $250 million. And then, so even if COR, the Council on Revenues, came back with rules to your estimate, like maybe $70 million, $80 million, that's still, you know, you're starting from minus $250 million. Yeah. Well, putting it in perspective. I mean, I suppose in the federal system, $250 million is a fly spec, but not in the state system. What's the total budget? Is what? $12 billion, something like that? That's about it. Yeah. So this is a substantial part of it. Yeah. Anyway, so okay. It's not chump change by any means. No, it's never chump change, but in Hawaii it's even more precious. So the other thing that's on the deck that we should talk about, to sort of create the landscape here, is the Tax Reform Act that was passed in, what, late December, early January by the Trump administration, which, you know, we can talk about that in substance. But I guess the first thing is the conformity bill you mentioned when we spoke recently, conforming the state tax code to the change, whatever changes there are in the federal tax code. Yes. You just conformed. Right. Is that the same here? For the past 60 years, what we've been doing is conforming to the federal code, and that's for two reasons. One is, so for you and me who have to file tax returns, once we're done with the federal one, doing the state one is much easier if the laws regarding what you report and what you don't report or what you write off and what you don't write off are fairly similar. And by the same token, it helps the state because once the feds audit somebody and they send a report to the state, which they do, then the state can have an easier time figuring out if they're going to assess the same person for state tax as well because if the rules are the same, then somebody's underpaid federal probably has underpaid state. So as for the past 60 years, I guess it was the Hawaii Tax Office put in a bill to conform the state tax code with the federal changes in the Federal Tax Reform Act. How is that doing? Is there a suggestion it may not go the same way as it has in the past 60 years? Yes. The current version of the tax conformity bill, which of course started out with the tax department, is that we're not going to conform in several key areas. And you may or may not like this, but okay for individuals, for example, you remember how in the federal changes, they limited what you can write off, like they limited your home interest deduction for your mortgage, they limited your state and local taxes that you paid. They took away all of your 2% miscellaneous itemized deductions if you're so lucky to itemize deductions. But they gave you an increased standard deduction, which is a deduction that you can get without doing anything, just by being alive. And so there are tradeoffs and the feds drop the rate as well. So there are tradeoffs. Yeah, yeah, for eight years, which is what they needed to get it past the Senate rule. But what they are proposing on the state side is not to conform to any of that, so they would allow you to write off your mortgage interest, to write off your state tax expenses, to take your 2% itemized deductions, but for state tax purposes only. They can't control the feds. This creates a disparity in the way it works. The rules now would be different between the state and the fed. So for example, an audit on something that was involved in the federal tax reform act would not be valid as an audit point, if you will, for the state tax because the rules are different. Yeah, it would be easier to get out from an assessment by saying, well, geez, well, there are all these expenses that I have and I can take deductions on the state side. You didn't consider this, so you have to prove up that I don't have these deductions before you can assess me. Yeah. Well, there's a huge statement here, and I don't think it's limited to Hawaii. I have the sense, you may know more, that this kind of pushback on the federal government on the tax reform act is not just Hawaii, it's other people. It's the whole notion of California's action on sanctuary cities. We don't like your immigration laws and regulations, your practices, the way you push people around. We're not going to enforce those things. And then a lawsuit by the Department of Justice, what an ugly day, actually. So the same thing here, I think people in the legislature on this issue and probably a lot of others, including immigration, they don't like what the federal government's doing, and they're going to do their own thing. And they're questioning whether the tax reform act is good fiscal policy, no? Yeah. But by the same token, what they are doing is they're picking up a lot of the business changes, right? So on the business side, they are eliminating write-offs for meals and entertainment, for example. The entertainment, yes, but the meals, they're going to leave at 50%. They are not picking up the rate reduction, right? Because the corporate tax on the federal side was 35%. They dropped it down to 21%. The state bill doesn't propose to change the corporate tax rate at all. I'm proud of them. You're proud of who? I'm proud of the state legislature for considering rejecting these changes. You can tell us how you feel about them, but I think the tax reform act, when it was just adopted in Congress, is really bad business, and it's another dump on the middle class, and it's very tricky, and it favors the big global multinational corporations and saves them a huge amount of money, and it doesn't really save us that much money. But tell me how you feel. We can agree or disagree. Yeah. Well, there are several things to hate, irrespective of which side of the fence you're on. You know, my personal feeling is that they should conform more, especially when it comes to tax relief for the middle class. I'm not opposed to them expanding the base so much if they reduce rates, but I think it is kind of, you know, kind of pilau if they pick up the base broadening without reducing it. Yeah, you're right. That didn't make you more money. Well, I suppose, yeah, we should reserve on that by saying it's the legislature trying to squeeze the public for a little more money, isn't it? That's what it looks like so far now. Keep in mind the legislature is only halfway over, and there's still a lot of time to go. Well, you're down there. I know you go there. I go there. And you check on all these tax bills, and thank God, Tom goes down there. So what's your sense of it, and who is standing shoulder to shoulder with you and taking similar positions about protecting the taxpayer, trying to keep a lid on taxes and spending? Who's with you? Are you a force, this community of people who watch over the legislative tax moves? No, I'm kind of a lone wolf out there most of the time. We should appreciate you for that. Yeah, howling in the wind. We should appreciate you for that. OK, well, on balance, if you say to the money committees and the legislature, no problemo, we've got a good report from the council on revenues, even if it's tempered by that $250 million or $280 million shortfall, they're going to feel a little more free in spending, aren't they? Do you see that? Do you see that they feel a little more free in spending? No, not at all. I mean, they have a big budget hole, and they have to fill it. Created by the 250. Created by the 250? Yeah. Well, OK, so what other bills are pending by which they're trying to fill it? And I really would like to hear your thoughts about gems, the green money, whatever it is, Bill. Yeah, now, let's kind of start with the theme that you proposed about what are they trying to do to fill it. There are several bills to raise the conveyance tax. So when you buy or sell property, the amount that is taken out. That's significant. Isn't that peanuts? It won't be. Well, how high is it going? There's one bill, for example, to add another dollar to properties over $2 million. $2 per? $100. So on $2 million, that's the best 20 grand. Wow. This is directed at high-end property transactions, maybe some of those high-end condos that are trading now these days. Right. $2 million is high, but it's not that much anymore. You know, Everett Dirksen, you know, a billion here, a billion there. After a while, it gets to be real money. Yeah. And after a while, we get to take a break. That's Tom Tom Yamachika of the Hawaii Tax Foundation. We're talking about what's going on midterm here in the legislature. Good, bad, and otherwise. We'll be right back after this break. Oh, my head hurts. Hi, everyone. I'm Andrea Gabrieli. I'm the host for Young Talent's Making Way here on Think Tech, Hawaii. We talk every Tuesday at 11 a.m. about things that matter to tech, matter to science to the people of Hawaii with some extraordinary guests, the students of our schools who are participating in science fair. So Young Talent's Making Way every Tuesday at 11 a.m. Only on Think Tech, Hawaii. Mahalo. Aloha. I'm Marcia Joyner. And I'm Beatrice Gantelho. And we have come in this series, young and old alike, to take a look at our past, your past, and the past that's not seen in history books. History books are his story. And what we refer to as mirrors of the past, but we as colonized people, indigenous peoples and people of Kola, look into the mirror and do not see ourselves there. On the ties that bind, we will examine those underlying causes. Please join us with the ties that bind on Wednesdays at noon twice a month. We look for you there. Aloha. Aloha. OK, we're back. We're live with the Tax Foundation of Hawaii, namely Tom Yamachika, who goes to the legislature representing our interests, tries to protect us, because we don't watch out on that, you know? Tax is the most important thing. Tax affects us all. Tax affects us all in our pocketbooks. Tax affects the economy. And most important of all, and I always harp on this, tax, whether you like it or not, whether you think of it or not as an incentive or disincentive for conduct, public conduct, the way you lead your life, the way you consume or not, tax has a huge effect on public conduct, public behavior, the direction of our state. So tax is really central as far as the taxing power is really big, really big. So I'm glad you're there. Let's talk about what was the next one? Harpta. Harpta. OK. Harpta, since we were talking about buying and selling property, and we talked a little bit about the conveyance tax, Harpta is withholding income tax on transactions of real property when they're sold by a non-resident. So the current law is that we withhold 5%, which makes sense because somebody who holds property and then sells it is probably going to be liable for some capital gains tax. The individual capital gains tax is 7.25%, but the person telling it will have some basis in the property, they would have wanted for something. It's a good guess, a reasonable guess. It's a reasonable guess. They want to change it to 9%. OK. So first on the 5% thing, suppose the guy takes the money and skips town. Suppose he's, you know, from offshore somewhere, right? And he owns the property, sells the property. Escrow is withholding 5%. In fact, it's 7%. And he's going back to the depths of Sri Lanka. How is the tax office going to get the other 2% from him? It doesn't. It doesn't. Yeah. It's very unlikely. OK. I mean, I just worry about the whole efficacy of that. There's some, it's a reasonable estimate based on the thought that, well, at least we wouldn't be completely out of pocket when he leaves town. Right. But in this case, now they're raising it to 9%. Why? Is it for the concern I expressed or something else? I think it's something else because a lot of the properties that get so turned out to be rentals. And so there's GT that's owed, there's TA, Transient Accommodations tax that's owed, and they scoop the income tax withholding to pay those, which I think isn't entirely honest, but that's apparently what they want to do. So that's that going on. Yeah. Will it pass? Something will pass, it seems. Maybe another percentage, perhaps. Yes. The percentage isn't nailed down yet, first the Senate passed out seven and a quarter, then they passed out nine, same bill, almost the same wording, but the percentage was different. So it doesn't have to go to the conference? Well, House hasn't acted. Oh, okay. Yeah. So are you taking a position on that? We're just offering comments like we always do. So you know, in the same vein, you have the REIT bill, the Real Estate Investment Trust Bill and Mike Fergus for years and years, putting that as a real estate investor here, putting that bill in on the thought that we had all these REITs in town who don't pay tax. A local entity in the same business doing the same activity would be paying income tax to the state of Hawaii, but not the REITs, because they under federal law conformed to a state of Hawaii law, that money goes up and away, and the individual REIT owners, stockholders, if you will, the interest holders. They're supposed to pay tax on dividends, but they don't because they're in other states. They're in other states, and they pay on their income, presumably in their own state and in the federal system, but they don't pay in Hawaii, and neither does the REIT pay. So the result is we're losing a lot of money to huge capital concentrations of shopping centers, big landowners, you know, all the big trusts sold off to REITs, but now the REITs hold large tracts of land, including developed and undeveloped land, all over the place, okay, and they're not paying income tax to Hawaii. Now, Fergus was introducing this bill for years. I don't know if it got introduced this year. I think it did. Yeah, there was a variant that got introduced this year because the, you know, the approach in Mike Fergus's bill was to tax the REITs, and this year's bill was focused on the shareholders. And the theory behind it was, okay, well, if we give the REITs a break, we've got to make the shareholders pay tax. So it was a withholding approach similar to what we do for S corporations. But where that one is at now is that Department of Tax is saying the cannon force it, the AG is saying it's unconstitutional. The AG of the state of Hawaii is saying it's unconstitutional. That's correct. But other states have provisions that tax REITs? No, they don't. Only New Hampshire. New Hampshire has it. Yeah, New Hampshire taxes the REIT directly. Yeah, so they got by a constitutionally challenged there, I'm sure. Well, I mean, there is really no challenge when you tax the REIT directly because it's the one doing business in your state. Right, simple. Yeah, that one's simple. Taxing the shareholders is a little tougher, but if we can tax S corporations, why can't we tax REITs? No reason why we can. Anyway, so it doesn't look like it's going to pass. Well, it needs to be on life support at this moment. Okay. On the same vein, we're talking about real property. Let's talk about Airbnb for a minute. There's been so much in the paper about that. What's the status of it? What does the bill say? What's the status? So this is another one that's very interesting because the governor budgeted $30 million or so coming out of the Airbnb bill. So they basically wanted the vacation rental platforms such as Airbnb, FlipK, VRBO, and so forth to collect and pay tax on behalf of the individual entrepreneurs who own these different units. But they've loaded up the bill with a lot of requirements. Like they need to get some clearances from the counties and if they don't, all kinds of bad things happen, including but not limited to the county can go after them to discourage the illegal profits. So they basically make the platform pay a large amount of money when it's really not their fault. It's the individual property owner who's not compliant with the zoning law. And how do you expect somebody like Airbnb to police that? But the net result is there are so many requirements for a voluntary compliance-type bill. Airbnb 401 has sent the money committees and the do-tax saying, okay, fine. If this is what you want, we aren't going to participate. We won't do it. So if you want $33 million, you've got to get it from somewhere else. That's what they said. This is what I call a mess. It is a mess. If you want somebody to do something voluntarily, there's got to be something in it for them. I mean, come on, reality check. So it's stuck. Yeah, it's stuck. It's not going to happen. At least so far. What position is the administration taking on this? They're supporting it. How about you? Me? We just give comments. But the comments that we're making are, look, if you want somebody to voluntarily sign this, sign on to this. No can do. Yeah, I mean, if you load it up with liabilities and challenges and pitfalls and stuff like that, who in the right mind would sign a paper? So it fails, which sounds like he's going to get stuck and fail. What's the result? Where are we then in terms of Airbnb? Same as we are now. We have individual entrepreneurs. We rely on them to, you know, be honest and follow the law. And, you know, sometimes they do, sometimes they don't. Last one that I can think of, maybe we can think of others too, but is the gems bill? Yeah. So the gems bill, it was at the end of the Abercrombie administration. And it was intended to help finance energy equipment on single-family homes, I think. That was a principal intention. And on profits, yeah. Okay. And people or companies that could not afford to get conventional financing. There was a bailout financing arrangement for people who couldn't otherwise qualify. And they raised $150 million with a bond offering, New York banks, and established a kind of infrastructure about how to make these loans. And I think it was scandalous that there were no loans made for at least a year. Not a penny was loaned to anybody. Yeah. I mean, they were following the same underwriting standards because they had to. They're fiduciaries. So if they didn't qualify for a loan and they came to gems, guess what? You know, gems declined them. Oh, sure. Because they were not qualified. Yeah. Surprise. Yeah. So for the longest time, gems had most of the $150 million is still intact. So what did the legislature do? They loaned it out for them. So in- I mean, they took it away. Yeah. In 2016, they passed a law that said, thou shalt loan $46.4 million to the Department of Education to help cool the schools. And by the way, DOE doesn't have to pay interest on it. Zero interest. Meanwhile, we, the taxpayers, have to pay interest because it's bonds. Right. We pay. But they don't pay. I don't get it. It's not taxpayers in general. It's the ratepayers because you and I and anybody who has an electric bill, we pay. We pay. Yes. And so what they want to do this year is they found that so edifying that they want to do more of it. So they want to sequester another $30 million from the Gems Fund and make it available to other state agencies at a scandalsily low interest rate of 3.50%. This is really funny, Tom. They're taking the money away. Little by little, there's going to be nothing left. They're going to sweep it all out of there. The original intention of the statute was it will not be met at all. It hasn't been, in my opinion. And, you know, it's just another one of those things where the legislature takes it from one and puts it in another. Despite the fact that the original intention was something else. Yeah. And there was, I also talk of using the Gems Money Defiance to fund some kind of rebate program. If they do that would certainly be in breach of the bond covenants. I mean, because the money is there to lend out not to give away. Yeah. Yeah. People forget. So interesting how the legislature forgets their original intention. I opposed this. I wrote a couple of articles in the Star Advertiser about it. I thought it was a bad idea in the first place. And guess what, Tom? I was wrong. I mean, it was right. I was right and they were wrong. I've written on it as well. Expressing probably similar sentiments. Well, the next time you look, there won't be anything left in the fund. But we still have to pay the 150 million back. That's right. OK. What else? You want to sort of characterize how things are doing right now? Again, the mood is, geez, we've got a budget hole and we need to fill it. So people are being told there's no money. I don't know whether the agencies and the unions and so forth are believing that. Because as you recall, they were told in 2016, I think it was, that, oh, we have a billion-dollar budget surplus. And the next month, they came to the union and said, oh, it's all gone now. So I'm not really sure if the administration has tremendous credibility with the unions right now. Meanwhile, we have all these unliquidated and unliquidated liabilities to pay, which we are really not paying very well. Yeah, we made these promises to our state workers and the retirees that A, we'll give them these pensions and B, we'll take care of their health expenses for life. Those are significant financial obligations. And they're growing. And they're growing. The liability, the we call it, the delinquency is growing. The unfunded liability is growing. Well, Tom, the session's not over. That's sort of good news and bad news, I suppose. And that means you'll have time to come back and talk to us again as it proceeds into the, you know, the ninth inning soon. Yeah, absolutely. I'll be happy to do that. Please. Thank you, Tom. Tom Yamachika, Tax Foundation of Hawaii. Yay.