 in the home stretch here on Talking Tax with Tom Yamachika of the Tax Foundation of Hawaii. I'm Jay Fidel. This is ThinkTek on a given Thursday. Welcome to the show, Tom. Thank you, Jay. I'm glad to be here. We've got two days left in our, including today, in our legislative session. And then they'll go, sink oil and they'll go home for another year. And in the meantime, we have a bunch of bills affecting tax and public finance that have got transmitted. That have been transmitted to the third to the fifth floor of the capital where our esteemed Governor David E. Gay can decide the fate of some are all of these bills. Okay. So what, you know, I mean people have said, and I've asked a number of people, what do they think of this session. Everybody has had, you know, glorious compliments about it. And there's a whole range of opinion, but most of it is not all that complimentary. How, how would you classify their work this year, this session on tax. You know, I'm, I actually have a rule zero look that maybe some people do with, you know, the, the kind and quality of bills that I got introduced. I was expecting something a lot worse. There were a lot of terrible bills that could have been enacted and have and would have made it, you know, much tougher for taxpayers, including some administrative changes that the department itself abandoned at the last minute. And we have some taxpayer taxpayer favorable visions. Some of them are going to be very consequential. And we'll get into those. The one thing is, you know, I always, I'm always interested when people say, oh, that was a terrible bill. And that bill, you know, shouldn't have gotten in the hopper at all. And everyone knew that it was a bad bill. And yet we have legislators out there who introduced these bills and put their signature on these bills. And you're probably going to tell me, well, you know, it's a political, political phenomenon. And somebody comes to them, whether it's a constituent or a lobbyist or who knows who, and says, hey, you got to introduce this bill, my favorite pet bill. And they do because they feel that somehow their office obligates them to do that. But wouldn't it be a better thing if they put their judgment, their thinking cap on for a minute and say, hey, this is a terrible bill. I'm not going to introduce this. Hit somebody else. Why, why can't we change the culture. Well, like you said, it's politically infeasible to tell the constituent. This is a terrible bill you schmuck. So they would rather introduce it and then have it die. Oh, was it my fault, you know, the, you know, the dam finance committee or the dam energy committee. So I really did a number on that bill and I was not wasn't had to do that. You agree with me it would be better more efficient, more honest to say to the constituent now I'm sorry. That doesn't meet my standard. That's not what I'm here for. I think you rarely you'll have something like that where where a legislator is is both, you know, sufficiently informed and and has enough of a moral compass to to make that determination and then has the courage to tell that to their constituent. But we need to change that because I think it's a drag. At the very least it's or worse, but at the very least it's a drag on across money to spin around with those thousands of junk bills. And across time, and it's distracting from the good bills. And, you know, and sometimes I think we make a mistake. We let it get through. And it passes. And it gets signed. And it's a terrible bill, which should never have been introduced. I really think there ought to be some critical thinking in the front end but that's just me Tom. Let's talk about the bills that you know you have selected for discussion today and some of them are real corkers. Yeah, well one of them, which is going to be, you know, basically felt by every man woman and child in the state is the is the tax rebate bill Senate bill 514. We've been hearing hearing about that in the news a lot. It gives $300 per exemption. So if you've got, you know, a wife and two kids. It's a potential $1,200 bill for you. And for those households making 100,000 or more. Or 200,000 or more per couple. It's $100 per exception. So, this is going to be for the for the 2021 tax year. So if you if you didn't think that you want to file an income tax return for 2021 because maybe you don't have any tax liability or you, you know, you like staying undercover. That's that's probably not a good idea you don't get your free money unless you file your tax return. Okay. How much is it going to cost the government to give that rebate. I think they were saying $250 million. We could we could use $250 million. Don't you think. I mean, is there is there nothing we need to do. Is there no need that we have. $250 million. Have we paid all our bills. Have we, you know, prepared for all the exigencies of living in the 21st century. Have we prepared for climate change. For example. The greatest need in any legislators mind is the need to get reelected. No, that's a good that's a good reason isn't it. That's a good reason. So, I think a lot of people would like to say hey, I the incumbent was in the legislature, and we passed this bill putting $300 in your pocket. Aren't you going to reelect me this time. Thank you very much. What, what does everybody is up for reelection, every single body is up because of the reinforcement. Every legislator, every senator is up for reelection in 2022. To pay off. Maybe. But, you know, let's not let's not forget. This is what our constitution requires now. The constitution requires that if we have too much money, so it's going to be returned to taxpayers. And then, you know, in later years we've enacted all, or you can you know pay down the rainy day fund or you can, or you can pay down the employer. Unfunded liabilities. Okay, but, but as it exists for a very long time, the constitution basically had the requirement that if I think it was since the since the 78 con con that if we have if we have too much money return some of it to the people that's for the constitution. I remember that. But you know, I never felt that we had too much money because, I mean, for example, the employees retirement system is still billions behind the required state contribution. Yep. But wouldn't it be a better idea to pay our bills. I don't know. I think if you ask most people. They would probably say it's you know I think the best thing is some combination of hey you know give some back to me. You know pay our bills and they are paying bills. Okay, the same bill drops $300 million into the pension program and 500 million to the rainy day fund, as well as bring this rebate to taxpayers. I'm not giving a credit for the construction of solar storage facilities. That bill has been, you know, in the ledge for the last four or five years and it has never gotten passed. Now that would improve solar and renewable energy in the state. But for some reason, they keep on bouncing it out again. Wouldn't it be better to spend it on renewable energy? Well, you know, there are a lot of things that, you know, people argue would be better uses of the money. Okay, some people say we should be we should be using that money to improve the social safety net. Some people say we should be supporting small businesses some people say we should be supporting large businesses. Some people say, you know, the list goes on and on and you have all these different viewpoints, and you have to reconcile them somehow. No, you have to, and that's the job of the legislature. Yep. You know, we gave up the electric vehicle tax credit four or five years ago, and we want we have a really a pittance of electric vehicles in this state. We need more, but we don't have any state incentive at all. Wouldn't it be a better idea to incentivize electric vehicles because presumably that would that would help on making us, you know, energy self-reliant. Well, there, there are other, you know, there are other energy related environment related bills, as well, some of them, some of them passed some of them died. This is this is the compromise that the paper recently about a house that slid down the side of the North Shore because the beach had eroded because of, you know, wave action and climate change. I might add that are we really hardened against extreme weather? Are we really hardened against climate change? Are we doing anything? You don't have to answer because the answer I'll give you is no. Wouldn't it be better? Wouldn't it be better? You know, if we spent the money on that out of the box, creative to deal with known existential threats. Yes, the same question to money and activists and get money and different answers. No, but that's what the legislature is there for. It's to determine which of those answers is correct. But the one that seems to be not correct is giving it back in an election year. Well, that's that's what they decided to do. So I might as well go on to another bill that because you know, there's there's no real answer here except to say it's an election year. But really, I mean, you know, you can argue with me all you want, but that's not going to accomplish very much arguing I'm agreeing, but it's sort of a fundamental level. Okay, so let's talk about. Let's talk about tax exempt organizations. Yeah, that's one of my favorite so tax exempt organizations do a lot of work that the government might itself have to do. And why has a fair share of tax exempt organizations, including yours and mine. Yes. And including big ones, little ones, all kinds of purposes and so forth. They're honest and they work hard. They make great contributions in my view to the community. And as I said, they do the work that government would otherwise have to do. So here we have a bill that actually strikes out at nonprofits. Let's talk about that way. Well, I mean, it doesn't strike out at them if it strikes a blow for them. Right now, as you all know, we have our general excise tax here in this state, and not even nonprofits are spared from them from from that tax. And one of the big sources of confusion that has been rampant over all of these years is the is the fact that the GE tax and the income tax defined taxable income of a nonprofit differently. The federal code goes off of a concept called unrelated business taxable income that is, if you're a nonprofit, and you can engage in business activity that that that is not important to your exam purpose and it is, you know, competing with a nonprofit with a regular business, then you get tax the same as the regular business tax. Okay. So for income tax purposes the feds do that for income tax purposes the state does that because we follow the federal law, but for GE tax we do something totally different we say that for GE tax your taxable for any activity the primary purpose of which is to raise money. It doesn't matter what you're going to do with the money. But if your activity raises money, then, then we're going to apply your tax. Okay, Senate bill 3213201 is a game changer, because it's going to say, we're going to, we're going to define the taxable income for nonprofits, the same way we do for income tax. It's the unit of the unrelated business income tax concept. So, you know, if you if you're, you know, a Cub Scout troop and you go out and have a car wash, you raise money for that under current law you got to pay GE tax on it. Under under this bill you don't. I take your point. That's good for nonprofits. For one thing it's consistency the same test applies in, in case of both of those taxes and the other. I think it's a positive thing. You know, to not have to pay gross exercise tax when it's being used being raised for a tax exempt purpose that all seems correct to me. It's a rationalization. I mean, so it's a rational bill and it rationalizes the test for unrelated business income. This is a good thing. I guess I could ask you why it wasn't done before Tom. It costs money. So now the state is actually giving up some revenue. Oh yeah it is. I don't know how much money it's going to cost. I don't think it's a big revenue loser but it. But it's something that you know the tax department of the administration has held sacrosanct over, you know, the past 6070 hundred years that we've had had the GE tax. The, the provisions that go, you know, that the tax, the fundraising income of nonprofit organizations go way back to that I think the 1930s. So did the tax foundation support this bill. We put we offered comments like we do on every bill and we didn't raise any objections, let's say. Okay, and so what. Neither to the department, you know, the, the amazing thing is that, you know, you would have expected the department of tax to kind of jump up and say, Oh my God, this bill is going to lose money hand over fist we're opposing it. But they didn't didn't do any of that. The right role for the department of taxation to be opining on whether a bill going to increase tax revenues or decrease them. Is that part of the mission of the department. I guess it is it's part of their job. And, and litters leaders always, always have questions about how much does this, you know, law change going to cost, how much is that law change going to cost because they have to balance their budget. Okay, well how much is this going to cost. I'm not sure I haven't seen the revenue estimate. It's not in the testimony I don't think. All right, I will say I mean, and it's not only because you and I are both nonprofits I would say as a matter of rational tax policy this is a good bill. And it was not a good idea to have two different different definitions in two separate kinds of taxes. Well, it's it's by no means assured that the bill is going to become law. And I'm not sure is that the Department of Taxes recommending or me recommend the veto of the bill. Why I don't know. It would have to be it's going to cost tax revenues. I think they're also concerned with some of the language in the bill that that you know that that it may not be technically sound. That's interesting you said they did not oppose it in the hearing stuff. But maybe they had a change of heart somewhere. I mean, we're not in a time where we need to be all that concerned about tax revenues. We're not in a time of scarcity we're not in a time of, you know, of lean, so to speak. We do have some money we have enough money for this big refund, and we have enough money for $600 million to the, you know, Hawaiian homelands can you talk about that one. Sure. There are a couple of things going with Hawaiian homelands this year. As you probably heard there was a recent settlement of $300 and something million with beneficiaries who have been on the wait list for a very, very long time. And, you know, we've got 28,700 people on the wait list for getting Hawaiian homelands. People have, you know, scores of people have died on the wait list. So I mean, you talk, you talk about having to wait a long time at the DMV department of motor vehicles. That's nothing. There was a piece on the white public radio of a woman I think was in the conversation. Catherine Cruz a few days ago where this woman was on the list for 30 years, 30 years. I don't know if she ever he was part of the settlement, but she had no idea when she was when she was going to get the settlement or her share of the settlement. That might be another 30 years. Who knows. Can you tell me why though is there ever been discussed and explained why it takes 30 years to to provide a benefit that exists by statute if not constitutional provision. Well, the idea, you know, one of the ideas behind the Hawaiians home commission Hawaiian homes commission act is you have this land that set aside, and you want to put native Hawaiians on the land. Okay. And, but the but the problem is that the land as it now exists is not habitable. You have mountain ranges, you have forests, you have cliffs, and you have some, you know, areas that are really, really wild. So, you know, in the, in the least wild of these, you have to put in infrastructure, you have to build houses, you have to put in, you know, like electricity, water, you know, all the kinds of things that are essential to our daily existence. You know, maybe add a few internet there, you know, here and there. And this takes a lot of time. So they so they've been complaining, you know, over the years that they can't that they've been trying like heck, but they, you know, they couldn't get permits they couldn't get the infrastructure in. And if, you know, there are delays that are out of their control they really can't do anything about. Okay. And then we, you know, kind of took a look at that and we, we, we kind of were worried because there was a spate in the life of DHHL where they really weren't getting things done. And, and, and so much so that there's a there's a federal block block grant that was given to DHHL every year. And, you know, in the, in the 2000s they were getting like $9 million a year $10 million a year $12 million a year, no stuff like that. But they weren't spending it. Okay. So in 2016, when our, you know, we had our, you know, lovely Trump administration. They decided, okay, fine, you don't want this money we're giving any to you. So they got cut off zero, zero money to department of Hawaiian homelands for this grant into in 2016. And our congressional delegation yelled and screamed, of course, that's what that's, you know, what they, what they are there to do. And, and finally, the administration says, okay, we'll throw you a bone, give you $2 million a year. And that's, and that's what happened for a number of years after that. Now, I've been told that under under the current administration, the amount's going to go up to like $7 million or $9 million. But a it's not, you know, at the level that it was and B, we don't know for sure if all of the non financial problems that we're preventing DHHL from doing what it needed to do have been solved. So in our testimony on the bill, we said, look, you know, we got to figure out why this federal money hasn't been spent. And if there's a problem that the legislature can fix, let's fix it. Because the last thing we want to do is throw $600 million and have it go unused. Yeah, that's an interesting point, because if Homeland's was getting, what did you say, 1012 million dollars per annum prior to the Trump administration. And that's an interesting question about why it stopped. I mean, what political forces were at play stop it in the Trump administration. Racism comes to mind. But so now, and it sounds to me like we still have that problem. In other words, we're not spending what we're getting. And we're not back up to the old levels of federal grants, but 600 million. What is that supposed to be for. And if they can't spend 10 or 12 million, how are they going to spend 600 million. They are in the bill they do have some alternative means of spending the money like, you know, for the for a time they were thinking of, you know, giving some native Hawaiian beneficiaries assistance with their regular mortgage. If, if they if they were to come off the wait list. That doesn't solve the waitlist problem at all. Well, it does. If you get people off of the wait list. Well, what I'm saying is that's not going to build houses it's not going to build infrastructure to pay somebody's mortgage you in order to get them off the wait list you have to provide a house. Well, I mean that's that's that was the intent along, you know, from the Hawaiians home Hawaiian homes Commission Act of 1920. What a failure. It's just to me like 6600 million is not structured in the sense that we don't know you don't know and if you don't know I sure I sure don't know where it's supposed to go, how it's supposed to be managed. We have to we have to rely on DHL to, you know, to figure out how to use this money and how to use it properly. The good thing that's in the bill is I think it the funding expires in three years. So if they don't use that 600 million dollars in the three years is gone. It goes back to general fund. Let's let's be optimistic and assume they will find a way to use it to find a way to, you know, do the land preparation and the infrastructure and then all that and they will let's assume that they can get their act together and use it. It means that the legislature here spent 600 million on that 328 million on the settlement of the claims of the people who've been waiting for 30 years for a total of 800 plus million dollars. Do we have the money for that? It seems like an awful lot of money. And then when you add to 250 million, the support must go to back to every man woman and child. We're spending like a banshee, aren't we? Yeah, but because we have the money. This year we have the money. So it's not a good year to raise taxes if you have the money. That's right. So that's one reason why we haven't seen as many of the revenue raises as we've seen in the past. Not this year anyway. I mean, next year hold on to your wallets, but this year we seem to be safe for now. Well, have there been any? Any revenue raisers? I mean, they were going through the session, but I don't think any of them are still alive. I tell you, I'm really not, I'm not all that excited about this result. I would rather see us plan forward and prepare the state for threats and, you know, circumstances and potential calamitous disasters that are likely to happen. I mean, since we could have bad weather any day, we could have a problem with the supply line. We do not have, we do not have sufficient food production here. We import more than 90% of our food. If the supply line goes down, we have no plan B and no plan to have plan B and we're not spending any money. When were Kai in the movie we made recently said the state budget included no more than 1% on agriculture. Oh my goodness. So what are we doing, you know, to harden up against that? Well, I mean, these and many other questions are going to be, you know, the topic of our future discussions on bills that were passed by the legislature this year. I think we've kind of run out of time so and we have a number of additional bills to discuss. So maybe we continue our conversation in a couple of weeks. Okay, why don't you say one more we have a couple minutes to do one more. Okay, let you pick what which one. Okay, we have another bill giving an exemption from the general excise tax this time for Steve adoring services. As well as a war fridge and demurrage fees that are paid by paid to the Department of Transportation. This gives a break to the water transportation industry. It makes a lot of sense to, to help that industry out given that pretty much all of our goods have to be shipped in. You know, a few, you know, a few tons come in by plane, a few tons we make ourselves but that's not very much. Almost everything that we have and consume here in the islands is brought in by ship. And, and I've been saying for you know some time now that if we, and by the way, there are federal prohibitions that say states, including us cannot tax transportation by air. We persist in applying our GE tax to transportation by water. So, so not only are we on an uneven playing field but we are really hurting ourselves by shooting us shooting ourselves in the foot because every incremental increase in the cost of transportation has to go back and get recouped in the prices of our goods and you know goods and services. Any, any help we can give to our, you know, beleaguered transportation industry I think as well. So is this all in that category. Actually, for, for the income that this bill talks about a lot of it is exempt already. Okay. So during services are already exempt. Warfrey didn't emerge our fees paid on behalf of the shipper. And they're paid to the government. So, it really doesn't make sense to tax the, the, the vessel. And they're paid to go to the shipper because they're really just handling the money as an agent and, and paying it to the pain, paying it to a government agency. Like, well, you know, if you ask me to sue somebody, and I, and I went down a court and I paid $100 filing fee to file your lawsuit. The, you know, the GE tax doesn't tax me on the 100 because it's not my income. Well, it strikes me that if anybody gets taxed in the transportation pipeline. The consumer winds up paying the taxes passed along. Right. Oh yeah. If you make an extra tax, the consumer pays more for those goods that are shipped. If you excuse a tax, the consumer presumably, I don't know if this really works in real life but presumably the consumer pays less. So this, this at least theoretically is favors the consumer. Right. Yeah. And I think for that reason it's a very good thing to do. Okay. All right, that's a good bill. Well, thank you, Tom. We are now out of time but that doesn't mean we're out of bills. There's plenty of bills. What's the schedule going forward on the veto practice? How much more will we know by the next time we meet? The next important deadline in the legislative process is June 27 when the governor needs to give notice of intent to veto a bill. So, in, you know, for the next month and a half, we won't know, you know, we won't know very much. And then we can, we can keep talking about the bills that were passed by the legislature, but we won't know for sure what is signed into law until much later. Yeah, okay. On the other hand, we can always repeating that always speculate, right? Right. Tom Yamachika, president of tax foundation of Hawaii joining us to discuss, you know, the product of this legislature and the likelihood that the governor will will either veto or sign a given bill. Thank you so much, Tom. I look forward to our next discussion. Thank you for having me on the show. Aloha.