 This is Think Tech Hawaii. Community matters here. Welcome back to the Showtime. Here we are at the end of the year and, you know, chaos in the White House, nothing new there. But it affects things. We may very well today have a shutdown of the government at least for a few days or longer. According to Trump, it might be a long time, you know, he's very strong about this. And on the other side of the coin, maybe we spend $5 billion on the wall, which every 5 billion gets to be 10 and 15 and 20 by the time you're finished with the project, as we know it was rail here in Honolulu. So I guess my question to you is, does any of that affect our tax, you know, process, our substance of tax, taxing and paying tax here in Honolulu? One thing that happened, as you know I'm sure, is that the tax system changed a lot from what it was in 2017. That was kind of more of an end of 2017, beginning of 2018 topic, but at that time it was kind of largely theoretical. At the end of this year, you will have your first tax year under Trump tax. And everybody's going to see some changes. Some people will see big changes. Even the tax form is going to be different. When you do your tax form next year, it's going to be very unlike the 1040 that you know and love. The first page actually will look like a postcard, it only has writing on half of the page. But it's only the first page. After a while we get into the ticket. Right. And I don't know how many people are familiar with the non-profit returns, the Form 990s. The way they work is there's a relatively simple form, but if you hit this particular area you need to adapt to schedule. If you need this particular area, you have to attach to another schedule. If you fill in this particular area, then you have to attach to another schedule. So it starts getting larger and larger and larger depending on what kind of areas you hit. So the 1040 is going to be the same way. So if you're self-employed, another schedule. If you've got a supplemental income and loss, like from a partnership, or I'll see that you hold another schedule. You have rents and royalties. That's another schedule. Yeah. Well, we should spend a moment about how the tax reform act of 2017 passed in the last days just a year ago in 2017 is going to affect us, filing returns in 2019. But query. I mean, what about the shutdown? Is that going to have an effect, do you think, on us as taxpayers? And I mean, either on the federal side or on the state side, because of things that happened on the federal side. I don't see that it will. Primarily because in all of the other shutdowns that have happened in recent memory, no federal workers lost a day of pay. They all got paid up, ultimately. Yeah. When the shutdown ends, everybody gets paid back pay. So we have to pay a whole lot of money for no work. Right. That's kind of how it works. They don't get interest, though, do they? No. And they have additional time. In this case, they would have a few days to go shopping. That's right. So spend some money into the economy. Right. So that's a great time of year to have a shutdown, when the malls are all geared up and then retailers are going, oh yeah, let's get some of this activity because people have more time to shop. Yeah. It's true. They're not working. So going back to the point about the 2017 Tax Reform Act, so there's a bit of a break for people, middle class, I guess. There's a bigger break for corporations. The break for corporations lasts indefinitely. The break for middle class, the little people, doesn't last indefinitely. It ends in a few years. But I think the biggest change that people are going to see right now is the doubling of the standard deduction. The standard deduction, of course, is what you can take on your tax return and write off without needing to substantiate anything, just if you're alive. So it encourages you not to itemize. That's right. You don't have to itemize unless you have a whole lot of other stuff. And that's why a lot of charities, for example, are getting worried because for most people, what they give to charity is well within the standard deduction amount. So people won't get a tax benefit from giving the charity unless they give a bit more than they're used to. Right. They can use the doubled standard deduction. They can get that even if they don't give anything to charity. That's right. There's no incentive. That's right. Yeah. Now that's going to apply for 2018, right? So when they give gifts at the end of this year, December now, they may not give as much to charity. And they'll still get the double standard deduction when they file their taxes in 2019. And so that kind of leads to one planning point, and that is if you've got gifts you want to make, consider taking gifts from several, maybe two, three years, squeezing them into one year so you can break the thresholds. You want to get outside the double standard deduction. That's right. You want to itemize effectively. Yeah. I mean, the plan is in the year that you give all these gifts, that's the itemize. Okay. You know, the following year you have no money, which is fine. You get your regular standard deduction. Yeah. I think a lot of people are going to take the simple road and forget about it. They might. And a charity should be concerned about that. That's what happens when you run a bill through Congress so quickly. When you don't have hearings on a tax bill, you don't let anybody speak on it. You don't confer with anybody. That's what happened with that bill. And so at the end of the day, I remember Paul Ryan, you know, it was like three days after the Tax Reform Act passed, he said, oh gee whiz, we gave away so much, so many tax benefits here, we're not going to have enough money to run the government. We're going to have to cut back on social services and various other things. Because now, you know, a few days later we don't have, you know, what happened? How could they possibly not have known that when they, just three or four days later, when they passed earlier, when they passed the bill in the first place? No, I'm sure they knew it. It's just a question of, well, are we going to stimulate the economy and get the engine running hotter and faster and throwing off more revenue, you know, that's the question. No, it actually didn't need to be hotter and faster. It was going pretty well at the time. Well, they wanted it hotter and faster. That's the political thing. So over time, we'll see less revenue to the federal government, and therefore, because of these tax breaks they gave in that bill, and we'll see, you know, less money available to pay for social services and so forth, so the pressure would be on Congress to reduce social services, which I think Republicans want to do that anyway. Well, yeah, but it won't be quite as easy this time because, you know, now Democrats control the House and Republican still control the Senate, so it's going to be a lot more, you know, back and forth. Back and forth, but if the tax bill stays in effect, there won't be as much money. So whatever they do, you know, whoever has the majority, they will have to change the Tax Reform Act in order to get more money, am I right? Yeah, they've got to touch the Tax Reform Act anyway because they have to do some technical corrections, so it's definitely a vehicle that people can use to make changes if they want to, so there's probably going to be a lot of horse trading involved to get to that place. Yeah, what's made more complicated is the fact that the stock market has been, you know, going down a steep curve lately, and there's no guarantee it'll come up again. In fact, you know, I think this profile on the chart suggests we might be in for a recession if not immediately then over the next six months, and if that's the case, if we have a national recession, depending on how bad it is, of course, we'll have even lower tax collections because you're taxing income, and that would create a problem. Another exacerbation of the problem about not having enough money to pay the federal government's expenses. Right? Yeah, yeah, no, that's, there are definitely ripple effects. So the question is, how does all that, this is not an easy question, I apologize, how does all that affect the state? How does that affect us, the state, and us, the taxpayers of the state? Where we are, I think vis-a-vis the federal government, is that the federal government is a major employer here, you know, between the military, federal agencies, and so forth. They put a lot into our economy. And then, of course, you know, we as citizens pay federal taxes, so there's a number of dollars that go outside. I think when you compare the two, we get more than we give. So, you know, a slow down or diminution in what the federal government is going to hurt us. Yeah. And you're assuming, by the way, when you say that the military is here and is a recipient of, you know, and Brian Schatz would love to see that, I'd like to do what Dan and Owen was doing, you know, feed federal money in for military purposes and other purposes of the state. But you're assuming that the military will stay here. You know, from time to time there have been discussions about moving the military or substantial parts of the force that is here in Honolulu to Guam and elsewhere. If the military moves, there's not enough or not as many military people and expenditures as there were before. It takes money to move the military. It takes money to move the military. Good point. Yeah. I think the resources to get them on transports and send them places, you know, that'll be a horrific undertaking. It will. Yeah. And presumably Congress will get involved in that, although, you know, it is in a free association world. If the president can pull troops out of Syria and out of Afghanistan on the same day because the president was having a bad hair day that day and some people think he has a bad hair day every day, then likewise, he could pull troops out of Honolulu and put him somewhere else. The problem is funding the move, as you say. Yeah. And then what is going to be the strategic goal for moving troops out of Honolulu to wherever it is? Is it going to be to aggravate North Korea to ... And if you do that, is the United States going to be better or worse off in terms of military protection? Because we do have active threats. Yes, I agree. We have needs for security here. South China Sea, North Korea. We have needs. But more and more in the new normal, these decisions are becoming his alone. And he ... Well, that's not a tax problem. Okay. That's not a tax problem. So we're going to address that in a break. We're going to come back in one minute, then we'll go back to tax. You'll see. Tommy Amacheek, a tax foundation of Hawaii, we'll be right back. Living in this crazy world, so caught up in the confusion, nothing is making sense for me. There's got to be solutions, how to make a brighter day. Hey, Aloha. I'm Stanley Energyman here on Think Tech, Hawaii, where community matters. This is the place to come to think about all things energy. We talk about energy for the grid, energy for vehicles, energy and transportation, energy and maritime, energy and aviation. We have all kinds of things on our show. But we always focus on hydrogen here in Hawaii, because it's my favorite thing. That's what I like to do. But we talk about things that make a difference here in Hawaii, things that should be a big changer for Hawaii. And we hope that you'll join us every Friday at noon on Stanley Energyman and take a look with us at new technologies and new thoughts on how we can get clean and green in Hawaii. Aloha. Some people say this program is community matters, but it's not. It's talking tax. Talking tax with a tax foundation. Tommy Amacheek. Oh, man, you get into this too much today. So let's talk about other tax planning considerations. Let's talk about what a person can do here at the end of the year to improve his position in terms of making the end of year tax moves. Sure. One thing you can do is that if you have a portfolio and you have a lot of paper losses in it, i.e. issues where the stock's gone down in value, but it's just they're sitting in a portfolio and it hasn't been realized. And you have capital gains that have been taken earlier in the year and are going to be taxed if you don't do anything about it. Now may it be a good time to sell off those overpriced shares, realize your capital losses, and put them where they're the most good, and that is against the capital gains. So if you have too much capital losses, you only get to take $3,000 a year. And if you've got capital gains, you can wipe your capital gains out first. So that's one thing you should consider if you've got capital gains and some paper losses in your portfolio. So mix that up for me with the phenomenon we've seen in the last two weeks of the stock market going straight down. How does that work for the average person? Yeah, I mean if you're holding stock and you acquired it recently, you're probably looking at paper losses. So the question then becomes, well, did you get some gains earlier in the year that you can use your losses against? And if so, what you can do is sell off your stock. If you really like it, you can buy it again next year. But you sell it off now so you realize your losses and net them against your gains. That's one thing. Another thing is, if you've got an IRA and you've got somebody who's like 70 and a half or more, they're worried about something called requirement of distribution, and if they don't really need the money right now and they have some charities that they want to give money to, well, here's what you can do. Instead of taking the money yourself, which you would have to do, you can send that money to the charity. It doesn't count as income to you. It does count as part of your required minimum distribution. So you can get around that requirement and not hit income. Oh, that's cool. And would that be the case even if you were taking that double standard deduction for 2018? Yeah. It's never income to you, so it's not even calculated. Yeah, it never even hits your income tax. But because you're not getting the income, that's a tremendous tax benefit for you. That's right. You don't have to pay any tax on that. That's right. So how does that work? You tell your pension plan, for example, I want you to give to Think Tech Hawaii or the Tax Foundation. And then that's simply subtracted. You get credit for making your RMD, but it's subtracted from your RMD for purposes of income to you, the recipient of the RMD. So you take it out en route. Yeah. So like, for example, if you have an IRA and you have to distribute $10,000 from it, if you don't do anything, you have to take your $10,000 and get taxed on the $10,000. But instead, you say, okay, Mr. IRA custodian, please distribute the $10,000 to Think Tech Hawaii, which is a 501c3 tax exempt organ. Then the $10,000 doesn't hit your return, so you don't get taxed on it at all. You don't get a deduction, but you don't care because you didn't have the income. You never had the income. Better than deduction, really. Yeah. That's right. So you see, there are a lot of things that would limit the deduction, okay, but if you don't get the income in the first place and you don't get taxed, it's better. Better. Yeah. And you're still counted as having made your $10,000 distribution so the feds won't get mad at you for not paying yourself. It's beautiful. You heard it here on Think Tech. This is a fabulous idea. Everybody should do that. Yeah. You don't have to think tech or the tax foundation, but some charity and you get a tremendous benefit and you still get the double standard deduction when you file your taxes in 2019. Right. So the clinches are, it's got to be an IRA, okay. It won't work for the 401k, okay, and you got to be 70 and a half, 70 and a half or a couple. Yeah, well, that's the RMD year anyway. Right. Yeah. Okay, thank you for that time. So let's talk about the council on revenues and what they predict for revenues. Let's talk about whether revenues are going to match up with what they predicted. Let's talk about what's pending, if anything, in the state legislature, which will open in just in a few weeks. What changes are we going to see? Let's talk about David E. Gays' budget, which does not actually get to the same amount as the amount that would be available under the council of revenues, I find that very interesting. Yeah, for the last couple of years, I think the budget that the executive has put into the legislature isn't balanced and doesn't match the revenue numbers. Too high or too low? Is a deficiency. So basically, he's got a budget with a problem, give it to the legislative to tell him because they have to pop up with a balanced budget. That's a constitutional requirement. But I mean, if I were the money chairs getting such a budget, I wouldn't appreciate that. No, I don't think they did. You're giving me all these problems telling me to fix it? Why don't you fix it? It's your job, not mine. So right now, we're in the middle of the budgeting process, or not the middle, but the beginning of it. It's already started. Even though the legislature is not open, they've already started having budget hearings. And it's interesting because there are discussions about different philosophies of doing the budget. Right now, we have, basically, you have this last year, and you justify the pluses and minuses. Which, I'm not sure the term for it, but they rely on things called variance reports. Variance reports meaning, okay, well, what did you actually spend, was it higher or lower than budget, if it was any different, why did it happen? This is part of the process of balancing it, or seeing if you did balance it. Right. And I've started taking a look at the variance reports. And a lot of these have some very strange provisions in them, like each component unit of government is supposed to measure specific goals, right? I mean, like most of us who run businesses, we have numeric targets or numeric goals to meet, and that's how we measure our progress. Okay. Well, you take out the variance report for, like, Honolulu Airport, Honolulu International Airport. Now, Daniel Keanoi International Airport, sorry about that. And you take a look at the measures. So measure number one, no data, measure number two, no data, measure number three, no data. You guys picked your own measures, and why are you saying there's no data? There's got to be data. There's got to be data. So either they don't like it, or the two ladies are collected, or what's their problem? I mean, most agencies do play ball, they have measures, and they do track them, but the airports seem to be in a world of their own. They always have that, I think. The airport was supposed to have this big face lift 20 years ago, hasn't really happened. But, you know, there was a piece about Sylvia Luke, the chair of the house finance committee for a long time, and how she was going to be real careful about any kind of spending this year, especially. Yeah, what she wants to do is, instead of the plus-minus variance process, she wants to transition to what's called zero-based budgeting, which basically means we don't care what you spent last year. You need to justify every dollar you spend from number one. Which is an attempt to spend less. Yeah, you would think so. I think most agencies are not equipped to do that, at least not now. If they're kind of forced to, then maybe they'll learn a little bit. Zero-based budgeting is done elsewhere. It's a lot of work. It's more work because you start out from scratch. It means you have to justify everything, and you can't rely on anything that happened before. That's hard. Yeah, but still, I think, to exercise proper oversight over our government. For many years, we don't know how much money we had. We don't know how much money we spent. I think at some point you have to do something like that. Yeah, okay. I wouldn't argue with it, but it sounds like it means we're going to be spending less. It sounds like it means we're going to have a real balance of the budget this year. The only real issue is, are we going to earn enough, earn as much as we thought we were going to earn? If we're not going to earn as much as we thought we were going to earn, we're going to have to raise taxes or find a way to make that up. We could run into this. I mean, if the federal government really has a problem here, and it can't give us the kind of infusion that it normally has given us, then we're going to have to raise taxes to make up the difference. So there are a number of things we can keep our finger on the pulse of. One is, are we getting money from the federal government? Are we spending it? If we're not spending it, it's a very good case for the federal agency to say. You don't need it. You don't need it. So why are we giving it to you? So if we have federal government money we're pulling down now, we should look into whether we can get more. If we're not pulling down federal government money, and we can, then we're going to look into why we're not doing it. For example, I wrote a piece a few weeks ago regarding the special education funding that DOE gets or could pull down. Like the average would pull down $40, $50 million. We pulled down $500,000. We could have had a lot more. Yeah. I mean, we pulled down 1% of what we perhaps could have gotten. This happens all the time. It's headlines whenever it happens, and it's because somebody in the state government not doing his job, is that why? It's not headlines. That's one problem. Oh. It should be. It should be. Because not only do we not get the money, but because the Fed doesn't think we need the money. We're sending them a message. Yeah. We're sending them an incorrect message. Yeah. We do need the money. Yeah. I mean, we are providing services to inagent kids. They are compensable. We just need to submit the paperwork. But I don't understand, last question, we're almost out of time, is we have all these unliquidated liabilities out there, unpaid liabilities, you know, ERS, the contributions to ERS, the rail, the cost of homeless is another one. There's a whole bunch of them, and they're $40 or $50 billion when you make a list. And we're not really paying them off. And it's hard to say whether these are the good times or maybe not so much the good times. But when and how are we going to pay them off? Where are we going to get that from? It sounds like an insoluble problem, Tom, and if we don't pay them off, what happens to us? Well, first we have to get those folks in the legislature to realize that this is a problem. A lot of them are in denial. They don't think that there is a need to pre-fund ERS or EUTF. They think, oh, we can handle it as it comes. That's not good balancing. It's not good balancing. So we need to kind of get a handle on fiscal policy. We need to get disciplined, and we need to do the right thing. Well, what happens if we don't? What happens if we cruise down the road here without addressing these over a long time? Well, then you could be in a situation like Illinois or Michigan, cities went bankrupt, states went insolvent, Puerto Rico. Oh, sure. I remember Puerto Rico. Left Puerto Rico very exposed to, very vulnerable for that storm, hard to recover if you don't have the money. They had financial problems before the storm hit. So should we be worried about any other changes in the tax law in the state of Hawaii this coming session? Is there anything else in the pipeline we should know about? There's a lot that's being talked about. I mean, there is talk about carbon tax. There's a talk about, oh, let's change the way we do road usage. Let's have a charge for it instead of fuel tax because we've got energy efficient vehicles that aren't paying fuel tax. How about credits? Are any likely credits, for example, electric vehicle credits? There are a lot of credits that were being pushed last year or the year before and didn't make it through. I'm sure the proponents of those credits will want to try again. This is the second year of the biennium, right? First. First year. Okay. So it comes in fresh. So we're not sure exactly what's going to come in. Who knows what will happen. There are a number of credits that went away over the past few years. Electric vehicles is one. That's on the federal side. That didn't happen in this sense. Right. It didn't happen here. We used to have electric vehicle credits, but we don't have it anymore. We still have credits for- We have the federal, but not the state. We have state credits for photovoltaic and wind and other kinds of installations, and that I think is not expiring, at least not so far. Well, it'll be in play for sure. Lots of stuff will be in play. Yeah. Well, can we follow that with you, Tom? Sure. All right. We want to see what comes in. We'll be around. It's going to come in soon, next few weeks. So let's get together again. All right. Thanks. I'm Yamachika. President of the Hawaii Tax Foundation. Oh, it's great to be here. Talking tax with Tom.