 Talking tax with Tom Yamachika on a given Thursday morning. I'm Jay Fiedel. This is Think Tech Hawaii. Today we're going to talk tax about the economy. It's the economy. Moo. OK, with Tom Yamachika. And that's the kind of riddle about the moo. But the hint is to get milk, you still have to feed the cow. And in the course of this very interesting discussion, Palmo explained exactly what he means by that. Welcome to the show, Tom Yamachika. Thank you for having me on the show, Jay. It's a wonderful Thursday morning. And we're talking about it's the economy. Moo. You may have heard about it's the economy stupid, which is the phrase coined by the Democratic strategist James Carville in the Clinton campaign against George H.W. Bush. And it really kind of simplifies that the economy is a very, very big concern in everybody's mind. It was then, and I think it still is now. But then it was so much of a concern that Clinton was able to beat Bush even after Bush had enjoyed a public approval rating of 90% the year before on the heels of the ground war in Kuwait. Remember that? That was a long time ago. But hey, it was a, and then of course, Clinton had his own issues, but let's not get into that. We don't have time for that. Yeah. But the real thing to be aware of is it's the economy. The economy still resonates in people's mind, with inflation being what it is, and with the war in Russia and Ukraine waging on, our pocketbooks feel it as well. Every time we go to the gas station, we cringe. And that's kind of one reason why we want to focus on the economy. Now, on June 6 of earlier this month, the financial site wallet hub put out a study called 2022's best and worst state economies. And in that site, our humble little state had lots of reasons to be humble. We came in at a bottom scraping 48 out of 51. They counted the District of Columbia. So the only three states to finish lower than us were Louisiana at 49, Alaska at 50, and Senator Joe Manchin's home, West Virginia, at 51. By the way, West Coast states did very, very well. California was ranked third overall, third from the top, not the bottom. Oregon was ninth. And Washington state had the top spot, first out of 51. OK. But Hawaii had really low ratings for innovation. Can you mention that? Sure. To come up with their rankings, wallet hub examined three areas, economic activity, economic health, and innovation potential. Economic activity included things like change in GDP, exports per capita, and state gross public debt as a percentage of GDP. Economic health included indicators like unemployment rate, change in non-farm payrolls, great in state personal income, government surplus or deficit per capita, and unfunded public pension plans per capita. And that statistic, by the way, we didn't do too badly. We were 33rd in economic health. And the third category was innovation potential, which used metrics like share of jobs in high-tech industries, STEM employment, entrepreneurial activity, as mentioned by some other site called the Kaufman Index of Startup Activity, and inventor patents attributed to the state. And on that statistic, we came in 50th, 5-0 on innovation potential. Again, we were 33rd on economic health. That was kind of sort of in the middle of the pack. We got blown on in economic activity as well, ranking 47th there. But innovation potential was where we did the worst at a solid 50 out of 51. So part of this has to be our state response to COVID. And part of it has to be state response to the inflationary stress of the Ukraine war. Right? Can you either confirm or deny that? Well, I don't think those more recent events would have factored into the metrics that these guys are using. Again, they're looking at things like how many people are in the STEM industry, how many patents do we have that have a hoi address on them, things like that. And these don't happen overnight. So this reaches back, what, several years, maybe a decade to find the causes for our success or, more likely, our failure. That's right. And it seems very horrible to me in that just a mere 20 years ago, we were throwing everything we had at the high tech industry, as you probably know. Well, I know that we did some things about the high tech industry, but I wouldn't go so far as to stay throwing everything that we had, because there was a lot of rhetoric, but very little action. Sorry. Well, we did enact a very rich tax credit program called the High Technology Business Investment Tax Credit. Act 221. Act 221. It then lingered and bashed it as much as she possibly could. And the newspaper, Sean Howe in the Honolulu Advertiser, bashed it every time he had a chance. So it was, yes, it was a very visionary statute, but boy, political problems and political attacks on a regular basis. And as a result, investors were scared away. I could give you more information if you like. I followed it closely. Oh, I'm sure you did. And then we also enact, I mean, we also made some government institutions specifically for high tech, like the high technology development corporation. That was out of the 90s. That was out of the 90s. Yeah, but that got kind of fueled. And we had actually, Linda Lingle wanted to kill it. Well, yeah, but I was in chair time. Yeah, of course. But 221 was enacted by the previous governor. Just at the end of the Kaitana administration. That's right. And then the new administration and the new tax director came in and they started beating it up like crazy, saying that there was a prolific revenue leakage, some of which was true. OK, and it was possible. I mean, I think it's another show, but I wouldn't say, I think we can agree that although we might have wished to diversify into tech in the early 2000s, we didn't actually make a commitment in that regard. And what we did was more talk than action. OK, but that, again, is one of the glaring things in this Wallet Hub study where we are in relation to the other states in technology and innovation is close to the bottom of the pack, if not at the bottom. And that, I think, is a crying shame. We have a unique environment here in Hawaii. We have unique industries that are designed to take advantage of the unique environment. We have companies like Oceanit that are coming up with new innovations in the biohealth space and in sensor technology and other things. We have agricultural companies that are saying that, hey, this is a great place for agricultural innovation because we have three growing seasons in a year where most of the mainland has just one, et cetera, et cetera. So what are we doing wrong? Where are we falling down in the tech space? And since you've kind of been intimately involved in that, maybe you've got some ideas. Well, we weren't willing to put the money down. And we weren't willing to offer true incentives to tech entrepreneurs. I'm talking about tech. And to switch to agriculture, the same phenomenon existed in agriculture. We weren't willing to put the money down. And we weren't willing to offer true incentives to young entrepreneurs who would go out and be farmers. And as a result, again, I mean, it was very clear, yes, we should do this. Yes, it's important. But when it came down to legislative actions, very little. Nada. And the gubernatorial initiatives were limp and they didn't go anywhere. And the result is that in terms of incentivization toward diversification, nothing much has happened in 20 years, a lot of talk beginning, but even the talk died out after a while. And finally, I think inherent in that stat is the fact that we have this problem with permitting. You want to get a permit for something. You want to start a business or be an entrepreneur that requires a permit. Oh, my goodness gracious. It takes a long time. And we have a plethora of industries where you need a permit. In most states, you don't. But we have more regulated industries than I believe any other state. Yeah, so those factors, they play together. And together, they're kind of a scissors and they clip off any initiative. And the result is that we have become, and this isn't just yesterday, this is probably within that 20 years, we've become a state of consumers, but not producers. And it's very sad that we have abdicated everything to hospitality. Yeah, I mean, we certainly have some natural disincentives to manufacturing, because anything that we need for manufacturing inputs has to be shipped in and out, which adds a layer of costs that others don't have. But why is that true for high tech? I mean, you don't necessarily need manufacturing inputs. You need ideas. You need know-how. You need maybe some. For one thing, best and brightest leave town. Ah, that's a big problem. And for another thing, and this happened in the Act 221 scenario, to the extent that the best and brightest come here in search of entrepreneurial activities, in search of organizations that have been funded by capital from elsewhere in order to do tech here on the strength of our vision, if you will. When they saw what happened through Act 221, they left. And so all this talent that came from the mainland was going to participate in this reorganization of the various sectors and the diversification of the economy. They saw how difficult it was. They saw there was no place for them and they took off. So you had, again, two factors working together on that. One is the departure of the best and brightest to the mainland where they were going to get an education in tech and are going to get paid more in tech and have a better life with that. And the other is the people who came here thinking there was going to be a diversification to tech. They saw and they left and that was that for them. And they haven't come back. Yeah, that's kind of a, the typifies a bigger problem generally, and that is people generally were and are packing their things and getting on planes with one-way tickets out of here. Because for one reason or another, they can't make ends meet. Yeah, Kali Iakena of Grass Road Institute has been writing about this and speaking about it for years. And it's a true fact and his point is well taken. Namely that we're losing our people in all sectors, not just tech and because they can't make a life here. They can't buy a home here. They can't get married and raise kids and have the kind of no-class experience that they believe is happening on the mainland. And so we have a serious problem and I don't think, and this is against the point of our show, that the state government, both the governor and the legislature and the committee chairs and the various heads of the agencies fully understand. We have a culture that goes, whoa, tell us what you mean by that. Well, a number of legislators in my humble opinion have forgotten that they're supposed to be serving their constituents and not the other way around. A lot of people at the legislature and I've seen this over several years following and testifying on tax-related bills there since I don't know how long have I been doing this like maybe eight or nine years so far. Some people really believe businesses and wealthier individuals are not people or a collection of people, but they're cows to be milked. And that's where the move comes from. That's where they think the economy is gonna be driven because all they need to do is milk the cows. But I got news for you. If you want the car to give you milk, you gotta feed it. Okay, and I don't think they understand that. Well, I think it, this is absolutely true what you're saying in my experience. I have seen this and I have come to the exact same conclusion about it and I admire your analysis. On the other hand, I want to extend it. This couldn't be possible unless the public itself, the electorate, also felt this particular culture point. Let's just squeeze business. Hawaii is an anti-business state and there are so many ways that we could help business which we don't help business and the rhetoric doesn't help. You've got to change the whole culture and the way people think about business. I remember I was in a liquor commission meeting representing a client who wanted to open a bar in Waikiki and there was opposition to that. And I will never forget, one of the liquor commissioners was cross-examining my client and he said, actually it was a she, he said, so you take money in this bar. Yes, and you pay your expenses with that money. Yes, and you have something left over. Yes, then you have profit, don't you? Yes, I've got you now, profit at least, or she's out to term profit as if it was evil. And I don't think we fully understood, this is the government speaking. I don't think that we fully understand that profit is a good thing, not a bad thing. I don't think we fully understand that you make investments in order to achieve a return. I don't think we understand that we have got to incentivize people who are willing to make investments and we've got to manage investments for more sure. And all of this is like too sophisticated and the people allow the government to take this position. They don't understand and there's nobody but the tax foundation of Hawaii and maybe think back telling them. Yeah, and it manifests itself in other ways too. I mean, let us say different proposals for an empty home is tax, for example, just kind of like draconian legislation, there have been proposals to escalate the TAT based on how many tourists we have. If we have more tourists, we step on the tax until the amount of tourists goes down. I mean, what kind of thinking is that, right? Well, one of the elements in the failure of 221 and the attack on 221 was this and it came from all over the place. You wanna give a tax incentives to those young kids who those young upstart kids who wanna form tech companies, what about me? Why are you giving the tax credit to them? They don't deserve it. I deserve it and I'm envious of them and I resent the fact that you're giving a tax credit to these kids and they're wasting the money. This is not a good cause. You shouldn't have tax credits for those kids. It's just really remarkable. You really have to have incentives. Otherwise, you have a free market, I guess you could say and the free market goes where it wants but it certainly doesn't develop an economy. Yeah, I mean, we at the foundation have our own problems with tax incentives, especially if they're more random and scattershot. Well, sometimes they're entirely political. And they often they are. They're the economic analysis. You know, that happens more often than not, I think. I mean, the people who enact our tax laws are political animals, they're political beasts and the legislature is kind of the zoo here and that's where our laws come from, politics. I totally agree with you about the move. I agree with you about the culture point where the government does not respect the entrepreneur, hence the innovation rating in this report. The question though is if we, if you and I were to lock ourselves in a room and try to figure out how you change all of this, right from the public opinion to the legislature, to the governor, to the department heads, where would we start? What will we do? Because this is a major problem and is leading us straight into backwater and allows the economy for decades to come. I mean, I think we have to refocus on, you know, what originally built this state, you know, the spirit of Aloha. You know, we're here to help one another. We, even the old kingdom welcomed people from the outside as opposed to, you know, kind of, hey, let's just milk them and send them away, which is, but the current attitude seems to be. I always felt that Hawaii was a combination of cargo, cult and paranoia. What I mean by that, this is my version of the move, that there's a certain strain in the culture that responds to business and the like that feels that anything from the mainland is good. And therefore we have to give it ultimate obeisance and power and respect. And sometimes that's right, but it's random. And sometimes it's dead wrong and it's damaging to the state. And you get people coming in, companies coming in that do damage to our state and our economy and our culture here. The other side of it is the paranoia. If people come from the mainland, they're bad and we can't trust them. So we dump on them in every way we can. And sometimes- Not only the mainland, it's, I think it's worse with people from other countries. Oh, absolutely. Yes, from outside, outsiders. It's an island mentality, you know, and we have to go beyond that. And the problem is you don't know which way is going, it's going to go. And it sort of depends on who your public relations and advertising people are. Who knows how to send a message to the powers that be, but it isn't really based on state policy. We have to have state policy here and we have to implement it on a consistent basis. And part of it has to be we want to keep our kids here. We want to offer them jobs and companies that have been incentivized somehow. And we want to treat offshore investment wherever it's coming from. And offshore entrepreneurs wherever they're coming from with respect, but also with management. We want to manage them. You know, I'm thinking of Singapore. Singapore has this idea and it works. We don't have this idea and it doesn't work. Yeah, I mean, I'm not advocating that we manage people in terms of, you know, dictating policy, but I think we do have to set an environment. We have to, you know, lay down the rules. We have to make the rules easily understandable. And for people who don't care about the rules and, you know, we need to have them face consequences. Yeah, so every year at the ledge, you get thousands of bills and they're from constituents who have some influence, you know, some political power influence over the legislators and they sign off and introduce the bills. But there are other bills that should be happening. And these bills, I think, should come from legislators. They shouldn't be a sieve, you know, a pass-through. And somebody has to be creative. Somebody has to say, hey, let's develop state policy here. Let's think about it. Let's get a room together and find a solution and write our own bills about policy points that will help the state survive in a very competitive world. I think back in the beginning of COVID, we all looked around and said, oh, gee, this is an opportunity. As much as it's a challenge to have COVID, we can remake our economy. When we come out to the other side of COVID, we are going to be smarter, more diversified. We're going to have a better handle on how hospitality integrates with other economic activities in the state. We are going to encourage people to do stuff and stay here. And now it's two and a half years after COVID began. And I would say, we haven't done that. We have not done that. We have merely returned like a rubber band right back to hospitality. Yeah. I think if we want to move forward as a state, as a government, we really should be cultivating the spirit, the spirit of service that we and the government are here to serve the people and not the other way around. People and businesses should be thought of as what they are as opposed to simply cows to be milked. Yes, I totally agree. I totally agree. And the problem is this is deeply ingrained. I mean, if you and I look back over the last few decades, though, we see this, it didn't exist this way, you know, early on at statehood, for example, but it grew and the government became bigger and stronger, more people. There was a particular incident involving one governor where they asked the governor, how many people are employed by the state of Hawaii? You must remember this, huh? How many people are employed by the state of Hawaii? And he couldn't answer them. And the press asked him over and over again, how many people? How many people you got? He couldn't answer them. That's because the state has grown so much. A lot of people work for the state, you know, it's a career, it's cradle to grave and then a fat retirement. Yeah, and they don't make- They are regulating the rest of us. Yeah, and then they don't make it easy to understand how government works either. I mean, if you were to ask somebody today, how much money does the government have? I don't think anybody can answer that. There are so many ways in which monies are squirreled away and hidden special funds and other things that it's really not possible for anybody to keep caught of everything. Even the legislative agencies and the Department of Budget and Finance who are supposed to keep track of all these things, there's gonna be stuff that agencies won't report to them. We know that. I mean, when the state auditor went and did their audits, they found stuff here and there. And that's only the stuff they found. What to do, what to do, Todd? Yeah, I think we need to rethink our government culture. I think we need to rethink what government is in relation to the people who gave them the power to be a government. You know, this reminds me of the old power bowl. I think maybe you were thinking of that. It's, yeah, you keep on demanding things and you want an early return. You want it right now. You're not willing, for example, to invest an incentive into building something that will give you a return later. And this parable has something to do with gold or something. And so at the end of the day, you have had- With the parable of the three talents? Go ahead, tell it. There's a biblical story of the parable of the three talents. The rich man gave one talent of, I believe it was either silver or gold. One talent was a huge amount of money at that time in biblical days. And dad said he'd come back a year later and see what the sons did with it. And I think the first one buried it and said, oh, dad, I buried it so it would be perfectly safe and it would be totally undiminished when the year came around. And so dad said, next, and the second son did something similar. And the third son, well, what I did was I invested it and I made a business and I grew it to three talents and here you are, dad. Okay. And dad basically beat up the other two sons and gave the two talents to the third son. Just, okay, well, I mean, and then the point of the story is money isn't to be hoarded. It's just to be used for the betterment of all and employed as capital is when, is one way to do that. Yeah. And you can't have an immediate return. You have to invest it for the long term. And here's the point which we haven't covered but we should cover now before we run out of time. Risk averse. You know, this is all a reflection of risk averse. We don't want to take any risks. We don't want to take any risk on the governmental side. We don't want to take any risks on the entrepreneurial side so we don't encourage risk. We don't encourage entrepreneurial courage. And so the result is that people are unwilling to start businesses because they're afraid that the business may fail. You know, the old thing in entrepreneurial teaching is the serial entrepreneurs, the one who knows most. And to lose a business, to fail in a business is a good training experience and it helps them out of the next business. And we don't really integrate that. We are afraid of any perceived risk. So the result is we don't have entrepreneurial activity. Now what makes this worse today is the mom and pop businesses, you know, are going out. It's the mom and pops are getting old and their kids are leaving town are not interested in doing the same business. I mean, I think a good example that was in Stilbeth this morning is what's happening in Mapuna Puna. There's a lot of old mom and pop businesses there. Commonwealth Reed came in and raised the rates on them. And now there's a huge Home Depot project going on there. Okay, fine. But that's a mainland company, a national company and the mom and pops who were there before are gone. There is no local entrepreneurial activity involved in that. So what are we doing? We're becoming a state of consumers. Right, I mean, we're shunning entrepreneurial development and not embracing it. Yeah, and that's what we have to do. So I hope that- And that's the economy, mom. Squeeze the people that you can possibly squeeze. And think that you're gonna do better because of that. If the government can raise more money, that helps us. But not really true. You have got to incentivize and encourage entrepreneurial activity. We've got to get that message through. And maybe going forward, Tom, in future episodes of Talking Tax, we can drill down on some of that. We can look at incentives that are good, incentives that are bad, look at the level of management we ought to engage in in dealing with offshore investment, offshore talent. I think that would be a great thread for us to follow going forward. Absolutely. And thank you for having me on the show. Thank you. We'd have far as always. Tom Yamachika, President of Tax Foundation of Hawaii in these very interesting discussions. Okay, Tom, all together now. Thank you so much for watching Think Tech Hawaii. If you like what we do, please like us and click the subscribe button on YouTube and the follow button on Vimeo. You can also follow us on Facebook, Instagram, Twitter and LinkedIn and donate to us at thinktechhawaii.com. Mahalo.