 Okay, we're back. We're live. Hey, Tom Yamachika. Hi, Tom. Hey, Jay. Thanks, Foundation of Hawaii. It's so important that we talk to you all the time, get a handle on things. Otherwise, we lose touch with what government is doing. And the thing that government is doing that we care most about is tax. Tax. Yeah. So, give us, you know, last time we spoke, the session wasn't over. Now it's now we've seen what bills the legislature has passed and what bills the governor has signed. Can you give us a pre-see about what happened in the spring of 2018? Okay, so probably the most far-reaching bill that was, in fact, signed is the one relating to Trump tax. Now, the feds made extensive changes to the tax code on their end. We picked up some, but not all. It turns out that the stuff that we picked up for individuals is a lot of the things that people were worried about, like state and local tax deduction. You can't rate it off for feds anymore. You can't rate it off for state either, except if you're in a certain income range. I mean, under this new change in the law? Well, even under the old one. Even under the old one. Under the old one, there was a level at which if you made more than that, you weren't able to deduct state tax at all. And now we're not picking up the Trump tax limits, but we're going to keep the old ones that we have. Yeah. But, you know, in sort of in a larger sense, what happened is the Tax Reform Act made changes. And the question is how many of those changes the state was going to adopt, because the state, you know, annually conforms to whatever changes. In the past, the changes on the federal side have been relatively small, minimal, mostly. This time they were more profound. And the question was, in this session, whether we were going to adopt all of them or some of them or what have you. And I guess the second question, which I'm really interested in knowing about is, you know, there was an opportunistic moment here in the sense that you were supposed to get a break under the Tax Reform Act. And the state wanted to have that. They wanted to have the break. They wanted to take what you gained by the federal changes, right? Right. So let's continue about what else the state did. Yeah. So as I mentioned, the individual deductions for mortgage interest, for miscellaneous itemized deductions, the state will continue to allow those, same as they did in 2017. One thing that we will not look forward to, though, is, you know, how on the federal side, if you were the owner of a business so that you get income passed through by a partnership or a limited liability company or something like that. Passed through. Yeah. Passed through income. The feds gave you a 20% break, right? Because of the lower rates that they are giving to business entities in general, specifically for corporations, they knocked down the top rate from 35% to 21%. So they're supposed to track on the break they gave to the corporations. That's right. The pass through income from small business, LLC, pass through organizations, limited partnerships, partnerships, that was supposed to track on what they did for corporations. But it was not perfect. It was not perfect. And the state's not picking enough at all. So you get no deduction for that at the state level. You will still, of course, get it at the federal level. Okay. So we get stuck on there. Right. Okay. Now on the business side, they picked up most of the changes, you know, especially the bad ones, the bad ones for business. The two biggest benefits for businesses were the ability to write off new purchased property all at once. You're talking about real property or personal property of both? Mostly personal properties. It's a bonus depreciation or section 179 is what the tax people call it. For federal purposes, you don't have to worry about section 179 at all because you get bonus depreciation at 100%. And what that basically means is that you buy something, you know, equipment primarily, you use it in your business, you write off the whole cost in the first year. In the federal system now? In the federal system now. So the changes of the tax reforming, but in the state? You don't in the state system. You have to appreciate it. So you don't change from before? Yeah, you have to appreciate it. Yeah, have to appreciate it. So we get stuck on that one, too. We get stuck on that one, too. But the bad for federal changes, like the changes they made to what you can write off in terms of meals and entertainment if you're in a business, right? State picked those up. Well, it's the same thing. It's bad on, it's a bad change. What I mean is the federal government made it harder and the state made it harder, too. So by and large, it sounds like when you net all that out, we took a hit individually and small business-wise in the state because of what the legislature did this year in tracking or not tracking on the tax reform act in Congress. Yeah, again, it depends on what you did or what kind of business you're in. But a lot of the changes were unfavorable. Yeah, so that was opportunistic in, well, that's what I call it anyway, in the sense that so now we have the opportunity to take some and leave others so we take the ones that are harder on the taxpayer, the state taxpayer, and we leave the ones that would benefit the state taxpayer. So all in all, the state earns more revenue out of us and gets more tax because of the choices the legislature made. I mean, was this publicized? Did we know this was coming down the pike? Did they enunciate, the state legislature enunciate their modus operandi on this? I haven't seen it. And it's very different from what happened in 1986 when we had that big federal change and we at the state level picked up a lot of it. At that time, there are a lot of revenue tables released in the state. Release those so that the public can take a look and see what were the estimated revenue effects of all of these changes that were coming down the pike. This time, there's nothing. It was just nothing. That's so interesting. And yet, you know, as we know revenue tables were prepared and they were shared with the legislators, but nothing for public consumption. That doesn't give you confidence in government, honestly. Sorry. The other thing is, as you and I were discussing before the show, is that the council on revenues, which is supposed to provide guidance in terms of meeting the constitutional requirement for a balanced budget in this state every year, have found we were doing fine and that we expected to, you know, receive increased tax revenues under the existing system before the legislature ever sat down in January. And they found that we were likely to have a significant surplus this year because of the way things work. And that considered, was there a need to be opportunistic about the effects of the federal tax reform act? No. Well, you know, I'm not sure if I agree with that because I mean, what they identify as a surplus is kind of, you know, what's in your bank account at a given moment. We have large debts. Oh, you're talking about unpaid debts. Yeah, I'm talking about just cost of doing business, you know, regular business affairs, keeping the ship afloat, avoiding an unbalanced budget. Well, again, you know, you have to look at like the state has a lot of employees and we promise them a lot of benefits. Even after they retire or quit or die or whatever it is, we have a lot of post-employment benefits that we promise them. And these benefits are what we call actuarially unfunded, which means if you take a look at the probabilities of things, the likelihood is that we're not going to have enough money to pay them when they become due. And we're talking about actuarially unfunded liabilities in the billions of dollars with a B. Right. Oh, yeah, this existed for some time. I mean, even back in the Abercrombie days, it was huge billions of dollars shortfalls that the state wasn't paying on established liquidated obligations, like the obligation to fund the employee's retirement system for retirement benefits of state employees, for example. And EUTF, which is what we pay them for health benefits after retirement. We're behind by billions. And actually, since the days of Abercrombie, those billions have increased, not decreased, regardless of the health of the tax process and the council revenues, our billions of dollars of unpaid liquidated liabilities has increased the past few years. Yeah. And that's why, you know, last year, about about the middle of the year, you know, the administration comes out and says, oh, yeah, we have this great budget surplus, right, over a billion dollars. And then they go to the unions and they say in the very in the very next breath, well, by the way, it's all gone now. What, they negotiated a deal to give it to the unions? No. It was all it was all it was all it went away in one month. Spent. Yeah. So it was either in the rainy day fund or, you know, here or there, or, you know, paying down the unfunded liabilities. But then it just went poof. Really too bad, because what we're really talking about when we're talking about tax, we meet with you and all that is we're talking about fiscal policy. At the end of the day, we're talking about fiscal policy. Why do you need tax well to pay government expenditures? And how well are we doing that? Well, not very well. We don't pay our existing bills. We do not really plan for a rainy day at all. And we give away a lot of money for purposes that are really not established. It is remarkable to me that, you know, we get in these last minute discussions about, for example, affordable housing or any number of things. And all of a sudden you're reading the headlines that we're we're giving twenty thirty million dollars away to this side of the other thing. Money that we had not planned to give away. Surprise. That's that's that's one of the bills that actually did pass. It's called the Bob and the Cotter bill. I'm sure you've heard of it. It's named after this Reverend who used to be a latest late or and now he's a Reverend and he's an advocate for affordable housing. So, you know, millions of dollars went to these different funds that deal with affordable housing issues and are controlled by HHFDC. And then some tweaks were made to the general excise exemption for affordable housing, you know, fairly minor tweaks. But yeah, there was a lot of money that went to to housing in the homeless this time around. Yeah. Well, you know, it's not necessarily planned. It's not necessarily budgeted. It just comes up. Somebody has an idea and going to the grant and aid program, which we mentioned also before the show, although think tech never saw a penny of any of that over the years. Fact is that some agencies in this state get hundreds of thousands of dollars annually on the grant and aid program, even when, you know, we aren't paying our bills. You mean you mean nonprofits? Well, yeah, nonprofits. Yeah. Yeah. And, you know, and the state isn't doing the work of the nonprofits arguably. So it needs to have these nonprofits out there. But there's a lot of money going out. And it's it's not like anybody is sitting over the nonprofit and saying, well, no, this is how it should work. This is how you should conduct yourself. This is the program that you should do. We're not doing nobody doing that. So may I say largely political in any event. So what we have now is a huge debt to the employer time and system and other agencies, which we're not paying. And we have huge exposure to additional debt going forward. And right after this break, I would like to talk to you about how this is going to happen going forward, how it's going to happen next year and the year after. And remember, between now and the next session is El Nino and is the likelihood, if not the possibility, the likelihood of a significant storm, you know, that would make the flooding in Kauai or in Hawaii looks small. You mean in November? Whenever the hurricane season comes around. Yeah. So anyway, I mean, suppose we have other unplanned for expenses. How are we how are we going to deal with that? I mean, FEMA is not the answer to all our problems. Let's take a short break and let's see what Tom does with that question when we come back. Yeah, Gabriele, the host for Young Talent's Making Way here on Think Tech, Hawaii, we talk every Tuesday at 11 a.m. about things that matters 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. Hello, I'm Yukari Kunisue. I'm your host of New Japanese Language Show on Think Tech, Hawaii called Konnichiwa, Hawaii, broadcasting live every other Monday at 2 p.m. Please join us where we discuss important and useful information for the Japanese language community in Hawaii. The show will be all in Japanese. Hope you can join us every other Monday at 2 p.m. Aloha. It's all about money, money, money. And the fact is the money is not far away from where we sit, not only geographically down a couple of blocks away at the legislature, but where we sit and financially in terms of our individual situations and our collective obligation to pay certain debts. So there's a couple of things coming up, for example, in November before the next session that will affect the Fisk in Hawaii Day. Can you talk about them? Sure. One of them is the constitutional amendment that's being proposed to surcharge real property tax. So right now, but the way it works is the counties have the ability, the exclusive ability to levy property tax so nobody can touch what they do as long as it's regarding property tax. And then the state has their own set of tax systems and so forth. Now, the teachers primarily are the ones that have come up and said, well, geez, our teachers are not getting paid enough and our property taxes are low, so this is a bad situation. And we want the state to surcharge property tax and give it to education. Does that mean it goes to the state to be spent for the Department of Education? Yes. Or is it a separate spending center? Well, that depends on the implementing legislation. The constitutional amendment doesn't really speak to that. That could be really disorganized, actually. Well, you know, there is no guarantee. The problem is there's no guarantee. Right now, $2 billion is being appropriated out of general funds to the Department of Education. And if the ballot measure passes and let's say it brings in another half a billion dollars, won't the legislators be under pressure to repurpose some of that $2 billion? Sure. We've got other priorities in the state. Sure. Other people will be demanding money here. Yeah. Invasive species, homeless, human services, all kinds of stuff. They always do that kind of thing. They always take it and put it in the general fund and use it for other purposes, even if the enabling legislation required them. You know, a perfect example is the barrel tax. Haven't got scotched here. It's still being scotched year after year for things other than the original intention of encouraging energy. Well, the original intention of the barrel tax was to provide a fund so that if we had an Exxon Valdez type disaster off our shores, that we'd be able to respond to it. But that was when it was five cents a barrel. Now it's a dollar five. And that dollar is, you know, a lot of that goes to general fund. Some of it goes to environmental programs. It's just going all over the place. All over the place. It's not what was intended. It's like if you if you leave some money on the floor of the legislature, we'll pick it up. I'm sure they will put it in their general fund pocket as soon as they can. So the same thing here. So the two billion dollars that would come into the counties likely to go, you know, into the general fund, at least a part of it. Yeah. And and that's that's where most of the objection is coming from is from the counties. They, you know, they don't want their, you know, cash cow, you know, tinkered with or slaughtered. I mean, they want to do the slaughtering themselves. They want to keep the money themselves. Of course they do. And apply it to what? Municipal services, but not education, police fire, not education. No, that's that's that's the states. That's why we have a state. Was that a legitimate request time? I mean, you know, you know, the counties can't seem to be doing a good that don't seem to be doing a good job on infrastructure, police fire, security, you know, the standard infrastructure obligations of the municipal governments nowhere in the state are the counties doing a good job on that. And especially in Oahu, don't you think they need the money? They need the money. So why don't they just raise county property tax? Oh, then there's there'll be repercussions for that, I'm sure. Political. And then we'll see those in November. It's right. It's political. I mean, maybe people just don't understand that they can't get the roads paved if the county has no money. Yeah, but at the same time, I think people are tired of of getting their pockets picked every, you know, everywhere they turn. Well, the county doesn't make it doesn't actually articulate advocate for a good understand public understanding of this is one of the problems. I think they don't try to educate the public and the public has lost confidence in government in general. Yeah, I think there needs to be a better job articulating what these are these government entities do and what it costs. And then, you know, hopefully we, you know, through the political process can prioritize these, you know, these these funding needs more efficiently. Well, you think that the education, you know, education, you know, property tax going for education, state education bill is going to or rather amendment is going to work. I mean, will it pass? Well, the analysts who've made their views known in the media say, oh, it'll pass easily. After all, you know, you know, that the question as presented is, hey, are we going to help out our cakey? If if if not, what kind of, you know, what kind of doofus are you? Right. Right. So so everybody's going to help out the cakey. Right. Help out the cakey. Yeah. By that argument, you could just ask for infinite amounts of money. And that's what that's what's basically I have. I remember I sat on the neighborhood board a few years ago and they would come to us. The schools would come to us in the neighborhood and say, you know, we don't have enough pens and pencils. Could you guys please contribute a few bucks, you members of the neighborhood board of the neighborhood to buy us pens and pencils for our schools? What? You're kidding me. We have a budget in the state of what is it, 10, 12 billion dollars. Am I wrong? How far wrong am I? Two two billion, two billion, two billion per year for education. Yeah. And they can't afford pens and pencils. Yeah. So what's what's going on here? That's crazy. It is crazy. And the same thing, you know, here, where OK, it's for the cakey. But wait a minute, you could make that argument for God. Yeah. And if if the you know, if the property tax or charge does bring in a whole bunch more money is it actually going to go to the schools? Right. It's going to go to DOE, maybe. But we'll go to the schools, which is notoriously inefficient. So will it pass? Who knows? What about the tax foundation? What are you saying about it? Well, we're not, you know, into handicapped, you know, you know, lobby for one side of the other. No, but we do provide information and then the information we're trying to provide is, you know, that people have to understand what's what's on the ballot and there are no limits. OK, let's let's move to the other one that's coming up on the ballot. And there. And then there is a an opportunity to have a constitutional convention. So it comes up every 10 years. If the normally the legislature is kind of the gatekeeper and and they're the exclusive ones who can put questions on the ballot for for people to vote on in November. And so in this particular year, it's it's the 10th year, so it's got to go on the ballot and the legislature can't stop it. OK, so and this could be a useful thing when what needs to be done is some, you know, check or reigning in of the size of government because the government is going to do by themselves. Yeah, that's a this will be on the final exam. Government by itself does not reduce governmental expenses. It's like tax. You never see a big well, except in the federal government this year. You saw a tax reform act that reduces taxes. But let me tell you, it's going to catch you later. It's deferred taxes is what it is. Yeah. Anyway, OK, the government does not generally reduce taxes and it does not generally reduce spending. And it generally does not put restrictions on its own power. Right. So a constitutional convention is a chance for the voters to do that if they think government has has run astray. And that's on the one hand, it's possible that the con con could put those restrictions on. But on the other hand, it's possible that the con con could take those restrictions off and spend a ton of money on projects that really are not in the better public interest. And that's possible. So you don't you don't know which way it'll go. And that's, you know, the general feeling seems to be that there's a substantial group of voters who are terrified of con con because of one set of set of facts, set of possibilities. And there's another group of voters who are terrified of what con con will do on another set of possibilities. You get get fear in here. Fear is the operative word for both sides, for all sides of what it might do. Yeah. And of course, the opponents of a con con will try to magnify these fears as time goes on. Yeah, we'll see. We'll see that in all the rhetoric in the newspaper. And also, yeah, I mean, that's that's typically what happens in not only here, but in other states. Yeah. So what do you think? Is there going to be a con con? Well, we don't know. And I would guess that the Tax Foundation of Hawaii has not actually supported one position or another. Right. But but what we do, you know, support having a discussion because, you know, this is obviously a chance to put important policies in place. Maybe the discussion and the discussion at con con will help the public understand the connection between taking long steps that cost money and taxes, where you have to pay the costs of taking those steps. And, you know, I mean, I'm hoping that the public can become more Akamai about that connection. Yeah, we certainly hope so. And that's one of the reasons why why we're here. You know, the foundation exists to provide education to you know, the public and to even law here. So here we are going to be 2019. I guess in large part it depends on, you know, the council revenues again depends on what happens with the possibility of con con. And of course, with this amendment about having a county's tax for education or something that looks like education, right? What do you think is going to happen in the in the session in 2019? Well, in 2019, there are going to be a lot of different faces and depending on how many new faces there are, there may be kind of a different organization or a different field to the legislature itself. And then, you know, maybe it'll change direction. Maybe it won't. But a lot's going to depend on what happens during the election. Yes, the election, of course. How silly of me. That has an effect too. But how does that work? How does the election have an effect on what happens in tax in 2019? Well, again, it depends on on who gets elected. Yeah. Because they're going to watch their positions. You're going to watch what they say. You're going to ask them hard questions. That's absolutely right. You've got to do that. Because it'll cost you or not, depending on their answers. And of course, whether they follow through on their answers. Yeah. One of the things that you want to ask any politician is, you know, if you're concerned, for example, about the cost of living in Hawaii, which is, you know, astronomically high. You know, you can ask these candidates, what are you going to do about it? Yeah. Then you then evaluate their answers. So if I'm, let me sort of distill some of the things we've been talking about. One is I should really follow who's running for office here and figure out what their position is on spending money because the money they spend, it's my money. That's the first thing. The second thing is I really better look at and see how this county billed amendment on education is working and make my careful choice about that because I could get nailed on more tax there and directly or indirectly. And con con, although the cost of con con is not that great, you know, was it $12, $15 million? It's not that great, you know, the problem is it could result in huge expenditures and again, a failure to pay existing liabilities. So I have to look for candidates and propositions that will be disciplined and appropriate to monitor the FISC and to control the FISC if I intend to control the taxes that are imposed on me. What would you add to that? What should they be thinking about between now in November and from November to the next session? Well, one of the things you can think about is, you know, we already have some provisions in our constitution that are supposed to curb spending and how do they work? Do they balance the budget provision? Well, I mean, I think most states, including ours, require that the budget be balanced and that's appropriate because we can't print money. The feds can, we can't. We have, you know, constitutional debt limit, which we always break. We have a provision saying- We always break. We always break. We break the constitution. No, the constitution is kind of watered down so that if you pass a bill saying, you know, certain things, then you don't have to comply with the debt limit. And we do that every year. Okay. So, again, the question is, are we going to pass some constitutional limitations that have real teeth in them or is it going to be just something that is, you know, easy to circumvent? You know, a lot of people feel that the government is an infinitely deep pocket. The government has money to do anything. And so they go to the government, they write to their legislators and they write to the governor and they say, we want this program, we want that program, we want it all. We want you to spend the money. You can find the money. We know you can find the money. What is your advice to those people? Because after all, it's not infinitely deep pocket. It's our money. It's our money. It's not their money. It's our money. Governments don't pay taxes. People pay taxes. So should I restrain myself before I write a letter or go lobby some legislator to do my pet project? Well, you, I think need to understand what that project is, how much it's going to cost. Is it, you know, is there a cost benefit? If the benefit's away the cost, then fine, go do it. But if it's, you know, going to result in just money getting thrown away, then why do that? Yeah. Thank you, Tom. Will you come back and talk to us again soon? Of course. Tom Yamachika, Tax Foundation of Hawaii, keeping us focused on the public fears getting our taxes. Thank you so much.