 Yeah, a GT exemption for food and drugs in Hawaii here on Talking Tax with Tom Yamachika. And we always enjoy talking to him about tax policy and taxes in Hawaii. Welcome to the show. Your show, Tom Yamachika. Thank you, Jay. Thank you for having me on the show. These days, there's been a lot of talk among the political candidates, especially the ones for governor, about possibly adding a general excise tax exemption for food and medicine, you know, over and above the exemption we have now for prescription drugs. The three Democratic candidates for governor all support it. And they have all articulated the port for that, so it's a platform point for all of them. Yes, it is. Now and the argument that most people make in support of that exemption is that the GT, you know, Hawaii general excise tax, which applies to most purchases of things, including food and over the counter drugs, and medical services, is regressive. Thus, it falls more heavily on those who are not able to make ends meet. And of course, structurally, that's true. The GT is a straight percentage of the sale, so it doesn't matter whether the buyer is wealthy or destitute. It's the same percentage. Both rich and poor people need to eat. Both rich and poor people need to have their health taken care of. And some studies have shown that poor people spend more of their budget on such things. So that's the issue. The counterpoint came from director of taxation, Isaac Choi, who pointed out in a recent start advertiser editorial that it doesn't necessarily follow that the GT burden falls more heavily on the poorest because there was already a GT exemption for food bought with Department of Agriculture, U.S. Department of Agriculture food benefits, like under SNAP or the WIC programs. The state also provides income tax credits for lower income folks, one of which is called the food excise tax credit. And that is of course meant to defray these costs. And as we mentioned earlier, there's already a GT exemption for prescription drugs and prosthetic devices. And so Mr. Choi reasons that a proposed broadening or the proposed broadening of the exemption to all food and all medicine and or medical services would primarily benefit the wealthy and the tourists. So we can kind of talk about that. We have often disagreed with him. You know, one interesting point here goes back to George Freitas. George Freitas was the tax office leader for many years in informative times after statehood. And his one great initiative was to make the GT plenary for everything, covering everything. And you know, there were these conversations back then to exempt this or that, but George stood firm. And at the end of his administration in the tax office, there was very, very few, if any, exemptions for anything from the gross excise tax. You know, and his argument, he had many arguments for this, but his primary argument is that once you start taking a piece out of the gross excise tax, it's a slippery slope. And politically, there will be pressure to take another piece in another area. What do you define as food? For example, a bag of fresh vegetables would probably qualify under most people definitions of food. What about a hamburger from a fast food establishment? There have been some Hawaii bills that attempted to exempt food, but it would have excluded the hamburger because it's prepared food and not groceries. Now, how about a top storyline steak, the storyline steak, then, if you have a hamburger that's exempt, what about a fancy meal at a fancy restaurant? What's the difference exactly? The bill would have exempted groceries, but taxed prepared food, restaurants, including fast food. Right. I think that's an easy division there. It's an easy demarcation, but what is the tax foundation? Your comments, I'm sure, if there was a bill, there isn't right now, but if there was a bill to exempt food, what exactly would you say what your remarks be about it? Well, there are several ways to draw the line. If you want to exempt food, you can exempt groceries and tax fast food. You can tax restaurants, but there are also arguments to exempt the restaurants and the fast food as well. It's obviously easier to apply a broader definition of food because then you don't have to worry about the differences between prepared food and fast food. How would you classify a Twinkie? Some people would be okay with exempting real food and they don't classify a Twinkie as real food. They classify it as junk food or something like that. This problem has come up in other states many times because a lot of states have food exemptions or lower rates for food in their sales tax laws. Now, I think the broader you make the exemption, the easier it is to administer because then you don't have to deal with the distinctions between real food and junk food or groceries versus prepared food, but at the same time that it costs more. If you're going to exempt the restaurant meals, it's going to cost more than if you don't exempt the restaurant meals. And then when it comes to medicine, most people accept prescription drugs and we already do. Over-the-counter medicines, that's probably considered medicine like Aspirin, Motrin, Aleve. Are they exempt from gross exercise right now? No, they're not. Over-the-counter. Only prescription medicines and prosthetic devices. And then the question becomes, what about homeopathic products, nutritional supplements that are believed to have some benefit but aren't scientifically proven? And what about illegal drugs or semi-illegal drugs like marijuana? I say semi-illegal because the state legalizes it under certain conditions. The feds still have it as a schedule one controlled substance. If I'm running a marijuana shop and I can legally with license in Honolulu, do I have to charge gross exercise tax on the marijuana? You probably should because you're being taxed on it. So I mean, zooming back for a moment, it's very regressive, especially when you consider that it's on everything. You can go to other states and find that the rate is double, our 4%, but at the same time there's all kinds of exclusions and exceptions. And I think over the years since George Freitas, the two arguments, the two reasons why we haven't made a lot of exceptions on gross exercise tax is one, as we have discussed, it's a slippery slope. Before you know it, there'll be more. OK, but the other, which is inherent in that is we're not inclined to get into the weeds. We're lazy. We don't want to make these distinctions. We know there'll be litigation over it by retailers, what have you, who are selling things that they would like to be exempt. But I think that we ought to follow up none of you only. I think we ought to follow the other states that have made that division and are not being lazy about it and have made the distinction because of the regressive effect of the tax to say that there is some kind of federal benefit on food for some people in the community is not enough. There are a lot of people who are disadvantaged who don't have those benefits and it's not it's not fair to have the regressive effect on them. I don't think food. I don't think food should be. I mean, I'm not talking about restaurant food, but food that you buy has food in a in a food store and a market that that food should be exempt. And it's a question of helping people who need help and not imposing a tax. If you want more tax revenue, then increase the income tax. But obviously, if you increase the income tax, you're going to have political pushback and that's a third factor that works on focusing on leaving the gross excise tax in place. I this is this is an essential unfairness about this and we are not really progressive as long as we leave it there. Yeah, the the general excise tax has been kind of a sacred cow in Hawaiian politics for a very, very long time, primarily because it makes so much money. It makes close to half of the receipts of the the state general fund. That's wrong. It's taking it off the backs of the poor and we ought to find another way. And the other thing is, you know, we we should spend a little time today. I hope you're interested in that. I have to talk about that half percent in a while. Well, yeah, we can talk about both both issues. But again, you know, what you do about the tax is. I think driven by, you know, the desire of or the desire or the question of who to benefit. OK, yes, there are benefits already in place for the lowest income people, some of which I question and let me kind of digress for a moment. Director Isaac Troy was talking about tax credits, you know, for the for the poorest of people. Well, that assumes that you know about the tax credit that you that you file an income tax return and you properly claim the tax credit on the income tax return form. A lot of our poorest people don't don't know about number one and don't do number two or number three. And then the tax credit, of course, goes away after a year. Never to come back. So that's a that's a fair point that I see truly makes. On the other hand, isn't that a matter of educating people? Well, how are you going to do that? I mean, like you need to need to take. People from the Department of Taxation to the homeless camps to to the public housing. You know, and again, who is your who is the audience you want to benefit from this? Is it just the poorest of the poor or people who are genuinely struggling to make ends meet? And there are a lot of those who, as you mentioned before, might not qualify under WIC or SNAP and get the federal benefits. Okay. Fair enough. That I, you know, in general, I think if you're going to impose a tax and give an exemption, you have to tell people. Yeah, no, I mean, obviously you're going to tell people, but that doesn't always work. No, I mean, I know, I know from experience when I was working at the Department of Taxation, you know, we announced changes. You know, people get confused and they make mistakes, a lot of them. And more and more likely they make mistakes when they are at the disadvantaged economic levels. You know, it's a structural problem in this state and in other states, but we're particularly vulnerable to it because of the effect of the tax. Because the tax is plenary and in many ways it's too high. So I don't know what we're going to do about this. I mean, it seems that you say that the gross tax tax is politically sensitive because it derives a lot of revenue, half the revenue in the state. Okay. That doesn't make me feel any better. I think that if the state needs to raise revenue in order to do the fine tuning at the income tax level, that is a better way to do fiscal policy, isn't it? Well, it's more progressive, but the issue is that the income tax is already very high. I think it's the second highest in the nation behind California. What's wrong with us that we have this? Okay, why is it so high? It's one of the highest in the nation. And at the same time, we have this regressive gross exercise tax. Where have we missed the boat on this? It sounds like our tax policy needs some rethinking, don't you think? And throw in the fact that our real property tax and real property is really the mainstay of many families. Real property tax is relatively low. So where are we missing the boat? Are we spending too much money? Are we mismanaging our fiscal activities and policy? I think there are strong arguments for both of those. We're spending a lot of money. The reason why taxes are so high in this state is because we're spending or attempting to spend a whole bunch of money. And even then, with all the money we spend, we can't get stuff done. Look at the humongous waitlist for Hawaiian homelands, for example. It's been a problem for decades and decades. And finally, this legislature seeing a bunch of extra money through $600 million at it and see what happens. We have backlogs in maintenance at our airport, at our university, at the schools. You name it. And I think this extends also to county facilities like parks. Yeah, we're turning into a backwater, you know, a third world country that way. Just look at the roads, eh? And then we can have a war on potholes every year, but it still doesn't solve the problem. Our roads need work. We have to, you know, fix them better so they last longer. So anyway, I mean, that's, it should be obvious to everybody, although I don't think it is. And it should be obvious to somebody who is paid to make tax planning, tax policy and fiscal planning and policy. So that we don't have this kind of imbalance that you describe. So from a call it a management point of view, aside from the tax foundation of Hawaii who thinks about this all day. What, what organizations are in place that would address this imbalance? That's a very good question. I mean, within within our government. You would think that the, the governor's office should be on top of this. I'm not sure they are. The department of taxation is on top of the tax part, but not the spending part. That's not their job. We have large agencies who do a lot of spending like DOE, Department of Health University of Hawaii. I'm not sure what motivates them to keep their costs down. And I think they have lots of motivation to, to keep them up. You know, just to answer my own question, less condo in the state auditor's office, although it's a kind of a hit and run approach, rather than a planning approach. Seems to me one entity that should have, it has had a lot to say about waste. And unfortunately, you know, the state auditor's office has taken hits from the legislature for political reasons, as we know from discussions with him on the show. But the state auditor's office could be very important in, in the landscape of organizations which investigate and, and throw some sunshine on this. Yeah, no, I think transparency has been a very big problem and it continues to be a very big problem. Especially in the larger agencies like DOE. There have been organizations that have been trying to get at DOE's accounting system to make it more accessible to the public. There was a lawsuit filed a few years ago to do that. I'm not, I'm not sure how far it's gotten probably not very far at all. There have been advances in, you know, the law mandating transparency of government operations. But then, you know, along came the pandemic and all of that was kind of turned off. I want to talk about Neil Abercrombie for a moment. You know, there was an event that took place at the MIC Minoa Innovation Center during his term of office. And I was there and a lot of people were there. And he was talking about technology in the state, which is, you know, it's a sad and disappointing initiative. And he called me out among the crowd and he said, Jay, you like tech, don't you? Yes. He says, I'm going to make you so proud, you know, that we are, we are going to have the best technology for the state government that you have ever seen. They will come from miles around and extol the virtues of the new system we're going to put in place. And we're going to bring the best technology and we're going to correct all the, you know, ancient legacy systems that are, you know, being used and still being used in state government. I said, that's great. This is an open conversation now in front of all these people. I said, that's great, Governor, but when? And now he's, he's really got to answer that. So he says, well, it's, you know, it's going to be by January. He actually named the date and it was a noble idea. I don't know if he had the, you know, the resources to do any of it, but he said he was going to do it. Well, that date came and went and nothing happened. And we still have all this legacy software and hardware in state government. But let me offer the thought that Abercrombie was right. And, you know, there was a special task force public private partnership where they brought this guy in from GSA in Washington and put him in charge of finding out what the problems were and recommending answers. And he made a very big, expensive report, but the report was not acted on. Anyway, end of the day is still, it's still the case that we could bring new software to make state government more efficient in every corner. This is sort of like the special fund that you and I have been talking about, special funds. In every little corner, there's different software packages and they're not coordinated. And if they were, gee whiz, things would be much, much more efficient. But they haven't been. And I suggest to you, Tom, if we were willing to spend the money, including with local software programmers and vendors, willing to spend the money and put better software, more, you know, interconnected network software around state government to all the agencies and all the little corners. We would be, you know, lots more efficient and we would save money. And some of the problems you're describing could be resolved through that methodology. Yeah. No, I mean, definitely one of the bugaboos of any large organization, including our state government and others, is that you get people in silos and they do and they want to do what they want. They don't want to be beholden to anybody else, but really what you need, or what we as a society need is some unified plan, which have, which when implemented would be way more efficient than what we have now. You know, we've kind of done that in pieces. But, but we still have, you know, software that doesn't talk to each other, we still have arcane management of maintenance backlogs, such that, you know, stuff doesn't doesn't happen in any kind of timely fashion. You know, what are we going to do about all of these things? I think those are the some of the biggest issues that our state government is facing. And I'm hopeful that whoever gets to be governor this time around is going to think seriously about it and and give us some great leadership to deal with these types of issues because we really, really need that. Well, in the private sector where, ostensibly, they do have resources to, you know, network their data. You know, they can do planning by push a button. If I push a button, I can know the status of my company instantly. It's right there on the screen. And then I can sit with my team and we can figure out how to how to use that information, how to how to change that data, improve that data, what have you. We may not be always successful, but at least, you know, we have the data to work with. It's like navigation, like the whole Kulea. I think, you know, talks about this is you can't really figure out where you're going unless you know where you are. That's the first step. It's like years ago. I'm remembering Earl on side was like he was attorney general maybe at the time. And the question was how many employees do we have in the state. And nobody can answer it. We didn't know how many employees we had state employees we had in the state. I wonder what would happen today if we asked that question. How can you possibly plan things if you can't push a button and have all the answers on the screen and know exactly what the, you know, for example, the total of the special funds is at the total number of employees. And all the data you'd ever want should be on the screen. And then you can sit as the executive branch as D bed as anyone as a legislature as the tax office can sit and know the state of affairs any moment dynamic basis. If we had that information and think we could do better planning, and not only on fiscal policy and, you know, more efficient government operation, but also on tax policy, don't you think. And maybe we can fix some of these tax imbalances that you and I were talking about. That's absolutely true. But, you know, we have some issues because, you know, some of the big agencies don't like transparency. And this, this I think is a problem common to, you know, many big organizations, you know, the, you know, people who have, who have a fiefdom like to control it. And they don't want, you know, outside interference. So, so they, they guard their, they guard their fiefdom, they build walls, they don't want their walls penetrated. And they would view, you know, a system that you're describing as, you know, really a breach of the main keep. And threatening. Very much so. I think I'm getting somewhere. I don't think that Neil Abercrombie's idea is going to come true anytime soon, even though we had $600 million that came away last year. That would have gone a long way to saving much more money in the long term, if we'd applied it toward developing local government technology as we should have done back in the day. But query back to the main topic. What do you think we should do about these exemptions strikes me that, you know, we want to be progressive. We claim to be progressive, we need to be progressive. We have to think of all the people who are disadvantaged and poor, largely because we haven't managed land that well and land is their most important, you know, obligation that most most threatening debt. And for that reason, the family budget in this state is always under pressure from rent or mortgage payments. And so how are we going to help people achieve a kind of an even playing field or a more even playing field in terms of living their lives in Hawaii not having to leave. And how are we going to make a life for young people who graduate school, how he got to do a little here and a little there and make life in these islands more progressive or equitable, more just more fair. And this is one way my view to do that. And I don't know why after all these years we haven't done it. You mentioned before the show that there have been bills from time to time in the legislature calling for this reform, but they've always failed. And here we are 2022 2023. Are we going to do this or never, you know, it's like that New Yorker cartoon where the guy's talking to somebody wants to have lunch with him, and he says he's leaning behind his desk and he says, How about never is never good for you. And that's what happens is never going to be the answer here Tom. Well, I think we need to kind of get the, you know, the fundamental question. At least, you know, discussed and and maybe make some decisions about how much government do we want. Okay. Can we pair it back to something that we can afford. And if we can, then maybe we can afford the exemptions that we're talking about. If we've, if we're, you know, staying the course with, you know, the big government that we have the programs that we, you know, maybe are nice to have but are not essential. And we've got to pay for them. And, and paying for them means that we got to keep taxes high. And, and, and, and, and, you know, literally doors are going to keep hitting the balls saying well we don't have the money. We either got to raise more, or we have to sacrifice this we have to sacrifice that what you and what do you sacrifice. Some of those very same candidates are saying, I could name names, you know, they have said this in the legislature for years. We don't have enough money we have to raise taxes and we can't spend and all this and so I mean I think ultimately it constrains our ability to grow and to build a livable workable society. It's very tragic because it all points downhill. And so, you know, this is a hard spot we're in. But I would say in the short term, the most important thing is to give confidence in the public to make the public feel the government cares about them. And this is one way that can be done. Yep. Very good thoughts. We're pretty much out of time so I thank you for the discussion about taxes and food and medicine. You know, bringing them down is a good thing but I think we also need to address the root causes that that make our government so big and want to tax so many people so many different ways. I think we need to kind of think about relieving the pressure on the fist so we can relieve the fiscal pressure on the people. Well put an important important idea and I think it really defines them, you know, the fundamentals of our state going forward. And it also defines the fundamentals of talking tax with Tom going forward. I would say, Tom, we have enough material to keep on doing these discussions forever. Is forever good for you? No, I don't think so, but we can go for the next couple of weeks anyway. Tom Yamachika talking tax with Tom. Thank you so much, Tom. Aloha. Aloha. You can also follow us on Facebook, Instagram, Twitter and LinkedIn and donate to us at think.kawaii.com. Mahalo.