 Mark Shklov, the host of Think Tech Hawaii's law across the C program. Today's second part of a two-part program about Hawaii's post COVID-19 economy with my guest, Roger Epstein. Roger is a lawyer and his legal career has focused on business and tax law. He's retired from the active practice of law but is presently co-founder and general counsel of the Asia Pacific Group, which facilitates transactions and projects between China and the United States. Aloha, Roger. How are you? Very good, Mark. Nice to see you again, as always. Now, in the first part of our program, which was broadcast two weeks ago, we discussed the post COVID-19 economy and you answered the question, how did we get here? Now, I want you to briefly summarize your view of the current economic situation in Hawaii and how we got here. Yes, Mark, let's put up the slides that I sent you. The first slide. Let's go to the second one. And there's a tremendous amount of information on this page, but what it does is compare how things were, I say statehood because there wasn't tremendous changes from 1959, 1960 through the mid-70s, not dramatic changes or the worst, they were kind of stable. And let's just take a look at some of these statistics real quickly just to set the stage for what we were talking about from last time. So the cost of a public university in those days was $329 a year. I paid 200 to go to college a year. I could earn 300 in a summer doing very little. Public university today, average 18,000. A starter house, if you graduated college and we're making $10,000 a year, you could really buy a starter house for $15,000, one and a half times your annual salary. Today, if you're making $35,000 a year, what can you get for one time that? Nothing. What can you get for five times 150,000? What can you get for 20 times? 700,000, that's the average house in Hawaii. So it's at least 10 times versus one to three times. So, and only one family member was working. We didn't get working wives till about the mid-70s and you could actually make a living and few people living paycheck to paycheck with one earner families. Today, 50 to 70% of the people in our community are living paycheck to paycheck. And that's with two people working, maybe two people, some one or more working two or three jobs. And when you retired, you got to define benefit pension. That is the company put enough money away so that you could get 30, 50, 70% of your last average salaries. Today, we've got 401K plans. This changed in the mid-80s, 90s. And whatever you put away, maybe the company matches a little bit and that's all you have to retire on besides your social security, which was never intended to be what people lived on. And so the average person today has 75,000 to 100,000 in their 401K. And the disparity between the rich and the poor. Senior executives and big companies were making 20 to 40 times with the factory worker or the average worker was making. Now it's 400 to 1,000 times. As things have gotten tighter for the United States, the rich have taken care of themselves, but not the workers, not the guys at the bottom. And Ronald Reagan came in in 1980 and demolished the Air Traffic Controllers Union. And what followed on after that was really the decimation of unions. Private business has only 6% of its companies with unions. Not that unions don't have their issues, but at least they protect your job and they give an employee some leverage to not get essentially wiped out the way they have been. So we have the 199% and we have a huge houseless population, the largest in the country, which we did not have in the early years. When I came here in 1972, there were not people sleeping anywhere near what it is today in the parks. And I mean, we just didn't have it. And here's the last one. This is interesting to me. The stock market in 1975 was $1,000. The standard and poor index. Today it's $27,000. And you might say, wow, that shows we're doing well. But what it shows is the rich people are doing well, the companies are doing well. The people that are making money off of this, we have 401K plans. And that has benefited, but not only that's just your retirement and it hasn't benefited enough to certainly make up for the loss of defined benefit pension plans. Okay, so when you say 1% versus 99%, you're saying that the 1% are the wealthiest people. And when you're saying stock market 1,000 versus 27,000, that means what? What does that mean? Stock market has risen 27 times while people's salaries have gone up two or three times, three times, two and a half, three times. So the relative value, this really demonstrates to me the increase in the relative value of invested capital. How much more is that work? The real estate is the same thing. Stocks are worth a lot more because corporations are worth more. That's your invested capital. The workers are getting paid less. And I asked you, how did we get here? So how did we get here? And what I said was this was not by accident. Let's take a look at the next slide. There was a plan formulated and distributed by Lewis Powell, who was at that time in 1971, the lawyer for the tobacco industry. And he became a Supreme Court Justice. I think Reagan put him on the court after he got in. And he wrote a memo, I have this memo, I've read it. It's just a plan that was implemented beyond anybody's wildest imaginations. And it was a backlash by the right-wing people by the Republicans to save the country from liberals. Just as I've said here, that's a quote in his memo. And he used Milton Friedman's concept of corporations that they should only go for profits. It used to be the Chamber of Commerce of the United States used to say the purpose of business was to provide quality products at reasonable prices, create jobs and benefit to community. And they changed that by 1980 to say the purpose of business is to make profits. Now, that is, okay, so we implemented- I don't know if I'm sorry. So the purpose of our talk today is, where are we now? How can we make it better? How we can make it better? So I want you to answer- Yes, so I just wanna say yes. And I just, one more thing before we go on, it's gonna get worse. That's my next slide. Just take a look at that. We didn't live this way 50 years ago. It's gonna be worse after post-COVID. We haven't seen it come next summer or next spring before the tourist comes in. Who knows where Hawaii will be? So again, I'm saying the next slide, I'm saying we could go back and make it better. And then one more, I start out with how do we do it? So the first idea since I've been a tax lawyer for all these years is to change the tax system in a way. When I first joined the IRS, let's go to the next slide. When I first joined the IRS, the highest individual tax rate had just come down from 90% to 70%. So if you were essentially making in today's dollars, about a million dollars a year, you were paying 70% in taxes. Today it's 38, 37 and a half percent. About half. Corporations were paying 50%. And we were living through some of the best economic times in the history of the world. So it's not like things where everybody was dying at the corporate level or the senior people, it was just spread around a lot better because taxation gives the government enough money to live on, to help the community out. And this is fundamental, Mark. I know we wanna go through all these things, but fundamental to this concept is what do you think taxes are for? And what do you think government's for? Is government to ensure that we have a quality of living or to be a part of that? That we have a quality of living that doesn't allow people or the sleep on the streets and doesn't make everybody live in paycheck, the paycheck, more than half of the population. It's wrong, I think. I think government has a role. Government is not, as Reagan said, government's not the solution, it's the problem. It's not, it's halfway in between. It's a combination of business and government working together so that we have a society where people have a decent way of living. So let me tell you a couple of things that I've suggested. The federal tax for taxation, the feds have lowered the tax rates from 50% now down to 21% just in the 2017 bill. Hawaii loses money from that because there isn't enough money at the federal level to pay for things in Hawaii and to pass money to the state. So Hawaii should pick up some of the taxes that the feds aren't giving them now. This is not unreasonable. This is- At the state level. At a state level. My solutions here are all at a state level because for better or worse, we can't do anything at the federal level and it's gonna be a mess no matter what happens in my view. But Hawaii can go on its own. Hawaii can do these things I'm suggesting and give our community a decent way of life. So if the feds knocked off 20%, was 35%, they brought it down to 21. Of course it had been at 50, then 35, now down to 21. That's 14 percentage points. We only charged 6.4% in corporate taxes. What if we doubled that to 12? That's not even half of what the feds gave away or what if we made it 10% instead of 6. Remember, even though it's COVID, this is an income tax. If the companies are struggling and they're not making any money, it doesn't hurt, it doesn't cost them anything. When they start making money, they kick in more of their share. This is the way taxes work. If you benefit more, then you need to kick in more because you've got more. A second thing is to double the tax. This has been suggested before the transient accommodation tax is now, I think 5%, something like that. It's much higher in New York. They've got a state tax and a city tax. I think it's about 14%. This is not gonna change the way people decide whether to come to Hawaii or not. It's not gonna have an impact any more than it is whether people to go to New York or not. So we double the tax. This brings in some 500, half a billion dollars. That's enough to, I think that's about 25% of our budget increase just right there. And remember, we don't have enough money to pay school teachers. We don't have enough to pay police. We've got all kinds of problems that change our society that are not handouts to people. They're just services that the government needs to provide. Here's another one. The real estate investment trust industry. This is an animal created by the tax law. These, the real estate investment trusts own $18 billion worth of assets in the state of Hawaii, including the Alamoana Shopping Center, the Hilton Village, Pearl City, many other trophy properties. They pay their income tax, their state income tax in the states where their constituents live, okay? They pay at 98% of their stock is owned by people on the continent. So the tax money that's supposed to go to the states goes there to other states instead of here. And Hawaii doesn't see any part of that. Here was what you're saying. Hawaii doesn't participate, except maybe 2% of the owners of these companies who pay the tax, not the company, that's all we get. So we calculated about $60 million in tax revenue that's gone to other states. We had a number of solutions. One of them was passed by the legislature last year and the governor vetoed it. And in my view, that was just a huge mistake. We have to understand that Hawaii is for Hawaiians. This is a local community. This is where people live. We have a treasure here. And if we give it away in a way that the people that live here, live in the hard conditions, why would we do that? Okay, so the other thing is we multiply, I don't say just increase. We multiply the real property tax on units, residences, but mostly condos, but also residences that are acquired by people that do not use them for either their personal residence or as rentals. If they use them as rentals, then that increases the rental market and it allows rental rates to come down for the people living here. But if they just hold it for themselves, they rent it out as a transient accommodation or they don't rent it at all like many people do, many very wealthy people own places here that they never use. And their tax rates, real property tax rates should go up dramatically so that they can pay the government to take care of in any way we can, the problems with high rental rates here. Okay, so Roger, you focused on the tax. That's your expertise. I wanna hear your other ideas quickly to go through your other ideas. We've got about, oh, 10 minutes left. And I'd like to hear what your other thoughts are. All right, here's one that's the next slide is one that we've quickly, we've been talked about a lot. We get our agriculture, we get our land back to agriculture and we get people growing crops. There's lots of ways to do this. What I've suggested here is collectively do the infrastructure and then lease it out at cheap rates to five-acre farmers who just farm there. You can make, I had, anyway, you can make a decent living much more than the average salary in Hawaii. If you operate a five-acre farm and sell your crops, maybe you have a co-op, the state could make the land available, philanthropists, there's all this sugar and pineapple land that should not go to housing development. It should go to agriculture so that people can live here. Okay. Okay, let's take the next one, volunteerism. We got all kinds of baby boomers coming of age, living longer. There's only two things you can use to create products and services, time and money. Money, there's never enough money. And if you get too much money, then the value of the cost of everything goes up. But an hour is an hour. We could get people to volunteer if that could become a way of life to help our community. So here's one, there was a program I saw in New Zealand years ago where elders would come into the class and just be a mentor for an assigned student, stand behind them or sit next to them and help him with whatever he needs or she needs. And it was a really interesting program and there's so much proof that one-on-one mentoring, especially seniors to younger students is a terrific thing. Another thing we could use volunteerism in for government service. There's no reason why you couldn't have a volunteer working in the automobile, passing out licenses and things. It doesn't, you can be trained to do it. And as far as privacy and confidentiality, they could swear to it the same way an employee does. Get the community involved. Get the community involved. It's so much better than throwing your money at it and saying, why aren't those guys doing a better job? You learn what they're doing and how it could be improved. Of course they'll be with that, but it just creates the possibility for so much more. And then get the government, get business to advertise for volunteerism. Let's put it out there as a really good thing. Okay, here's affordable housing. Here's one, there's been a lot of discussions, but here's the idea that I think only makes sense if you really want affordable housing. And that's the next slide. You really have to focus on the shelter aspect, the resident aspect of housing. You cannot have it be both a residence and your best investment. And so you need to separate those two. You need to make investment affordable housing only a residence. And the investment does not go to you as the owner. You get all the rights of ownership, but not the investment increase so that the affordable house stays at an affordable price forever. 10 years down the road, it's still $500,000 instead of a million dollars. Now we've got something that really could work. We take perhaps and using this model of buying houses and then letting people be co-owners with a Konohiki or a NGO allows them to use existing units. How many units are gonna be commercial properties? Maybe hotels that are no longer, I mean, they're out of business because of COVID. So we take advantage of that and we make them into these permanently affordable units. One quick, a lot of discussion, I'll just mention this. We revised the criminal justice system. Not only does this make the community more livable, you can save a lot of money. We're throwing away tens of months. We had something like seven, I got these numbers wrong, but the population of prison has gone up in this period. Something at least 10-fold, maybe double that. And so we've got, and this is all over the country. So you could, last year, 2019, the legislature commissioned a group of people to study what was wrong with the criminal, how we could revise it. And they came up with 50 ideas. I think one has been implemented so far. So we really need to change that. I mean, here you ask people to come out with the suggestions, they come out with good ideas and they're not brand new. These ideas been kicking around for a long time that we're in this committee commission paper. And so one of them. Not just get the community involved, but get the government to be responsive. Absolutely, absolutely. We need to partner with the government and we need to partner with business. We cannot do this unless we join as a community. That's what we have to realize. And only can we do it in Hawaii because of who we are with a community that doesn't hate each other, you know? Okay. So one of the things in criminal system, if you just changed the bail system, so you didn't put people who couldn't make their bail in prison, you would save something like $200,000, $200 million a year. Can you believe that? Just changing the bail system. Okay. What else? What else? Okay, here's one. Hawaii could create its own digital currency system. They could create essentially Hawaii dollars. What does that do? The government could say to you, Mark, you come and fix this road for me and I will give you a hundred Hawaii digital dollars, right? It's not currency. You can make, this has been done in other cities around the United States. It's not illegal. It's not like you're creating your own money even though you kind of are. But what you do is you get the government to say, I'll give you this. And if you want to use it to pay your taxes, we'll accept it. Now, once the government, once the state government accepts it for paying taxes, now the local merchants will take it because they also can use it for paying taxes. So it's more like it's a community and the government working together to have kind of a local trade system. Exactly, exactly a local trade system. And that system, you don't need to raise taxes because you're essentially getting the money in advance. The government puts out the credit and then you give them the credit back later on instead of the government waiting to pay you, you to pay your taxes and then them using the money. So I think there's a lot of things we could do with this thing. A lot of things. This is again, just ideas thrown out to think about. The last one, not the last one, I have a couple of more but I only have one more slide. I think we ought to take advantage of China as a huge asset for Hawaii. I know we're all fighting at the federal level with China but the truth is China is not going away. Hawaii is very Asian focused. China, I know I have a business there and I've been going there since 1982 in Hong Kong since 1974 and I work with the lawyers there as you well know Mark and you do too. They're not going away. They're gonna keep growing. Things are changing and I think my experience is China could really use America's health now. If they may not need it as much but they really need it now and we should collaborate become partner. My company has a partnership with China. That's all we do is partnerships. We're not looking to take people's money. We're looking to be win-win for everyone. And I think- And King Kalakala went to China and was looking for connections and networks and that is something maybe we should take advantage of that we have that spirit here in Hawaii. Mark, one of the things that I have been working on for about a year and a half now is something called the Shanghai Academy. The Shanghai Academy would like Hawaii to participate in meaningful discussions about all kinds of things rather than the federal level. And so we have many inroads into that. So let me tell you the last one that I didn't put on here because it has some tax issues but I'm trying to come up with a not-for-profit corporation that could allow people to exchange services. I paint your house and you fix my plumbing. It only works if it's for COVID people if it's because it's got to be a charitable kind of operation or everybody's going to get taxed on the value of their services without putting in any money, without getting any money. But I mentioned that because I wanted to put it out there. I think it's a great idea. I'm still working on it and I will include it. If anybody's interested in any of these ideas that we've got, I have this PowerPoint available. I'm happy to talk by phone or email. You can just contact you, Mark or think that. I'd like you to, what is the summary of your discussion? Put up the last slide and I'll show you the summary. So my summary is Hawaii comes together to create the community we want. We take those actions, we can right away and we move at a pono pace. That means we're all in this together. We know what we can accomplish and what we can. I truly feel that we could become a model for the rest of the U.S. in the world. And I love this saying, Queen Liliukalani said, she didn't go to war against the United States at the time of the overthrow because she wanted to preserve a loha for when it would be needed to save the world. And I say, is this the time? Well, that's a good question. And I think, frankly, I think it is the time. And I hope we can answer it. And you've thrown out a lot of good ideas, Roger. I appreciate it. And we have one minute left and I guess my question to you is, why should we care, Roger? Why did we care? That's a great question. And it's been talked about in this heated manner. All this Pila Kea we're going through with the right and the left and the red and the blue. And one of the reasons not only for you and I who are, I'm 75 and you're 86. And so it's for future generations, Mark. This is a country that has a fabulous history and a lot of shadows, but we can make it what it's supposed to be and Hawaii and a loha are what the world needs. So we can do it here. And that's what you're here for, to make the world a little better place. It may not show up for two, three generations, but if you don't do it now, if you don't put in the work, it's never going to happen for your children, your grandchildren. And as the Native Americans say, seven generations down the road. Well, Roger, I appreciate your loha. I appreciate all your ideas, everybody. Roger Epstein has been a source of good information and we're throwing out these ideas and let's hopefully we can continue working with them and with the loha. So Roger, thank you very much. Aloha to you and we'll talk to you again. Thank you. Aloha everyone. Great pleasure.