 Think Tech Away. Civil engagement lives here. We're back. We're live. We're here on a Monday morning at 11 o'clock. Block, I'm Jay Fiedel. This is Think Tech and its community matters because it does. Okay, we're just over the session. Does that sound right? Over the session. We just like over the moon. We're over the session. We got over it. Now we can look back on it, make some analysis. The only thing I want to say is what Tom Yamachika and I were talking about before is that the core of any legislative session is the fiscal policy and the taxes and he's involved in the taxes. He's the president of the Tax Foundation of Hawaii. He watches everything about taxes. Hi, Tom. Hi, Jay. Thanks for having me on the show. Thanks for coming down. So what happened this session? I mean, in a general sense, would you say that this was remarkable in some way? Can you characterize it? You know, yes, no, maybe. How do you feel about this session in terms of tax? Well, I think it was kind of a typical session. Some things made it through that are scary. Some things that were scary didn't make it through, thank goodness. And now we just have to kind of worry about the ones that are scary. Okay, I have a list of various bills we can talk about. We'll never get to them all, but what about the scary ones? Can we talk about those first? Okay, let's talk about the constitutional amendment. Okay, so there is going to be on the ballot in November a constitutional amendment question that basically says, can the state have the power to put a surcharge on real property tax, which is now, you know, and since 1978, ConCon has been the exclusive province of the counties. So the counties hate it. The teachers want it. It's going on the ballot. You know, we already know that the governor can veto it because that's not how it works. You mean the governor cannot veto a, all right, because the Constitution tells you how amendments are made. Right. And it's just an agreement of both houses. They have to have some super vote. And I think some majority's enough. Majority's enough, okay, for both houses. And the governor is not involved in assigning it or not signing it. That's right. Okay. Well, that's really interesting. And the part that's scary is that there are pretty much no limits. It says investment real property, but that's the only constraint. Investment real property. Correct. Do we know what that is? No, the legislature has to define it. So if you and I were called to speculate on what that could be defined as, it would be anywhere, anything where you either make a profit, make a return, a return on your investment, or you want to make a return on your investment. You act like you want to. But if you live in that property, then that would not be investment property, am I right? Yeah, I think the only exclusion would be if you live in it. And right now we have like in the city and county of Honolulu, we have a different property classification for owner occupants. And everybody else was in residential property. So I kind of looked at the numbers on it and said, okay, if we have all this residential A property, right, and we're going to surcharge that at 750, which is what they were talking about last year, that would pull in maybe 113 million. Okay. In the teacher's testimony last year, they said they wanted to get 500 million. So no, we're close. So we're thinking what's going to happen is, in order for the teachers to get what they want, they need to not only hit the residential property that doesn't qualify for a homeowner's exemption, but they got to go after a bunch of other stuff. Okay. So the definition may not be everything other than residential where you live there, but it may be less than every single other property. There might be other exceptions to investment property. Yeah. Yeah, for example, commercial property. Yeah. It's not residential, but there's nothing in the constitutional amendment that says residential. So that's one way they can broaden the base. Yeah. So there's going to be a lot of hassling over that. You know, one thing strikes me, it's worth a moment to dwell on it. Yeah, the teachers want it. And the teachers are powerful and they have a powerful union, but there are probably more people who own property. Oh yeah, but I don't care if I own property and live in my property. I'm safe. So I don't care whether this tax is adopted or not. I might vote for it, even though my, if I owned investment property, I would not vote for it. Why would I tax myself? Why would I take money from the people who own investment property and give it to another group? What shook me when this first came out was, why don't you just take it out of the general fund? Why are they concocting this whole thing about real property tax? Why don't we just increase the tax and be straightforward about it and be direct about it? Why do they have to go to real property? Concocting a new tax just for one purpose. Well, their argument is the real property tax is low, and it is compared with other states. And number two, they're saying, well, jeez, we have all these evil real estate speculators that are driving up the price of our housing. Let's go knock them down, take them down a few pegs. But that's not how this is going to work in practical terms. How is it going to work? Like I said, number one, you'll probably have to go after commercial property. If you do, that's going to impact our cost of living for everybody. Sure. And the mom and pops, the mom and pops small businesses. Yeah. And anytime you rent, that's commercial property or investment property. Yeah. So if I own a small store, I mean, either own the land or I'm a less see on the land, won't turn short term, my cost of occupancy will go up because the real property tax on that land has gone up. That's right. So the result is the mom and pop businesses will be under further stress and be at even a greater disadvantage than they already are. Right. Absolutely. That's a good thing. Yeah. And there's no guarantee at all that any of that money is going to go to the teachers. You know why? Because right now, as you said, we already have a bunch of general fund money going to education, $2 billion approximately. And if the measure passes and they get maybe $500 million more, won't there be a whole lot of pressure on legislators to say, well, you know that $2 billion that was going to education? Let's redirect some of it. Away from education. Yeah. We have other needs. We have homeless. Absolutely. You can see that happening. We have invasive species. We have sunscreen in the water. All kinds of other needs. Yeah. I mean, that's gross because then it would reduce the $500 million and spend that for hobby expenses, if you will. The other thing that might happen, as happened in the barrel tax, is you have a clear statement of intention at the outset, but the legislature dips into the money just the way they dipped into the barrel tax and use it for reasons that were not originally contemplated. And so it could get lost on either end of that continuum on reduction of other spending or on a redistribution of the money that comes in through the special tax. You know, as you said, it's a function of what the legislature ultimately says to implement this amendment. And it could save a lot of things, allowing it lots of flexibility as to what to do with the money. Right. And then, of course, there's the Me Too factor. The Me Too being, oh, the teacher's union got all this extra money? How about the other unions? What are they going to say? Are they going to simply sit still? Yeah. Yeah. And we have a homeless problem. So we spend $30 million in that bill you mentioned before the show. But you know, that's dropping the bucket when you calculate how much it really costs to deal with and repatriate the homeless. So maybe there's another constitutional member coming down. Who knows what? You know, it's a further source of income for the state to squeeze on the county real property tax. That's what really troubles me about this. You know, however long they might be, this is a new dimension in tax in Hawaii. Right. Now, you know, back in the old days, the state had the real property taxing power. The counties didn't. Okay. It was only after the 78 Con Con that it was transferred to the county so they get their own basically revenue generation recognition because they didn't have very many tools to fund their own. Right. But their obligations did not include education, which is a state function. So that was a little peculiar. But in most states, education is a county function. That's right. So a little kappakahi what's going on here. Did you support or oppose that bill for the amendment? We made comments like we normally do. We don't take positions on anything. What do you think now? Again, like I said, there's a lot of room for mischief. Once that genie comes out of the bottle, you know, is it going to behave as people intended or is it, you know, going to do other stuff? Taxes are inevitably going up. You know, I could ask you the same question after every single session. I could say, Tom, did the taxes go up this year? And it's okay. You would say, yes, they did, Jay. And I could ask you, well, is there anything that went down this year? And you could say every session you could say no, Jay. It didn't go. Nothing went down. Am I right? It's very rare when stuff does go down. It happens occasionally. You have to look in the old history books. Really? It doesn't come to mind right away, does it? No. You said there were other scary things. What other scary things come to mind? Okay. One of the things that happened is they went and changed their income tax code because of the Trump tax changes. Now, a lot of the business changes that went into effect on the federal level will take effect here. Like, for example, you won't be able to write up your golf with clients anymore. Sorry, Jay. I don't play golf actually, Tom. Okay, I won't need to do that. I'm okay. But the client entertainment is now non-deductible. It used to be deductible at 50%. The meals are still deductible at 50%. Other types of food and beverage expenses are 50%. Also, for example, if you stock a break room for your employees and spend for food, that's 50% as well. It's not fully deductible like it used to be. Okay. So all those changes are coming into the Hoy Code. Okay. A lot of the changes on the individual side, what they did on the individual side was they brought in the base, but they knocked down the rate. They didn't pick up many of the changes on the individual side at all. So the intent, I understand, is to freeze that a 2017 law. It's, again, it means to be seen how they'll actually implement it. So the taxes locally have been, in general, conformed to the federal tax reform bill that Trump passed at the end of last year. Yeah, I mean, normally, for the past 60 years or so, we've tracked the federal bill. However, I saw in the paper a reference to the fact that the legislature was trying to take advantage of the fact that taxpayers in Hawaii now have more disposable income. These certain groups of them have more disposable income because of the Trump tax reform bill. What has happened in that regard? Are we getting to, you know, pay what we were forgiven on the federal level, pay it on the state level? Are they taking our money? There was actually a bill that said that, specifically, in the estate tax context, and it said, oh, now that the feds aren't taxing the estates as heavily as they used to, it gives us an opportunity. That bill didn't pass, however. Good. That would have increased the estate tax for state purposes as well as the conveyance tax. It shades away people who come here to retire and hope to avoid estate tax. Oh, yeah. I mean... Yeah. Well, let's take a short break, Tom. It's Tom Yamachika, president of the Tax Foundation of Hawaii, and we'll come back and we'll talk about some more of the bills that we should know about that came out of this session on taxes. Hi, I'm Ethan Allen, your host on Pacific Partnerships in Education here on Think Tech Hawaii. Every other week, Tuesdays at 3 p.m., we have guests on and talk about the fascinating, interesting and unique partnerships in education that occur across the Pacific Islands with Hawaii, Micronesia, the Marshall Islands, Palau, Guam, all these places have really rich local education programs going on, and the exchange among and between these programs is a wealth of great information helping the islands all learn how to survive and thrive in our ever-changing world. I hope you'll join us on Pacific Partnerships in Education. Hello, I'm Cynthia Lee Sinclair. We have a show called Finding Respect in the Chaos. It's all about women's rights and gender equality. It's a place for survivors of abuse to come on and tell their stories and a place for advocates to come on and share important resources so that people can get past the abuse and into the hope and healing that's on the other side. I hope you'll join me every other Friday at 3 o'clock for Finding Respect in the Chaos. I'm Cynthia Lee Sinclair on ThinkTechHawaii.com. We're here with Todd Mimichico talking about taxes in the 2018 session now that it's over and trying to get a handle on how things change and how taxes might change as we solve them. This is not necessarily an order of importance, but let me just go down my list. There's one thing you mentioned that really, to me, that's pretty scary, is that as in the federal government, there's an organization in state government that evaluates the cost of legislation, any legislation. And this is very important because sometimes, as we'll talk about later, bills get killed without any express reason when, in fact, it's just that somebody in the Finance Committee feels there's not enough money for that bill. Every money bill goes through the Finance Committees and so forth. So anyway, this bill was a bill to make that information, the analysis of how much any legislative act is going to cost. This was actually a bill that would have changed the secrecy of that information up till now. Right. And that bill failed. Right. Now, if you're trying to get some legislation passed, one of the things that legislators are going to ask is how much is it going to cost. So typically, the Department of Tax will analyze the bill and they'll come up with a number and they typically won't share it with anybody. They'll just share it with the legislators, figuring the public doesn't have the right to know because there's some taxpayer information that goes into these calculations. Not in the cumulative numbers. I mean, in the individual. Well, at some point when you have credits or incentives that don't affect that many people. You might be able to figure out who it's affecting. You might be able to figure it out. So this has been secret. It troubles me because what it leads to is the priorities and what gets funded, what doesn't get funded based on some sense of how much it costs. I'd like to know that. Yeah. And the methodology, how they come up with their numbers is critically important. If you are trying to get something passed and the Department of Tax scores it as a huge revenue loser, good luck because that bill ain't going anywhere. But if you have some reason to challenge the methodology which you won't unless you know what the methodology is, then maybe you can kind of save your bill from extinction. Well, the public ought to know. The media ought to know. We ought to be able to say whether a given order of priorities to pass one bill and knock one off because of funding issues. We ought to know how much the fund is going to be. I can't imagine properly understanding, especially these effectively secret conference committees at the end, how they're making their decisions if we don't know the relative costs of the bills, which takes me, I don't know if you're familiar with this one, HTA lost a third of its budget, something like that. But that one, it's very interesting because a lot of the money that HTA lost was the state's right hand paying the left hand anyway. The way it was set up was there was this large debt that was set up to build a convention center. So HTA owed the state a ton of money and the state floated bonds and got third-party financing, the convention center got built. Now the bonds are all paid off. So what's happening is HTA was getting an appropriation of money from the state to pay off this debt that's due to the state so the money is going in a circle. So somebody had the good sense to say, okay, well, why don't we then knock this off? Let's cancel the debt. So cancel the debt, cancel the appropriations, and come up with a true cost of what it costs to run HTA. That sounds like good thinking to me. Yeah, I think that's good thinking. Yeah. And that's what they did. So sometimes it doesn't show on the surface. Right. So let's talk about what happened, and I'm familiar with two bills that got dashed in the conference committee process last week. One of them was the airport authority bill, which would have cost some money. And the other was the revamp of the energy tax credit. I want to say Senate bill 2100, it was. Famous or infamous, you know. Both of these bills had been agreed, and the Senate and House versions were almost identical in both cases, but they got lost at the end and they didn't pass. And we didn't do any of those two important initiatives. And speculation could be, I don't know how true it is that the House Finance Committee pulled its people out at the last minute from the conference committee, thus dashing those and other bills. The real reason was they didn't think it was enough money for those bills. You know anything about this? I don't know anything about it. The decision on whether to go forward with or pull countries is made at the Speaker of the House level. So you can ask him, but if, you know, if it's the finance people that were being pulled, then you know, money would probably have a lot to do with that. Yeah. I was pretty upsetting to a lot of people, the ones who were supporting those bills. I mean, and I feel, and I think the airlines were supporting the airport authority idea and felt that the airport needs better management and this was provided. The hotels, I think, were supporting it. So it's good for tourism and tourism is the engine of our economy. And our airports are developing a reputation for being well below the international standard. So that was really too bad because that's an investment in the future in tourism in Hawaii. That's too bad. And the airport was supposed to be redeveloped like 20 years ago. It hasn't been. Yeah. I think for the airport authority bill, the hang-up was on the procurement law exemption that it was reported that some legislators were uncomfortable with. I suppose they were comfortable with setting up precedent because then everybody else would want to come in and say, well, why can't we get exempted from the procurement law? My recollection is that that was changed. They were uncomfortable because there was an exemption from the procurement code, which is such a tender thing in Hawaii. And so it was put back in. So if the bill had passed, it would have had that in it, thus dealing with that objection. But I think it was the walkout at the last minute that caused the bill. Anyway, the other one was the bill for SB 2100, the bill for energy tax credits. And then we're going to reduce, ramp down the solar installation credits, but ramp up credits for battery storage. Battery storage. Which was very rational. Very rational. I think the industry wanted that. I think everybody in the energy field wanted that. So with some exceptions, of course, but that was also a bad surprise. And I'm not sure what happened there, but there were a lot of people very unhappy about it. One thing that happened at the federal level that was interesting was that, on the federal level, they said, if you have a battery system that is installed to complement a pre-existing photovoltaic, for example, then you can get the energy credit for the battery backup system, which I think changes the game a little bit for the Hawaii credit, because the Hawaii credit in large part follows the federal one. Yeah. Well, here we are without either. And it's the end of a biennium, so they don't automatically come up next year. That's right. Well, but the energy credit bill, I've seen that for at least three or four years. Yes, it has. I think the airport authority too, been around. Anyway, okay, that's really too bad on that one. So you have the scary category. You have the too bad category. And let's go into some other ones now. The withholding of proceeds on owners, investors from outside, from offshore, on sales or real property. This is called Harkta. What that is, is that if you are a non-resident who owns Hawaii real property and you sell that real property, a certain amount is withheld on the gross sales price to, ostensibly, to settle up your Hawaii taxes on capital gains and otherwise. So the rate had been 5%. One bill that passed raises it to seven and a quarter, which is our maximum state capital gains rate for individuals. There were some versions around that would raise it to 9%. Even beyond the max rate. Yeah, and I think the theory behind that was you over withhold and then you figure out, oh, some of these people were actually renting out their properties, so they have other taxes to pay, such as transient and comm or general excise, and then use that, intercept that to pay for those liabilities, which we think is a kind of cumbersome solution, and not really addressing the problem that's at hand, but suffice to say that bill passed. Seven and a half percent. Seven and a quarter, yeah. Seven and a quarter, yeah. Well, there's a certain logic in it, but I tell you, this is riding on a wave of public sentiment that wants to tax offshore investments in Hawaii. You see that happening more and more. Yeah, and the HSTA came up with a really, really strong rhetoric, just really saying, well, yeah, we've got to pummel these guys. Of course, the context was a little bit different. It was the context of the constitutional amendment, but that certainly applied in this context as well. Yeah, yeah. Okay, and here's another one. It falls into the same category. The use tax on intangibles, use tax when you import something. How does that work? Okay, so if you are a consumer, for example, and you have a choice of either buying a widget from the local store or from online. If you buy from the local store, there's going to be a four and a half percent GE tax, and if nothing was done, then the online seller would have an advantage because they're not subject to Hawaii tax not being here. So the law says that if you buy from the online seller instead, you have to pay directly to the state the four percent or the four and a half percent tax. Now, this individual liability has existed for years. It's in other states. Compliance is very tough. They do enforce it against businesses, where they have presumably more purchases, but it's tough to go after individuals. Hard to go after somebody who just ordered a pair of socks from Amazon. Right, exactly. Amazon is not... Well, the law does not, at least at this point, require Amazon to pay as they grow sex-size. Oh, Amazon itself has started to pay effective for 1,2017. Voluntarily. Yeah, so it registered for GE tax and is paying GE tax on direct sales. Okay, it's not paying on marketplace sales, which means they represent another seller that's located someplace else. Oh, they want to be the other guy's tax collector. That's right. Basically, yeah. I mean, they could be, they're not doing that. So it's very complicated. Well, but it's been kicking around for a long time. Now it looks like they did this because they saw the clouds on the horizon and they saw the ominous possibilities. Yeah, now, that is tax on tangible personal property. Okay, tax on tangible personal property. So our state has that, other states have that. Okay, we also impose use tax on services and contracting, which other states don't do. Give me an example. Like, for example, if I were to engage a mainland consultant to do something to help my business here, and I pay him like $1,000, I'm supposed to pay the state 40 bucks. Because the mainland consultant is helping me. I've imported the service for my business. I'm here. So that's, again, I have a choice. I'll be buying local from somebody who's subject to the tax or buying from the mainland who's not. Okay, and so the next logical step according to the bill support is, okay, let's apply this to intangible property also. So if I'm, let's say, running a McDonald's franchise. Okay, and I pay somebody on the mainland a franchise fee. Shouldn't somebody be paying 4% on the franchise fee? Okay, and supposedly under the logic of the bill, if the mainland seller doesn't pay it, I got to pay it. But I'm not sure if the people who were supporting this bill really thought through how it works, because there is some law that says in that situation, the franchisor is liable for our general excise tax. And so they ought to be paying it anyway. And so the use tax... This is an enforcement question first of an existing law, right? That's right. So did this use tax on intangibles pass? It passed. So now it's kind of a duplication on the same point, yeah? Well, it's going to lead to at a minimum confusion as to who's got to pay it. Even with tax on tangible personal property, there was decades of confusion in the auto industry, right? Because the manufacturers weren't paying use tax, or general excise tax. The dealerships were paying the use tax, because they thought they had to. And then they caught a few manufacturers with local presence, like maybe they had a sales staff or salesperson or something, and they hit them for general excise tax. Did they give the use tax back to the local guys? No. At the same time, do I have this right? They did not actually impose a tax on goods, on tangibles, like what Amazon sells through mail order in Hawaii, right? I mean, Amazon pays it voluntarily, but there's no law imposing the gross excise, specifically imposing the gross excise on internet sales into Hawaii, right? Well, there is a law that imposes it. The question is whether Hawaii has enough jurisdiction over the, or enough connection with the seller to enable it to have power to impose the tax. So it's a practical question. So it's a U.S. constitutional question. So in many cases, Hawaii is not imposing that tax? Because they can't. Yeah, because they can't. Well, there's a very interesting this year. I don't have the sense that what Scott Seike said was about being a progressive session is actually really true. There were a lot of distractions and diversions. And what I thought coming in, and this is my last question to you, but I thought coming in is that things look good. We had a good year in tourism. The council on revenues predicted, you know, mooch show revenues. And yet we were nickel and diming. What happened to all the money? Why are we trying to increase taxes when we already have a pretty robust tax base? Well, the financial plan that was submitted by the governor's office was out of balance. It was $200 million short. And then the actuary for the EUTF, you know, the employer union trust fund that gives the state retiree health plan, said that we needed to come up with $50 million more. Okay. So already we're $250 million in the hole. And this made them nervous. Of course it did. I mean, they have to pass a balanced budget. Yeah, they have to pass a balanced budget. And that's always the concern for the legislature every year. Oh, yeah. Well, thank you, Tom. Thanks for coming down. We'll do this again, I hope soon. Tell me I'm a chief of president of the tax foundation of Hawaii.