 On Thursday, I'm Jay Fidel, this is Think Tech Hawaii, and we're talking about tax today, talking tax with Tom Yamachika, who's the president of the Tax Foundation of Hawaii, who helps us, you know, and represents us in terms of dealing with tax and tax increases and inequities in the legislature. And we have a legislature going on right now, so it's very important we try to get a bead on what they are thinking about and help analyze it. Hi, Tom. Tom Yamachika, welcome to the show. Thanks for having me on, Jay. So the legislature is almost in session, and it starts next week. I guess it's right after the inauguration, maybe the same day as the inauguration. That'll be an interesting day all around. And, you know, there are already proposals flying here and there about trying to make up for the deficit under the state constitution. We cannot have a deficit, so they've got to work hard with that, and I sympathize with them in that regard, but they need to do good policy so they don't take destructive steps. So, Tom, what are they thinking about this session? Well, as you probably had heard, and we were talking about this last week, Jay, we have to try to balance the budget in, you know, somehow. The governor had put on the table furloughs and budget cuts. He has now taken the furloughs off the table until at least July, on the hope of federal aid to the states, which of course didn't come with the new federal bill. And so now, where does that leave everybody? And they're not a whole lot of options other than raising taxes. Let me ask you a couple of questions that come out of that. Number one is, you say you didn't take the furloughs off the table until what, July? Does that mean he's deferred furloughs until July? You know, to me, that is a very important option. Is there any chance that you're going to do furloughs now? According to what he's told the union, no, it's not going to come before July at the very earliest. That's too bad because that's a huge amount of money. The other, the other thing you mentioned is, you know, balancing the budget, what happens, Tom? If we don't, if we try but fail, what happens to the state? Do we go, is it like Cinderella? We turn into a pumpkin? No, we, we just keep muddling along. But, you know, the constitution said, our state constitution says we have to, we have to create a budget and the budget has to be balanced because of, you know, some attorney general opinions that were rendered very early on in the process. And the fact of the matter is we can't print money. The feds can, we can't. So we have to try to live within our means if we possibly can. The way we do this is we take the projections from the council on revenues, which is a kind of pointed body consisting of economists and other professionals who hopefully are smart enough to give us good predictions on the matter and then the legislature is supposed to take it from there. You know, one of the, one of the things it raises in my mind, it was something you said, was that the federal government was supposed to have this COVID relief bill. And it was $600, but Trump said he wanted $2,000 and it bounced back and forth. And I thought that they ultimately passed it. But I don't, I don't have a recollection. Maybe I just didn't catch this. That Trump actually signed the bill with $600. It never got to 2,000. Publicans stood in the way. And so did that ever happen? I haven't really asked around as to whether anybody got a $600 check, but one thing seems clear from the failure of the state government to expeditiously deploy the vaccine that we don't have, we don't have money for the states and the counties. And that's very troublesome. We actually do, it's not direct aid, but the relief bill was passed, the 5,000 page bill was in fact passed. You know, Trump went back and forth on it for a while, but he finally said, ah, I'm gonna sign it. So he signed it. Part of it was the defense, another bill was the Defense Reauthorization Act. And that got enacted by veto override. Okay, so that was the second piece. So- So do the states and counties get money out of the first one? They do indirectly because there is support for like vaccines and their support for health, so that the states can draw from that, but there was no direct aid to states. It's gotta be in the context of something else. Troublesome because I think the states are all in trouble. They've had to spend a lot of money in dealing with COVID and failed economies. And I just wondered if the failure of federal money is somehow part of, aside from the failure of a plan, a national plan for distribution of the vaccine, I think a lot of states and municipalities don't have money to distribute it. And I wonder if that's behind the problem that Hawaii is having. There's a piece in the civil beat, I think today about how they have X number of shots available, doses available of the vaccine here in Hawaii, but we have given a very, very small number of shots to people. I mean, a fraction of the doses that we supposedly have on hand. And I wonder why that is and whether that could be a matter of money also. Well, I think the article you're talking about did say that we're lagging behind the other states, which is true, but there are plans in the works to counteract that. The state is, for example, going to be establishing a couple of mass vaccination centers. Queens is gonna be responsible for one. Why HPH is doing one? And I think that's the one that the state is building at Aloha Tower. Yeah, then the one for the Neil Blaisdell Center, I believe is the other one. My recollection is that there were a couple of 100,000 doses, but only 30,000 people had been vaccinated. Right, and the mass vaccination centers are going to be live, I think, tomorrow. So that may take some of the pressure off, but it doesn't take the budget pressure off. And that's where we are back at the legislature and we're dealing with the budget pressure. Now, there have been a number of proposals floated, some by the administration, some by others. As you know, the legislators get to introduce the proposals, so not only the administration can come up with tax increase proposals, but what the administration has come up with is tax the rich under the income tax. And as we mentioned last week, who's rich? You're rich. I'm rich. What's rich? Is there, do I, if I'm rich, do I know it? Well, we won't know until the bill comes out. But so far, nobody's talked about any dollar thresholds. Okay, they've also talked about increasing the barrel tax, which is a tax paid on fossil fuels, not only gasoline, but also any kind of fossil fuel like liquefied natural gas, propane, coal, stuff other than your traditional petroleum products that are already taxed and will be addition to that, right? That was the tax. That was supposed to go for the development of renewable energy, not into the general fund, but I guess the idea of distributing for renewable energy is over the hill now. Well, when it was originally enacted, it was supposed to just create a fund to combat oil spills. And it was five cents per barrel. It then got multi-purposed. It's supposed to now work on food energy, security, all sorts of other things than its original purpose. And a whole bunch of it does go to the general fund and it went from five cents to a dollar five, a 2,000% increase. I'm just kind of wondering what they have in mind now. Is that maybe another 2,000% increase? Oh, clearly it's gonna go to the general fund too. I mean, they're only doing this to raise money, right? Yeah, but the worry that I have is that it now produces I think a relatively modest amount of money. I think it was like 25, 30 million. We have a budget hole that is 1.4 billion per year. To say nothing of the counties. To say nothing of the counties. Because Oahu alone has a deficit of 400 million. Not only that, but the state has shut off all of the money that was going to the counties. It was going as an earmark to the transient accommodations tax, but under the governor's emergency authority, he suspended it. Is that legal? Can you change the tax statute by his emergency proclamations? Can you do that? I think it's disputable, but that's what he did. One of that unemployment tax, we really need to spend a little time on that. That's been a matter of national news. I got something from Khalid Iyakinah this morning, indicating that it was in the advertiser now, it was in the national press about how the unemployment tax in Hawaii is going to rock it up like multiples. And that's a- Yeah, it's going to triple. Yeah. It's going to triple. And the reason, and the way it works is like this. Our unemployment tax system is programmed to self-correct. The tax rates are imposed on a table and one part of the table, the columns of the table are the employer's own experience with paying claims. So the more claims you pay, the more tax you pay. And the second part of the table, the rows, would be the overall health of the fund. So you've got to have money in the fund. If you don't have money in the fund, the rate goes up. And the rate schedules based on the health of the fund go from A to H with H being the highest. This past year, 2019, I'm sorry, 2020, we are on schedule C. And that's where we are most of the time on schedule C or D. With the phenomenal amount of unemployment claims we've paid out, not only is there no money in the fund, but we're borrowing from the FETs. So that gives us a couple of problems. One is that absent corrective legislation being passed this session. And there's been talk of doing that. Because we have no money in the fund, it's going to go to schedule H from schedule C, which will result in a tripling of the rate for most employers. Okay, the other effect is- Is that automatic or does that have to be automatic? It's automatic unless legislation takes action to change it, it's an automatic thing. Okay, and the second effect is that if you are a state and you have a loan outstanding, and you're in default under the loan, and I don't think we've paid anything back to the FED so far, employers will lose the federal unemployment tax credit. And it's a certain amount that otherwise the FEDs wouldn't worry about, but now they will. Unless we do something about it. It sounds like a domino effect to me, Tom, because all of that would have a profound effect on a number of marginal businesses who can't afford to make those bad- Yeah, it's beating the employers when they're down. They're down the math gasping for breath and you're hitting them again, pummeling them again. Right, and they wind up throwing up their hands and saying, I can't do this, it's bad enough in Hawaii, the state is so oppressive from a tax point of view on small business that I'm folding. I'm folding and I'm not gonna hire anybody, I'm letting all my people go. And I think that's gonna- Not only small business, not only small business, it hurts everybody. Yeah. Medium-sized and big business have a lot of employees. So what you're saying is this is automatically gonna happen, we're automatically gonna have this domino effect, we're automatically gonna have this draconian result in the business area in general. And in order to avoid that domino effect and result, the legislature has to act. What can it do? What it has done in the past and what they're planning to do here is to freeze the, or to cap the unemployment tax rate as something less than scheduled age. Okay. So in the past, I think they've let it go to F and G, but, and this was in the aftermath of the Great Recession, about a decade ago, but it's really up to the legislature this time as to how far they'll let it rise. Well, let's look at the other side of the dilemma. Let's say the legislature does that, does that at great risk, because now there won't be any money, increased amounts of money in the fund as the original scheme was designed, then the fund won't be able to pay unemployment claims. What happens to the unemployment claims? Well, we still pay those, but we have to finance it some other way, like borrowing from Uncle Sam, which is what we do now, or borrowing from some other source, going to the bond market, for example. And, but this, of course, is not facing the dilemma. It's putting it off until another day when hopefully our economy, the pandemic will be gone and our economy will be back to something closer to normal. Just a word on that. We interview various small businesses here on Think Tech and the general sense is that a lot of them are shuttered, a number of those are not coming back. A lot of entrepreneurs, a lot of business owners, you know, they're cutting their losses. With the notion they might come back later, but for now they're cutting their losses. And so I just want to get your thoughts on, where are we in reopening? Where are we in coming back? It seems to me that, you know, we don't really know the extent of the damage. And everybody says, well, there'll be a bright sunny morning, we'll all be better and fine and reopened and our economy will be, you know, like it was, whatever that was. But, you know, how optimistic are you about that, Tom? Well, you know, I think we'll bounce back eventually, but the problem is how long is it going to take and, you know, what's the cartage going to be in the meantime? Like, for example, the hospitality industry is in tatters right now. If you want to open a bar, you know, forget it, you can't even open your doors, because we're still under, what is it, tier two in the city, Coney Honolulu. And, you know, there are comparable restrictions elsewhere in the other counties. So, you know, the first problem is even being able to reopen, some folks can't, they just can't. Yeah, they don't have the money. And they can't hire anybody. Even if they have the money, even if they have the money, the government's telling them it's illegal. Yeah. Well, reopening is going to be hard. You know, it's like you're going back to the unemployment tax for a moment. It strikes me that ideally in reopening, after say that the vaccination has had some measurable effect, it has not yet. That the government says, hey, we're going to give you a tax holiday. We're going to give you all kinds of benefits and incentives to come back, to open your business again. We're going to ease the pressure on you. We're going to, it's going to be business first. You know, I'm not sure that they can do that, even if they want it. I'm not sure that anybody respond. I think, you know, the probability is that business will reopen, the economy will come back, but it'll be organic, you know, in sort of internal development rather than external incentive. One thing that's happening is the defense have come back with a second round of the Paycheck Protection Program. So businesses that have faced interruption and had gotten a, you know, wholly or partially forgivable PPP loan might be able to do it again. So that may help a little bit, but there's nothing, I don't believe, being proposed at the state level. After the federal aid money from the CARES Act ran out at the end of the year, what is there left? I mean, I don't think there really is anything left, because all of those special programs that were enacted to basically spend the 1.25 billion that we got from the feds, you know, they spent the money and now that that aid is gone. I've just a footnote on the whole thing with the PPP and the forgiveness. So there have been some articles recently about how there's a forgiveness program in place and a lot of loans will be forgiven. But I'm not sure that's gonna make that much difference because if I'm a small businessman and I made that loan, A, if it's forgiven, fine, I can put that aside. If it's not forgiven, I'm not gonna pay it back. I have no money to pay it back. So I'm not sure it makes a difference to me. Pay it back, not pay it back. I'm struggling on current cash flow. That's the last thing on my list to pay back anyway. So I mean, nice, but no cigar. So let's look at other taxes that might come up that there are proposals for. I suppose there are proposals in the state legislature this year. What about gross excise? Are we gonna have an increase in that? That's an easy way to raise money because it's a snap your fingers one line bill. On the other hand, it's regressive. That's right. There are proposals, at least what I've heard there are, that there's a proposal to raise it by 1%, not 1% of the rate, but an additional percentage point. So from 4.5% to 5.5%. That's huge. And it's hugely, hugely progressive, regressive. Hugely regressive. And it's compounded by the fact that, businesses pass on the tax and that gets taxed as well. So right now when we have 4.5 being inflated to 4.712 because the tax gets taxed, 5.5 is gonna go up to I think 5.9 or something in that range. And what's ironic about it is that, over the past few years, mail order vendors, internet vendors have gotten into the swing of paying that tax and then charging it of course to the customer. So very little will escape an increase like that. And it will affect your ability, all of our ability to buy goods and services here or by the internet. It'll come for everyone. Yeah. And as a result, people are finding that they can't afford to live here because they can't escape it by going to Amazon. They can't escape it by doing mail order because there is ways for the tax department to get at the vendors in that kind of situation. So what are the chances, Tom? You think it's gonna get increased? So what people do is they leave the state and that's what we've been seeing. We've been seeing an exodus of people. I think we're like the third fastest out migration rate in the past two years. Why is that? I guess an interesting, well, I think it's because the economics, they don't have jobs. And if you had to make a profile of who's leaving, it'd be the people who don't have jobs. I mean, there are others too who are dissatisfied with how the state is being run of quality of life. They're probably just down about the COVID. But I think the main profile would be, I don't have a job and I have to feed my family. And I'm not getting enough government support. I gotta go. I think the basic principle comes down to this. I mean, you wanna raise taxes, it's gonna have an effect on people because government doesn't pay taxes. Taxpayers pay taxes, okay? And if you try to target people to make more contributions, they will make choices. You wanna target the rich. Some of the rich are gonna buy plane tickets and get the hell out of here. That's what they've been doing. Before we go to my bottom line question, which is coming soon, what about income tax? Is there a move to increase the income tax? Yeah, that's the tax the rich movement. That would be on the income tax because that's the only tax we have that is dependent on the amount of income you make. So what's the extent of the increase contemplated? That we don't know. Again, what we've heard is tax the rich, but the threshold of what is rich and the amount of the increase are yet to be seen. We obviously we're not content with having the second highest rate in the nation. We gotta go higher. So challenges are forming again. And it goes back to the question of that. What is that line in the sand? What makes you rich under this concept? And I suspect a lot of people who are middle class are gonna be roped into that and the tax increase will apply to them. So my last question for you, which is the first question we talked about is the furlough thing. The obvious way to raise money is to reduce state employees. The state's payroll. And I mean, a furlough doesn't knock it off. It just, it's kind of a wage reduction, if you will, because the days you work are fewer days. Wouldn't that be the best way of all to raise money? Because the state is bloated with agencies and employees. We are paying an extraordinary amount of money for a state government that maybe doesn't do what we hope it would do. And has huge, the state has huge retirement and medical benefits beyond the average, way beyond the average worker in the state, for private business. So wouldn't that be the most important thing we've discussed here to balance the budget? Well, we definitely have to look at the extent of state spending that we've got. To an extent, nobody knows how much, especially the big agencies are spending on what right now because the financial systems that they have are old antiquated and might not be able to handle. Take a look, for example, at the Department of Education, there's been a nonprofit, it takes the Education Institute of Hawaii going after their financial records and they've had to do so for I think a year and a half before they got anything. And recently, they were given data from I think 2017 and 2018. And how much relevance is that? I mean, it's just better than nothing, I'm sure, but how much relevance that gonna have? I think the best thing we can do is have the legislators who are in charge of overseeing the budget come out with their sharp pencils, dig into these departments, find out what the heck is going on and help our agencies sort out what is essential versus what is nice to have. And we can't afford what is nice to have we need to concentrate on what's essential. Yeah, Tom, I think that's really a valuable point. I hope they keep that in mind. This is a time to focus on both sides of the equation, if you will, and the side that comes to mind first is where the fat is. Thank you so much, Tom Yamachika for this discussion. I'll see you in a couple of weeks. I'm sure there'll be a lot more to discuss after the legislature gets rolling. Aloha. Hey, hello, thanks for having me on the show.