 Yes, talking tax, talking tax with Tom, Tom Yamachita, Yamachika, and he is the president of the Tax Foundation of Hawaii. Hi, Tom. Hi, Jay. Thanks for coming around. Thanks for having me on the show again. Yeah. You know, this reminds me of Gene Sheppard, our background here. He was a radio announcer, a radio host, I guess, back in the 50s and the 60s in New York. And he announced from a little brick basement. Yeah. And he was brilliant. He could go on for days and days. Gene Sheppard, remember? That's going to be in the final exam, Gene Sheppard, yeah? Okay. So we're here to talk about tax policy 101, and I give you a hypothetical, it's more than a hypothetical. I give you a problem. It's a case study, okay? My case study is we have extreme weather. We have increased homelessness. We have surprises and joys galore, and we don't have enough money for it. We can't pay the money. And gosh, I don't know what else, but rail goes further in the hole. Who knows what? All kinds of bills coming soon, bills that we can't anticipate. I mean, I think I told you before, my information is, you know, we have 40 billion dollars of... Oh, are we Puerto Rico? It sounds like it, yeah. Before you know it, we'll have 80 billion dollars. We will not be able to afford it. And there's nobody coming to our rescue here. So the question I put to you is, how are we going to raise the money to pay these bills that are in large part going to be a surprise, and we'll break our backs if we don't pay them? We'll be Puerto Rico. It won't be good. What do we do? Well, I guess one of the things that we have to be thinking very, very hard about is, is our government too big? Is our government too big for us? Are there a lot of programs and services and stuff that we really aren't using and or are nice to have, but we don't really need them? Then we really ought to start thinking about whether we're going to cut them. Because, yes, every program has its constituency, but we can't afford everything, like even Steve Jobs when he ran Apple. He was, he was presented with, you know, 10 great ideas, put him up on the white board and says, okay, we don't have enough resources for three. That's how we did his business. Even though, even though there are seven other great ideas, we only have, we only have resources enough for three. Because you're going to slash and burn and live within your means. Yeah. Because, of course, you know, we should talk about this too, is maybe we should change our means. You know, I mean, I've been talking that for 20 years anyway. We should change, you know, our, our economy instead of having, you know, based on hotels and based on the things where, you know, we earn more money. Well, I think there's a more fundamental problem. The fundamental problem is our taxes in large part are in almost in a whole. Depend on the amount of business that we generate. Right. Okay. Here, the tax system, a lot of the revenue that it shoots out is based on business activity. You don't take care of the business activity. You're in trouble. Okay. If you're, if you're just trying to run a government by looking at whatever money you have and say, oh, it's a good year, let's, let's spend more, more, more, more. And then, you know, a few years later, we're in a recession. And that money, they're anymore, we still got, we still have the bills to pay. And that's kind of what, what we've been doing historically. You know, we've been creating program after program, we've been creating benefit after benefit. Yeah. I mean, people may deserve these benefits like lifetime health care, but is it something we can afford? The answer is we can't afford it now, but we're going to be a lot, a lot less likely to afford it later because the crunch is coming. You know, don't you agree with me, the crunch is coming. You know, our business, our local business is sort of flat. We are not developing any particular sector except tourism. And there's a, there's a cap, there's a glass ceiling on tourism. And you know, we can only have so much of it. You know, there's no new sector that we're building. So that, you know, if you assume that the tax is a function of the business activity, the business activity, I don't think, even the economists that you hear are saying it's going to be flat. It's not, it's, or down, it's not going to be up. And so, you know, we, we don't have an increase in the, in the offing. We have flattered down in the offing, and that means we have flattered down revenue given the existing tax structure and rates, that's what we have. And you know, another study that you hero came up with recently was about the Jones Act. And how, you know, island nations like us and, and, not in the nations, but states, and our flung states like Alaska are really hurt by it. Because it, and now there's, you know, empirical evidence that says, you know, this type of policy drives up prices. If we, if we are talking about, you know, prices being driven up back and making it more and more difficult to run a business, you know, taxes, government fees, charges and so forth are a break on, you know, like a car break on whatever it's applied to. So you have this economic engine trying to spin a tax, tax and tax more of it, you know, it's like putting the brakes on it. Yeah, right. And you have less disposable income by these companies. They can't use that to reinvest in their, in their company. It just gets to the tax office. Yeah. So, so we need this economic engine running to, to power this thing with what we call government. So can we have the government take care of the economic engine? I mean, I think really there's got to be a mentality change, you know, I'm not saying we shouldn't be concerned about the employees, you know, the employees' welfare are giving them, you know, minimum wages, giving them brakes, giving them anti-discrimination provisions and so on, but you have to realize and I think government has to realize that all of these, you know, taxes, fees, regulations and so forth are an impediment to the economic activity that you're trying to tax. You want the money, you got to let the engine run. That's basic economic policy, economic policy and tax policy 101. So you know, like, and the government we have here is too big, you know, I think it was Earl, he was in the government under, I want to say, Caetano and somebody, somebody asked, well, how many, how many employees you have in the state, nobody could answer that. I'm not sure they could answer it today. And each employee has got a great job because it has lifelong benefits. You retire working for the state or the city, you get these huge benefits and we have so many employees who do nothing but bureaucracy. You know, they stop things, they make you go round and round before you get your permit. They slow it down, so they're another break, if you will, on the economy, on development. So you know, we have a serious problem in the sense that we don't have any particular sector that's emerging. We have hotels which are so subject to anything that happens bad in the world. Oil prices, oil prices, because of what happened in Saudi Arabia, right, a couple of days ago. So oil prices go up, fares go up, people decide they want to make a trip with the increased fare. Who knows what? There's some terror attack. Somewhere else doesn't have to be here and a 9-11 attack would really do a job on us. Certainly could did a 9-11. Just like it did a 9-11, so the beaches are empty and all of a sudden our big cash flow model stops cold. Okay, and as you said, you know, without the business activity there's no tax. So if that stops cold for any significant period of time, our tax revenues are way down and therefore the ability of our government to do things is way down. And of course I agree totally that you have a lot of government activities that are not worthwhile. They are not within our means, they are not useful and we, you know, we've let them continue as legacy but we can't afford them and that's going to be all the more obvious when we have some kind of bad event like a storm where we have to dig deep and get our community going again. That'll cost a lot of money and you cannot assume that Donald Trump or any federal agency is going to come in here and save us. That's not an assumption you can make. Look what happened in Puerto Rico, what a mess. So I think we have to have a kitty somewhere which we don't have and I think we have to, you know, find a way to build the economy to have more economic activity. You know, I have been campaigning for technology for 20 years and it really hasn't happened. Not only me, a lot of people, a lot of governors have been campaigning for technology and it hasn't happened. And that could be a real game change to have a technology industry that can export and so forth, export ideas. What a beautiful thing that would be, but we haven't done it. We don't have the political will, we didn't and we don't and we probably won't. So what we're left with is the existing economy subject to the existing risks which are formidable and the existing tax structure which can't handle the existing spending. What would you knock off, Tom? What would I knock off? Well, I think if I could, I'd knock off the taxes and transportation. One of the things that we rely on here is, you know, goods coming in from the mainland foreign countries elsewhere, why are we taxing them? It makes, it's a direct correlation to cost of living, I think. Can we manufacture stuff reliably here in the state? Well, we have shipping that's necessary to bring whatever raw materials that we don't grow from one place to another. Even if we grow them, we have to get fertilizer, feed, bait, whatever it is, it might not be made here, we have to bring some in. That requires transportation. When we do sub-assemblies, even assuming we can get some raw materials, we do a sub-assembly, we sell it to a person who makes the final assembly. We impose a tax on that. It's called the GET and it's at a half a percent, whether or not it's, you know, any finished goods and it's sold to someone else at the end. So you would change the tax structure to incentivize manufacturing, incentivize economic activity. We need to incentivize or reduce the disincentives to economic activity. Yeah. Sure. We can make a list. Let's play with a list. First of all, stop the bureaucracy because it slows everything down and people can't do anything. And if you stop the bureaucracy, hopefully you'll stop spending at the government level. Well, at least if there's going to be bureaucracy and there's going to be bureaucracy, make sure it's efficient. Make sure it's doing stuff that people really need. There was a scandal a few years ago when whole bunches of state employees were caught watching Netflix on the job. Is that what we're paying them to do? No. Okay. And you're talking about manufacturing and economic production of value-added goods, value-added goods. Yeah. I just put up manufacturing as an example because I know the Chamber of Commerce was trying to push it at some point. And to me, our tax structure is very, very hard on manufacturing more than, you know... Because of the gross excise tax. Yeah. The tax that is put on intermediate inputs, raw materials, and shipping makes it very, very hard to do any kind of manufacturing. It's true. It's true. And then again into the labor laws here and all the, what do you want to call it, the laws that run against employers in so many ways, that costs a lot of money. And it's a big, huge disincentive for anybody to start a business. When you and I started practicing or started looking at the economy, how many years ago was that? There were new corporations being formed every day in this state. I mean, in my law firm, they would come in a couple, three a day. We were a small law firm. They were always forming new corporations about everything. Everybody was taking risks, taking chances. Because actually the cost, I remember, was only a few hundred bucks. You could be in business legally. I don't think it's like that anymore. And I think people are not forming new corporations anymore. They let the big boys, the big boxes, come up in the mainland and do it, cost them a lot more. But the mom and pops are not growing the way they did after statehood, I must say. Yeah, I mean, the tax rate we have in this state disincentivizes the mom and pop. I mean, the way you can get around the externalities that our GET adds is you do everything yourself. And if you're super big, you can do that. And that's how business is like- No supply chain. Yeah, there's no supply chain. We have a tax structure that imposes tax at each step in the supply chain. Okay, you get around that by being so big you don't have a supply chain. Sure. You go from one department to another. Yeah. Same corporation, same entity. And therefore you don't have to pay tax on transferring things between one section, one division, or another. One of the things that, one kind of case that I got involved in a long time ago was an automobile dealership came in and they said they wanted to do one corporation for Oahu, one corporation for Maui, one corporation for Kauai. And when they needed cars on one island and had too many in another, they would just sell the cars in their company. And I says, do you guys know that whenever you do that, you attract half a percent tax? They go, what? Even between companies owned by the same people? Yes, you do. Do you do corporations? Yeah. Yes, you do. There you go. So the other thing is, it seems to me that we don't really attract offshore investment. We should need investment to build local businesses, to build any business. And notably, the large capital concentrations in this state invest outside the state. They don't necessarily invest in the state. I could name a few when you know what I mean. Shades are the big five. Their investments are in large part, without the plantations, their investments are offshore. They have converted to offshore investments. And the problematic aspect of that is that the jobs are offshore, not here. And the income is offshore, not here. And it doesn't really have that much of an effect on the local FISC or on the local taxes. And the other part of it, and this goes to TMT. TMT is a really good example of how to send foreign investment away. Not only academic grants and the like to build telescopes, but all kinds of investment, because they think that Hawaii is backwater and is living in a controversy, a controversy they want to be involved in. So there's no way to tell how much offshore investment we have lost over the past few years with these fights on the top of the mountain. Right. One of the things you've got to keep in mind is that investment is fungible. They don't have to invest here. They can go anywhere they want. If they got the money, they can do that. So people would invest here if they find a business that has an advantage that you can monetize over any other business in any other place. Like, does this business produce something that people want that nobody else can produce? That's Tazanthin. They're trying to make a return. They're trying to make money. Of course they are. And that's why they invest. I'll never forget. And so the question then becomes, can we give any of these businesses an advantage so that they can market themselves to lure the outside capital? Well, that's a hard question because right now we seem to be focused on sending them away. Think of a super ferry where Wall Street lost hundreds of millions of dollars on that. You think they're going to come back anytime soon and try to invest in another ferry? No way. And there are so many projects like that that have gone south. And you know the guy at the other end who would have written the check is not going to write another check. And if this thing, Monacaia, fails, even if it doesn't fail, even if it succeeds, we've already given ourselves such a black eye and shot ourselves in the foot so many times that the number of people who might have come here is way less. And they're not going to invest in a place where there's trouble standing between them and making a reasonable business return. So of course we hurt the kids because they have no jobs and they really don't. A lot of kids don't have jobs. That's what's growing up here. And at the same time, we don't have the economy to support the tax. At the same time, we have to take care of those kids and take care of those homeless. So we're getting it at both ends and we're not recognizing the problem. Instead, we have all these programs that are too expensive. And I think it's ultimately going to put us in the red big time like Puerto Rico. So the question I put to you here in the last few minutes of our show is, let's assume that it stays that way. Let's assume that people are really put off by the way we treat offshore investment. We don't manage it. We don't welcome it. We send it away in this kind of arrogance of we don't need your money. We don't want you here. Great. And how are we going to have an economy that will pave the roads? So how do we have an economy that will pave the roads? Let's talk about the tax structure. What taxes would you impose? What taxes would you raise if you had to if the economy goes flat? And the question then becomes, why do I have to raise anything? I mean, we're in a bad situation now. Why do I have to make people pay anymore? Well, you have to pave the roads. Otherwise, the roads don't get paved. Otherwise, the place declines. What's happening already? This is going to be in the final exam, too. Let's assume that people do recognize that we don't have enough money, that our economy is flat, that we still have these obligations that we are. Obligated to morally or legally or both. That's where we are right now. How are we going to raise the money? Are we going to have it? There are legislators who faced with those challenges are basically saying, look, whatever we have or taking in right now is obligated. We need to raise more taxes. And as a matter of fact, I think five years ago during Abercrombie's time, the governor or somebody connected with the administration basically told the Tax Review Commission, come up with ways to raise more taxes. And my point is, this is the wrong direction. So what would you do, though? My fact pattern that I gave you says, the economy stays the same, subject to the same bad risks, bad hair day risks, let's call it, bad storm risks. Stays the same, and the economy stays the same. And the amount of receipts either stays the same, it goes down. But the need- Start taking an axe to some of the larger government agencies. The need-by-government services stays the same. It's got to break somewhere. How do you fix that? I mean, in terms of the tax structure. So you're saying, where do we raise taxes? That's a really hard question to answer because it depends, again, a lot on what you prioritize as social policy. Well, right now we have one of the highest tax structures in the country in terms of state tax. Yeah. And it's getting higher. I mean, we just enacted a new 20% estate tax bracket, which makes us highest in the country for that. I think tied with Washington state. Our income tax rates are very high, probably second or third in the country. Our GE tax looks low, but it's not. But it applies to everything. Because its base is exceedingly broad and is probably the broadest in the country as far as it goes. So there ain't much room there, man. Well, you and I wouldn't do it, but what do you think the legislature will go in terms of a soft spot to raise taxes? Because they do every time they get a chance, you know? Well, and they're going to raise the gross excise again? I don't think so because GE is something that people are watching. And they get excited. And they sit on the legislature and they make the displeasure known. And it's terribly regressive. Yeah. So the last time they tried to touch GE, there was a big backlash and they backed off. That was when they tried to put the extra percentage on the neighbor islands, wasn't it? A year or two ago. Which didn't work, right? Right, and then of course the teachers were asking for a GET increase before they went for the property tax. Oh, yeah, I remember that. And that kind of got rebuffed. That didn't work either. Yeah. I mean, you know, there's really not... So if there are increases that are going to happen, it's going to be in the miscellaneous taxes that nobody really knows about. Right, the Nickel Dime parking meter type of taxes. Yeah, the fuel tax, the tobacco tax, good example, the barrel tax. Yeah, tobacco tax, alcohol, conveyance tax. Conveyance tax. That's the conveyance tax, really silly. It went from like $5 million to $100 million in 30 years. Yeah, yeah. And what about income tax? You say we have a high income tax, but, you know, why not make it higher? Why not make it higher on corporations, you know? This is a sort of democratic thinking state. Let's sock the businesses. We don't have that many corporations to tax. And the ones that are here, they don't make so much income. I mean, you know, they're losing money. How about the REITs? You know, the REITs, that would have been an interesting tax. I don't know if we would have raised that much money. But that's, you know, that's what they come up with. Disagreement on that, yeah. And there'll be a fight on it. Yeah, so, okay, inheritance tax, state plan. You could increase that, but that's not going to... There's not that many really wealthy people in the state that's going to affect, yeah. No, and those are the kind of people who can go elsewhere. Like the drop of a hat. They can drop, yeah, they can leave. So what do you think? We covered it all. And it leaves us in a kind of a bind, and where the legislature might come out on this is those nickel dime taxes, you know, taxes that you don't see coming somehow. Yeah, I mean, a lot of the people there are in denial in terms of whether we have a problem or not. We don't have a problem. If we have a problem, we'll fix it at the time. Kicking the can down the road is what it is. Yeah. This really does sound like Puerto Rico. Yeah, it does. Because after a while, you can't afford the government. Yeah. So what's the solution? It sounds to me like raising taxes is not a really good solution. It sounds to me like trying to do the economy, that's a better solution. Yeah, take care of your engine. I think, and trying to knock off parts of government is, you know, I mean, it's a great idea, but it's very hard to do because you have the political obstacles and people are not going to like it. People in government are not going to like it. Nobody wants to have entitlements that he worked his whole life for taken away from him. That's very hard. I mean, it's doable, but it's very hard. So it has to be stoke the engine. OK, and we have one minute left, Tom. How do we do that? How about a tech tax credit, for example? Well, one was just to increase this past year question of how effective it's going to be because it's only like $5 million a year. There's really something got to do about the engine. I mean, you have to, maybe it's not taxed. Maybe it's regulatory. Maybe back off the regs, right? Let the engine spin a little bit more without, you know, getting government involved as to whether your business can do something or not. Yeah, and I continue to think that drawing offshore investment is an extremely important part of this whole game because offshore investment feeds money into the economy. Yeah, but that's not going to happen until our economy gets better and our business climate gets better. Well, it's not going to happen until our attitude changes, you know, which has a long way to go. So, I mean, if you're listening to the show and you want the best possible way to hold your taxes, you know, from going up again and to make life better here is to try to be nice to offshore investment, you know, $1 billion, $2 billion in telescope. Next era, we would have had a couple of billion dollars in that. The ferry would have been, you know, fabulous, would have helped the farmers in two or three counties. But we blew that all off. And as a result, we don't think about it, but as a result, we have a reputation on the mainland that we don't want investment here. And we don't get it. That's the problem. Last comments. You said it all, man. Yeah. All right. Thank you, Tom. Thank you, Tom. Let's do it again soon. Tommy Yamachika, tax foundation of Hawaii, talking tax with Tom. Wow. Thanks.