 Okay, we're back. We're live. I'm Jay Fidel. This is think tech Hawaii to 10 o'clock block on a given Thursday with Tommy I'm a Chica and he's the president tax foundation of Hawaii and His he's here as a what I say co-host contributor regular person Here on talking tax with Tom today. We're going to talk about how our raising taxes does not necessarily Raise money. This is the kind of thing you have to think about as a taxpayer and a citizen of the state of Hawaii Hi, Tom Hey, Jay glad to be here on a given Thursday So what about you know, we know Taxes go up taxes never go down But that doesn't necessarily mean that we get the money they say they are getting there You know using the tax increases to get Where does that break down? Okay, well what I'm going to be talking about today is a very interesting Economic discussion paper that came out in October of 2019 by two economists one Associated with the University of California Berkeley and they published a paper titled taxing billionaires estate tax and the geographical location of the wealthy and In that paper They tried to predict the likelihood and conditions under which The ultra wealthy people Would vote with their feet and move in Response to a tax increase and specifically they're looking at a tax increase in the estate tax Then and I suppose they looked at that because that's a tax That typically only affects the wealthy Even in our state it doesn't even kick in until five point four five million dollars and in your taxable estate So we're not talking the run-of-the-mill people you find in the street here you know, we're talking about people that have substantial means and Paisilibly the ability to set roots down anywhere they want You know what's what's a makes it a little worse is that it's highly political, isn't it if you track the Increases and decreases in a state tax in a state tax Floors and ceilings and rates over the past what well our careers Tom They've been up and down half a dozen times haven't they? Yeah, well in our state in our state. It's always more that more toward the top, but Yes, they they have they have come and gone and as we've seen in this past legislative session they've You know flirted with the idea of dethroning California as the as the nation's number one high-tax state Okay, I get you. Yeah, and by far they were considering a An increase in the top tax rate to 16% will while California is at 13.3 Okay, but anyway, so so what does this mean in terms of them, you know, walking with your feet? Okay Here's what the study tried to do they tried to look at these this population of These 400 rich people We call them the Forbes 400 because they're off a list published by Forbes magazine and And they did some mathematical modeling and they tried to they tried to answer the question Okay, if your state adopts Because a lot of states haven't or adds to an estate tax Are you going to make money and And So the the study had a couple of different Scenarios in it and I'm gonna, you know walk walk you through what happened one of them was They that the state imposed a new estate tax only on billionaires okay, so reaching the ultra ultra wealthy and They tried to quantify the probability or the expected value of Having a particular person Move out of state and and when a person moves out of state, of course, they take with them Whatever they are contributing to the state in terms of income tax and sales tax Or in our case the general excise Okay, and When they And the economists said they didn't know what they were going to find when they started doing the study but when they Modeled it out when they when they applied the billionaires tax They found that most states in fact did make money except for two California and Hoy They they they found that the expected present value of having that type of it's estate tax Was 73 million dollars minus That we would lose money if we instituted a billionaires estate tax So because when the billionaire leaves town, he's not paying the other taxes. Yeah, that's right. That's right And then those can be considerable the Often times billionaires may take with them, you know businesses that they run right They they don't you know, they're not necessarily just sitting on money. They inherited from somebody else a lot of times they're entrepreneurs and You know the headquarters at their business is going to follow them Well, are they reary? I mean a question If if you know if I'm going to vote with my feet And I'm aggravated that I'm gonna have to pay a state tax in one state I go to another state where there's no state tax, but from a business point of view The tax structure in the first state is better for me You know the corporate or the LLC tax structure However, you start a partnership that tax structure is better in state one than state two That business is going to essentially decide by itself. So they're not necessarily coupled in a lot of cases. Don't you agree? Yeah, but we have Very harsh taxes Even on the income tax side If Hawaii's not competitive on income tax it's going to lose people no matter what whether they're billionaires Whether they live here or there or anywhere That's right and and you know hold that thought because that'll go into the you know the the next part of our show Which is going to be discussing What the why is in the where for us? But let me present you the other scenario the other scenario is the same economists modeled a a more broad based a State tax either adding to it Or implementing it if the state didn't already have it And and I think what they were looking at is is a is a cutoff around the Place where a federal estate tax kicks in which of course ours kicks in earlier, but That's kind of what they were looking at and there they found That eight states were expected to come up short okay meaning that You know like the two states in the previous example Eight states would be expected to lose money if they adopted the broad based estate tax Okay, of the states that didn't have an estate tax now Four of them were at risk California, Idaho, Nebraska, and New Jersey Of the state that did have an estate tax another forward at risk Vermont Oregon, Minnesota, and You guessed it Hawaii Okay Now the the study didn't pin down exactly when or why The state would be at risk for losing money if adopting an estate tax, but some people who have looked at the study Notice stuff noticed a Ecomminality between the states that were at risk. They all had high income tax rates mm-hmm and You and you kind of think about it, you know a lot of businesses, especially closely held ones Operate through partnership forms Not necessarily, you know partnerships could be S corporations, but Or limited liability companies Structures in which the tax of the business is being paid by the individuals running it Okay at the individual income tax rates So that's why the individual income tax is is very very important and by the way It's been estimated that 75% of all businesses Are structured in this way You're not not with not with corporations pass-throughs. Yeah, yeah with pass-throughs. Yes. Yeah, and and you know Corporations have their own advantages, but they but they have double taxation They have taxation at the corporate rate and when they distribute dividends to their shareholders Those get taxed at the individual rate also So there's an inherent disadvantage there, which is probably why a lot of businesses have decided to go with pass-through And that's why the individual income tax rates are critically important in figuring out, you know, why You know people will consider, you know packing up and leaving Well, let me add a thought though into this mixture of elements Well, it sounds complicated and and the modeling would have been complicated because so many factors so many states so many possibilities, but you know the estate tax in my view has always been more consequential on the federal level and Regrettably that's also become politicized and it's changed a number of times in the past what 20 years 30 years For political purposes not necessarily revenue-raising or the public good or national interest No, because you know one party or another months to Help its, you know, primary You know Members and so they will raise it a lower as they see fit But fact is it's national fact is, you know, you can't go from one state To another state and avoid the impact of the federal estate or gift tax it is It's on you no matter where you are matter of fact if you're an American citizen a resident Well, or non-resident but American citizen you have to pay those taxes as well as income federal income tax Whatever you are in the world So, I mean, that's a great level or isn't it's an equalizer And so if I took away, of course, it's nice to have you know, and it's constitutional to allow all states to impose their own Income tax, but if every state gave up a state tax and you raise the Federal estate tax to a rate, you know, that is more egalitarian than now You know with these high thresholds Then you would have uniform effect all around the country and there would be no, you know, pack up and leave motivation Well, that's still would be did that Did the estate taxes is imposed like at the federal level? Based on where your domicile is So if you know, and if and if you're wealthy enough and the and the bites hard enough Some people Consider and some people do a pack up the pack up their bags Go to a foreign country. Oh, that's true Sure, a lot of people do that However, however, if you're looking to equalize if you're looking to avoid this kind of 1% disparity We find ourselves in right now where wealth is passed wealth and power Is passed down from generation to generation and then if you look, you know year to year and decade to decade You find that some people are incredibly wealthy and some people are incredibly poor and there's a huge disparity If you wanted to at least try to equalize that to level the playing field What you would do is you would make the estate tax much stiffer You would have it applied to all American citizens. Well, it does now And and you would make high rates too so that the old man cannot leave billions to his kids And I mean, I don't any problem with that at all. And in fact, I wonder why we don't do that because what's happening is, you know We're developing a kind of aristocracy in this country where people are not only wealthy, but they pass it on essentially tax-free To the next generation and they're wealthy and they don't have to work and they're always going to be wealthy and goes from generation to generation Is that what we want in this democracy? No, it's not So I think the federal government has been remiss In allowing the thresholds to get that high and the rates to get that low it would it's always been a balance of You know the the kind of social considerations that that you just mentioned versus look We're supposed to be capitalist here. We're supposed to be able to innovate and Be smart and if we're smart We make our mark in society and earn money and if we earn enough money, we should get to keep it That's you know, that's the countervail Okay, we have a philosophical difference on that because yes That's absolutely true for the generation that works and earns it and it's smart and entrepreneurial and all that but they they should not be able to pass it on to their kids generation after generation and The kids don't have to work never will And that whole area of the family is aristocracy now This does not affect the capital structure of the country to do that because you go public You know, you have other stockholders public or not, you know, who have a piece of this company the company continues A high even a confiscatory estate estate tax on a federal level is not going to it's not going to disrupt The concentration of capital so to speak Except the executives will move away Because they don't want that. Yeah, if they feel they need to do that, then they got to do it Yeah, but we can't stop that but what we can stop is the accumulation of wealth and Extraordinary amounts now which has been happening. I mean, there's a there's a policy breakdown here Yeah, no, and again, that's something It's that's more of an ideological thing to be you know dealt with at a national level and that's where we have a Congress Well, we used to have a Congress time When we did have a Congress when we did have a Congress The the estate tax law was a lot a lot easier in that it allowed a what we call a pickup credit. So The the the feds would give You know the state in which the taxpayer lived the opportunity to impose their own tax But the feds would specify the amount and and and most states did that and then You know But a decade ago that went out the window Okay, so the the feds basically said, okay, no more of this pickup tax states. You got to do your do it yourself and and right now Only I think 23 states have an estate tax We're one of them for my money, none of them need to have an estate tax, you know, because if they if they all repeal their estate tax tomorrow morning That would be okay. And that would deal with the problem You know vote with your feet problem that you described earlier at least a substantial part of it. Let's have income taxes Let's have it, you know, county taxes and sales taxes, but doesn't that contradict what you just said earlier? I mean, yeah, I thought you were a fan of the confiscatory estate tax. So at the federal level No, it doesn't it's not inconsistent at the federal level. We need to raise the taxes on the states and and we should be doing that Unfortunately without a Congress, we're not likely to do it and with it, you know, very strong Agenda by the Republican Party, we're not likely to do it a fair in power or in semi power They'll vote against it every single time because the rich like to perpetuate their their wealth And so you really have to have a whole new approach at the federal level, but in a perfect world That's what would happen and the federal government Congress when there is a Congress if there is a Congress again Would say wait, we have to avoid the passing of wealths in such huge amounts From one generation to another and so we're gonna we're gonna have a confiscatory estate tax You keep you're a billionaire You're gonna give up a good part of it when you die you can do planning you can get your tax lawyer and all that But at the end of the day, you know The threshold is going to be low and the tax rate is going to be high and that would solve a lot of our social problems Yeah, but then people will find a way around it. I mean Well, they always do but you have to start in a good place That's the American way But you you know if you start in a place where the estate tax Steak tax threshold is is you know five ten million dollars and the rate is low Where you go from there? You have to have the statute to at least set the parameters Okay, that's a little bit different discussion from from what we're talking about now And what I wanted to talk about, you know here is basically to illustrate the the fallacy of the You know of the proposition that you know if you raise taxes, you'll make more money and and and and really, you know when you're at or you're in a state like like ours Where the citizenry is already taxed to the hilt You got to know that there's a tipping point and My tipping point I mean People will get on planes Or ships or you know, whatever they have to do to get the heck out of here and avoid the You know the bite wasn't that happening already I mean any any sentient person can make the comparison the study made and say wait a minute We are paying way too much in tax in the state, you know the what did Randy Roth call it the price of paradise? It's way too high So I'm out of here, you know, I took a trip to Oregon a few years ago And I walked into a store to buy something in Tom There was no sales tax or gross sex tax at all I paid the sticker price and it felt like I was in heaven that nobody was nickel-diming me you know for Sales tax or use tax or gross sex size tax This was there was an emancipation And that's very attractive even if the rate is that you know is not that great when you compare it Fact is it feels better not to have to pay tax and there are many states like Oregon Right, and then there are states that do the other You know have the other parameter and that is Oregon Has has no sales tax, but it has an income tax Washington which is like on its northern border has the opposite. It has no income tax But it has sales tax. So everybody lives on the border in Washington. Yeah And then you have our 8th island with I mean our 9th island which which is the state of Nevada And they don't have a personal income tax either And that's where a lot of our you know our wealthy people wind up going to I mean I have I've had clients that that packed up and left and went to Nevada for that very reason Well, how kind actually is the state of Hawaii to retired people? I guess it's not nearly as kind as a state which doesn't have an income tax at all But does it doesn't incentivize retired people to stay here live here? We we do exempt certain kinds of pensions Not all We we exempt like the pensions from defined benefit plans like the the ones that the state gives to its workers I and Pensions that are entirely employer funded if you if you're getting a Retirement check from a 401k plan Where where you had the ability to contribute to it yourself and you did Then of course that's going to be taxable Like like in most other states that's that's that's probably the the biggest Incentive that we give to retired people Well, I can see is a matter of public policy the state of Hawaii would not be all that interested in providing incentives like that I mean, there's a certain move not only to you know reduce the number of tourists But it's to reduce the number of immigrants, you know and immigrants are largely these days or have been traditionally They they've been retired people. So, you know looking looking at it from a, you know larger point of view And of course being mindful of the fact that you know There's a Commerce Clause and you can't differentiate But but you know, I think one way to discourage people from coming here, especially retirees Is not to give them that many breaks So while there was a time in Hawaii history where we wanted to attract them because they were you know They were retirees. They only did was spend money all day. I'm not sure that feeling exists these days. What do you think? well If you're talking about the specific incentive that we give to retirees like the pension exclusion Governor Abercrombie tried to get rid of it He became a one-term governor. I mean that the backlash was so fierce It surprised lots of people including him They do vote oh They do yes, I mean that's they they have a lot of that a lot of time in their hands and they exercise and yes So at the end of the day, okay looking down from the 50,000 foot level and being mindful of the fact that However complicated the algorithms are the study studies you mentioned People do vote with their feet and if I'm you know retired or feel I'm paying too much tax And and the price of paradise ain't worth it then I'm going to take off So if you're the policymaker in legislature or the governor who may not think of this as much as the legislature does What do you do? What do you do to balance it? How do you achieve a balance which will you know retain? populations But also collect tax. Well, I mean that's that's exactly What you have to do you have to maintain a balance. I mean it's been it's been said by some English Lord long long time ago that the art of taxation is like You know plucking a goose the the idea is to get as many feathers as you can And minimize the hissing and without making the goose fly away We're killing the goose. Yeah There's been a lot of literary reference to that Okay, we drill down I mean, what would you do exactly right now today? I know in terms of the balance. Yeah in terms of the balance You know, I think you really got to get the government's cost center control, right? I think right now There are several instances that have been You know leaked to the media already over the past several years where You know government spending is rampant the The means to control them is not existent. There are special funds all over the place that Are there basically to evade oversight and Legislators are now just beginning to get their hands around it And And then trying to grapple with the the actual true cost of running government Who in the legislature? I mean what structurally what committees what chairs? and what staffers and What members of consulting members of the tax office are involved in this process and to what extent does the governor and his staff get involved? Well, there's always a there's always a budget review That's supposed to go on every year. The the primary agency is the Department of Budget and Finance the Legislators hold hearings Every year on the budget of every agency Agency's supposed to tell them what they you know what they did for the for the public good and That they should be and they and they argue that their programs that Got these results should be continued and if they are getting You know good results for the people Then I think they should be continued, but if you got some iffy stuff Things that people don't use if it's a kind of a nice to have rather than a an essential government service you got to consider getting rid of it Not just not just keeping it keeping it around because you know, you have union members that Will otherwise have to look for other work Well, you know when we come on and have these discussions time where we're largely talking about efficiency We're talking about efficiency in the way state government handles money And we're talking about efficiency in the way the tax structure is designed You know, and I guess what I come to after our various discussions in and around the subject is we're not all that efficient And and we tend we tend to make mistakes and the mistakes You know do have an effect when people vote with their feet and people do you know Well, we know that the level of in migration to Hawaii is declined In fact, I think we have a significant out migration and and it seems to me also that Aproposally, you know the original Title of the show is if we don't do it right the worst case analysis is we collect too much tax We lose our tax base and then we don't have the money We had hoped to achieve by increasing the tax So it has a reverse effect on our ability to manage our our state of fiscal affairs And that's it and that's a very real risk. Yes, are we going there now? We're going there now I Mean there was way more of a risk. I think then Then lawmakers are now considering I always feel Sobered up after we have these discussions time You got to stop drinking at night then Jay No, I just just remember the goose I Vodka they make vodka with goose. Okay. Thank you Thank you very much. Tommy. I'm a chica president tax foundation of Hawaii helping us understand the world in which we live The the tax and fiscal considerations of the state of Hawaii. Thank you so much time. Tommy. I'm a chico Thank you. Thank you for having me on the show