 Okay. The words Tom Yamachika mean anything to you? They mean a lot to a lot of people. I mean, you stop somebody in the street and say, you know, do the words Tom Yamachika mean anything to you? Most of them will say, that's the President of the Tax Foundation of Hawaii. That's what they'll say. And then this is ThinkTech. They'll say that too. And I'm Jay Fidel. Today we're going to talk about the 2019 Legislature here on Talking Tax with Tom. And we're going to talk about, you know, the tax sheet goes on in the 2019 Legislature. Welcome to the show. Thank you for having me, Jay. And the beat does go on. We have a full dance card here today. So let's talk about the REIT bill, the real estate investment trust bill, and those who would like to tax REITs here at the local level. Okay. Let me just kind of give you some background. REITs are federally authorized vehicles. They're regular corporations, but they file a form with IRS to have special tax treatment. And what that is, is they have to get income from the passive use of real estate, so rents basically. And the deal is that if they distribute more than 95, I think 90 or 95% of their income to their shareholders, then they don't get taxed. They get something called the dividends pay deduction, which basically allows them to zero out their income and not get taxed at that level. The shareholders love that, right? The shareholders love that. They like the disgorgement. Well, I don't know about that, but like any other corporation, the shareholders are taxed the dividends they receive. So I mean, that doesn't change. And in the federal scenario, it's okay because presumably most of these shareholders are citizens of the United States, and if the feds don't get it from one place, they'll get it from the other. Right? So they'll at least get one level of tax. For us, we have a problem. And the problem is that when you distribute, when you use a corporation, distribute dividends to a shareholder, the shareholder is taxed only in the place of the shareholders' residence. That's been a long-standing rule from centuries gone by. So what that happens is if you have a REIT, which does all this federal stuff and pays out dividends to shareholders, there's no tax here because the REIT's not taxable. And at the shareholder level, the shareholder attacks someplace else, if at all. If at all. Because a lot of the shareholders are exempt. Exempt entities like pension funds, for example, or tax-exempt orgs, stuff like that. They don't pay tax on dividends. What about an overseas shareholder? I don't think we'll be able to tax them either. And he may not pay tax in Hong Kong, for example. Yeah. In the federal system, there's a way to get that income because dividend is withheld when it's paid overseas. But we don't have something similar here. And I don't think we can. Okay. So it's unfair to the state of Hawaii. That's the point. At least a lot of people feel that way. And there's been a couple of champions of this issue for about six, seven years now, I think, trying to tax REITs here locally, establish a tax at this tier at the place of doing business. Yeah. So what the bills would do would be to tax the REITs like any other corporation so that you would pay state tax here. And whatever dividends are paid out, shareholders getting REIT dividends would pay tax on those dividends. The dividends would be less though because the corporation would have to pay tax here and then it would deduct the tax it pays at a business expense, right? Right. So like any other corporation? Like any other corporation. Yeah. So that's, you know, that would benefit Hawaii. And there are a lot of REITs who own a lot of property. And you know, that's the way our foreign real estate investment has worked largely through REITs from far away on the East Coast, the West Coast. Yeah. And it turns out that in Hawaii, there is a lot of REIT investment. Almona, a lot of hotels, many of the shopping centers, Commonwealth, which owns Puna Puna and also most of Campbell. So that's a lot of investment. It's billions of dollars of investment and it's millions and millions of income every year through rent. So the question is, you know, is this bill have any chance because those guys are going to oppose this. They're going to bring all their forces to bear and try to stop this bill as they have in the past. Yeah. And this year is no different. The national REIT organizations involved, they got, you know, the, you know, the nation's foremost professor of state tax guiding Walter Hellerstein way in and submit testimony. Yeah. How does it look? We don't know. At least it's still moving. Still moving. Yeah. The Senate bill definitely crossed over to the House, I think. There's a House bill that will cross over to the Senate. So both companion bills. Yes. Essentially the same. Well, this would be very interesting to, you know, to see. I'll tell you why. Because it's, you know, it's an example of our democracy in action. You have lobby groups, you have well-funded lobbyists who are in there every day walking the halls. This involves tens of millions, maybe hundreds of millions to collectively to these REITs. They're determined to stop it. Query, who's on the other side of that? Are the people on the other side of that as powerful, as influential, as well-funded in their efforts to push it forward? Well, the proponents of the bill are local real estate developers. So, I mean, they're obviously not REITs. So, if they form a corporation to do the same thing, they get double taxed like any other corporation. That's the thing. The guys who oppose it, to them, it's real dollars. Dollars out of their pockets, so to speak, at a local level. For the guys who are pushing the bill, it has only an indirect effect on them. And they're looking for the greater good, I think, for the state of Hawaii. Right. Not the same motivations. And therefore, it's not the same level of advocacy either. Well, I don't know. I mean, for the local people, they have to compete with the REITs. So, it is hurting them personally. Yeah. Okay. All right. Well, wish them well. But we'll have to check back with you on that. Now, the crossover is happening right now, and it's going to go into the switch committee, so to speak, right after the crossover is over. That's right. So, right now, at the legislature, the House bills are being finished up and sent to the Senate. Senate bills are being finished up and sent to the House for consideration by the other, what we call the non-originating House. Okay. Well, there'll be more committee hearings probably. Yep. So, that'll start probably next week or the week after, and then it'll be madness again. And then we'll check back with you on that. Okay. The next one is a TAT bill where the counties are asking for state statutes that permits them to add a surcharge on the TAT in all the counties. Why are they doing that? Yeah. So, here's the background on that. For the last four or five years, the counties and the state have feuded over how much of the TAT they will get because part of the TAT is shared with the counties. Okay. For the earlier part of this century, it was a percentage. So, like for example, Maui got 10% of the take, and I think Honolulu got 15% or so on. But in 2013, okay, in the same statute that raised the TAT from seven and a quarter to nine and a quarter, it's seven and a quarter now, by the way. Okay. Okay. It never goes down, you know. Yeah, it started off at five percent. It never goes down. And it was supposed to be temporary. Right. Okay. Okay. Yeah. That said that what the counties get is going to be a fixed number. I mean, somebody made the, you know, somebody got up there and testified before, you know, one of the legislative committees that they wanted a stable and predictable source of revenue. Well, that's what they got. A fixed number is stable and predictable. Which is now? Which is now what they say inadequate. It's, I think, 103 million to be shared amongst all the counties. Okay. So it's inadequate. The states go to the legislature. The states are, I mean, the counties go to the legislature. The counties are advocating for this change. What does this change permit? And so what this change is going to do is it basically resolves the question of, you know, how much the economy is going to get. Basically what the bill will do is knock out the county sharing. Okay. But the county will be allowed to add a surcharge on the TAT just like how they are allowed to add a surcharge to the GET now. So right now, the counties get a part of the TAT. Right. Under this bill, they wouldn't get any part of it. They'd have to make a surcharge and they'd get all of that. That's right. Wow. And they wouldn't have the same amount of surcharge county to county. They'd do each county would do it something. Yeah. So that's kind of one of the beauties of it. So like if Maui, for example, but oh geez, we got too many tourists, it's ruining our natural beauty and stuff so they can jack up the TAT really high. Whereas another county may be more willing to accommodate tourists and they would set their bar lower. They can compete. They can compete. They can compete. They can go, I guess they go to the people who package tours and the like, people who fill the hotels and say we're a little cheaper on the TAT than the next county. Right. That'd be interesting to watch and see how that works. Yeah. So it's a very interesting idea. But how much, let me ask again, how much were they getting? Have they been getting under the existing law? And would this TAT be more or less than that? Well, it's hard to determine right now because there's so many blanks in the bill, which is typical for this stage of the process. They leave the amount blank. They give the county authority to enact a TAT surcharge up to blank. So it's hard to... You can't. And we'll only know after conference committee, right? Right, right. So... It's just likely to pass. Who knows? Well, let's see, who would be pushing back? The hotels would be pushing back, wouldn't they? Maybe. Again, it just kind of is a speculation as to who's going to come out better. You know, Tom, this is the part of the show where my head begins to explode. And whenever my head begins to explode, I'm sure you have the same experience. I take a break. Watch this. Aloha. I'm Wendy Lo and I'm coming to you every other Tuesday at two o'clock live from Think Tech Hawaii. And on our show, we talk about taking your health back. And what does that mean? It means mind, body and soul. Anything you can do that makes your body healthier and happier is what we're going to be talking about, whether it's spiritual health, mental health, fascia health, beautiful smile health, whatever it means. Let's take healthy back. Aloha. Aloha. I'm Dave Stevens, host of the Cyber Underground. This is where we discuss everything that relates to computers that's just going to scare you out of your mind. So come join us every week here on thinktechawaii.com 1 p.m. on Friday afternoons. And then you can go see all our episodes on YouTube. Just look up the Cyber Underground on YouTube. All our shows will show up. And please follow us. We're always giving you current, relevant information to protect you. Keepin' you safe. Aloha. It was an article in the paper about people who are fascinated with exploding grapes in the microwave. I doubt you would have seen that, but there it was. You're thinking that your head is like that? Exactly. Geez. It's feeling better now. That's good. So anyway, let's go to the next bill. And that's the carbon tax bill. We talked about that. A lot of discussion about it. And certainly, that would be involved in the Green New Deal federally, I guess, something like that, in order to tax carbon to de-incentivize use of fossil fuels, whatnot. They disallow airplanes. It's a hard one, though. It's so new. It's so disruptive to everything that people are people are not going to really warm to it, right? Yeah. Warm is warm is a chosen term. They're not going to do climate warming over that one. Good one, Jay. Thank you very much. So question is, how's it doing? It's going to make it over the crossover? Yes, it's crossing over definitely. What that bill does, in its current form, is revenue neutral. So what it would do is it would take away the multiplicity of taxes that we now have on fuel. So right now we have the state fuel tax, the county fuel tax. We have the barrel tax. State and county fuel taxes, as you know, are imposed on gasoline and similar types of fuels. You pay at the pump. The barrel tax is a little bit different because it's imposed on fossil fuel whenever it's imported. And that one is more environmentally focused as opposed to fuel tax, which is supposed to be the pay for wear and tear on the highways. So you can see some big winners and losers because right now there are some big users of fuel that are exempt from the fuel tax, such as the power companies. That's how they generate electricity. And the reason why they're exempt from the fuel tax is because they don't use the road. Fair enough. Fair enough, right? And also farmers. They have off-road vehicles, like the tractors and the plows and whatever else they're using. It's not on a road. And the fuel tax is supposed to be one of the primary feeders of the highway fund. So rather than both of those, all of the county fuel tax would remain intact, but what the state wants to do or that bill is considering is replacing the state fuel tax and the barrel tax with a carbon tax. And the carbon tax would be based on you import or use fuel that when burned is going to put carbon into the atmosphere, then you pay for the carbon that is thereby produced. So coal, for example, is taxed at a higher rate because it produces the most carbon per energy production. And then I think natural gas is further down the list. Is this a bill that comes from a uniform bill from somewhere else or do we write this bill right here at home? We're right here at home. I mean, no other state in the US statewide has a carbon tax. There are some cities who have adopted it on the mainland, but there is no state carbon tax here. I must say that I don't think people know about this very much. They don't know the details of it. And if they don't know, I don't think the legislators know either. And I'm sure there's going to be resistance to this because it is such a big change. And you don't know the effect of it. I think it needs to be what's socialized among the public, socialized among the legislators for it to work. But on the other side of that, it seems to me that Hawaii is doing, aside from clean energy, which it could do more, it could do more. Aside from that, it seems to me that Hawaii is not putting a whole lot of money into climate change. It simply isn't. Can you tell me of anything where the state is making a real monetary American dollar commitment on climate change? I can't. I don't think it's doing anything. And so, you know, so on the one hand, we really should do something in order to incentivize the, you know, diminution of the use of fossil fuels. On the other hand, we're not ready. And many organizations are talking about climate change, and it's up to them, I think, socialize this idea and get people to understand it and want it and demand it and bang the table for it. But so far, I don't think that's happened. Yeah. So where we are right now is the bill's revenue neutral. But there have been some calls for, you know, DBET or somebody to do a study on what would it take in terms of the level of the carbon tax to coax enough social change so we can meet our renewable energy goals in the timeframe that we've set for it. And I can tell you right now, to do that, you would need a carbon tax with a much greater number than we have. Okay. So it would be revenue positive. And I think, you know, people in the government probably wouldn't mind that. You know, more money to go around. We as consumers would get hit in a number of places. We'd get hit at the pump. We'd get hit in our electric bills. We'd get hit in the cost of farm produce. Yeah. But don't we have, you know, I'm reminded of the recent London economics reports that cost a million dollars for DBET on the question of what kind of utility model is appropriate going forward. And I'm not sure that was worth a million dollars. I told them I would do it for a million. But you know, don't we have talent here that could do this kind of study instead of going wide like I know this will happen. And it will take years to make a study like this. And the study will be inconclusive. And then even if it is conclusive, there's a big question about whether anybody will listen or put it on the back to shelf. Well, I mean, we would have the state energy office do something because the state already found that they are not. They've been defunded, haven't they, the state energy office. Maybe we can get that something for them to do. But, you know, when, while that reminds you of, you know, the London study, I'm kind of reminded of what's happened in France with the yellow, you know, the yellow jackets. Right. Yeah. Writing in the streets because among one of the things that made people so unhappy was carbon tax. Right. That was the central part of yellow jackets, wasn't it? Yeah. So you can see what might happen here. And I don't know what the intensity of the lobbying is right now in that bill, but I imagine there's not a whole lot of active support for it. Well, I think there's a not a whole lot of at least frontline activity on either side, because I mean, the hearings haven't been, you know, attended with, you know, acts of people. Yeah. Yeah. Pushing in either direction. Yeah. So what's your expectation on this? I think a lot of action is taking place behind the scenes. Yeah. We have to work on that. And that one, we'll have to come back next year, I think, and talk about it some more. Okay. Meta vehicle tax. This one's very interesting because it relates to a larger issue. Can you talk about that? Sure. There's right now a bill is moving and it's just crossed over to deal with the rental vehicle tax, which is what we pay for rental cars. And whenever we rent a car for a day, if you like fly to Maui or Kauai to do business and you're out of rent a car, then you pay this tax among other things. Now, we enacted an amendment to this tax last year that says, okay, we're going to charge locals with a Hawaii driver's license $3 a day, but we're going to charge people without a local driver's license $5 a day. Okay. Probably you can't do that. As a state, you can't do that. It feels good if you're, if you're local Hawaii. Yeah. That feels good. But then when you look at the Constitution, it doesn't feel good. Yeah. I mean, there's part of the US Constitution says we're supposed to, you know, we're supposed to treat people from other states as our Ohana. The Commerce Clause. It's called the Commerce Clause. So, so, so we can't basically, basically, we can't do that. Okay. So, so there's a, there's a, the way they're going to fix it. And this is, I think, after at least one of the big car companies is a modern challenge to the laws it currently has. And, and basically the AG and the Department of Tax have basically fallen on the sordid admittance constitutionalist as it now reads. And says, okay, we're going to, we're going to do a fix. We're going to charge $5 to everyone. In fact, from July 1st. That's a real fix, isn't it? We get fixed, they get fixed, everybody gets fixed. Everybody gets fixed. See, see what happens when you, when you fight with mother nature. Yep. Somebody gets burned. Everybody. Okay. So now that issue, that issue also comes up in the context of agricultural products. Can you talk about that? Yeah, there's a, there's a bill to, to award a GT exemption for, you know, food that's raised, grown or caught in Hawaii. We raise, we raise beef cattle. We, we raise crops. We sell coffee, you know, GTs and for all of that other, other food we bring in, nada. Okay. No, no exemption. We already ruled on that. We already have a Hawaii Supreme Court case a number of years ago called Hawaiian flour mills. That said, you can't do this. That also violates the Commerce Clause because it discriminates against other state stuff. And so the same thing, the same thing. That's against the Constitution under the Commerce Clause the same way. So it's too bad because it feels good. You know, we do want to incentivize local agriculture. Yeah. Everybody else does too. Yeah. But, but that would lead to what the Supreme Court called economic balkanization. And they thought that was a bad thing for the nation. So that's why, you know, the rule is like the way it is. Just, just in the hypothetical, suppose I, I'm the legislation, I really, really, really want to incentivize local agriculture. How can I do it in a way that is legal? That is un, that is constitutional. Don't use the tax system. You know, use a subsidy of some kind. Everybody does. Subsidies are subject to different rules. In the end of the day, it costs the government money just like a tax creditor. Yeah. So you can do that. I mean, so that's not unconstitutional. Yeah. I think within reason you can. We have to do something about local agriculture. It's not growing at a rate that's nearly fast enough, not as nearly as much as we had anticipated and wanted. You know, the plantation agriculture died, a slow death, a quick death. And now, and now we're faced with all this land and being isolated and not having enough food here, except McDonald's, to deal with extreme weather, for example, or some other kind of crisis. And we really better do this, but we haven't done it yet. If you want to make the state resilient, you know, you have to put money into dealing with climate change and also dealing with, you know, this kind of resilience on agriculture. Right. And you have to make it worthwhile for people to do farming. Yeah. So I mean, if the legislature or the people who introduced this bill had been a little more thoughtful about the Constitution, they might have come up with something else. Maybe they'll come up with something else next time. Maybe, yeah. Yeah. What about, actually, could you, you couldn't do this in the form of exempting any tax. It's only a matter of giving some subsidy instead. Just before we close, though, you know, Sylvia Luke at the outset had a new way of looking at budgets this year. What was it, zero-based budget or some words like that? Right. What was that? And is that something that's still in play? How has it been expressed? It's very much in play. What they're doing is they're basically looking at, I think, a previous year's baseline budget. And they're saying, OK, departments, if you want any more, you got to go to your justification, you know, get your justification, go to your subject matter committees and make your case. And so one subject matter committee has already found some excess funds squirreled away in DCCA. Another one has found excess funds, I think, in the Department of Labor. The state auditor has found excess funds in the Department of Transportation. So all this stuff is not coming to light, which is a good thing. So we can at least see what's there and figure out where our priorities are and where we can use them. Is it a substantial amount of money or just, you know, a little here, a little there? It's a substantial amount of money. If that's the case, then we're likely to balance the budget this year with a surplus. Well, I mean, you got to be careful what you say. I mean, if you say there's a surplus, which is what the administration has been doing, then you're going to kind of lick their chops and go, OK, we want raises now. Everybody wants the surplus immediately. Yeah. And then they have to go to the unions and say, oh, by the way, we spent the money last month. So there's no surplus anymore, which is what they did. Yeah. It's a delicate, fragile balance for all the powers that be. Thank you, Tom. Thank you, Tom Yamachika. Tax Foundation of Hawaii. Thanks a lot.