 Welcome to Hawaii Together on the Think Tech Hawaii Broadcast Network. I'm Kaley Iakina, your host and president of the Grassroot Institute of Hawaii. We've got a wonderful guest with us today, Tommy Amacheca. But first, let me talk a little bit about what's going on at the state legislature. You know, it's become like an annual tradition, just counting the new year, counting on the new year or setting off fireworks on the 4th of July. Every year in late January, we observe the running of new tax proposals. And this year it's no different. So far, the Grassroot Institute of Hawaii has identified dozens of new tax bills under consideration in the 2021 legislative session. I think you're going to be amused. Well, maybe you'll be crying when I mention some of them. There's a car tax being considered on the purchase of any non-zero emission vehicles or proposals to raise the base of the general excise tax from 4.5% to 4.5% or a three-year surcharge on the liquor tax. Literally, you know, that's a tax on top of a tax or a proposed constitutional amendment to remove the exclusive authority of the counties to tax real property. So guess what? The state can also tax you on your real property or new taxes on the struggling tourism industry, including a sustainable tourism tax and a surcharge on the transient accommodations tax. And again, that's a tax on top of a tax. Proposals to increase the top marginal income tax rate here in Hawaii to 18% or 16% all the way up from 11%. They're also considering a carbon tax and a hike in the barrel tax that would increase the tax on gasoline to 56 cents a gallon from 3 cents a gallon right now. And there are many, many more. You know, it's not clear whether these taxes are being proposed in a misguided attempt to bring in more state revenues, but you know, there's widespread agreement that we don't need these taxes. In fact, our own governor had mentioned recently that we don't need more taxes. But that's what's going on at the legislature, and that's why I've got with me today someone who understands taxes tremendously. He's an attorney and president of the Tax Foundation of Hawaii, and we're going to talk about how tax hikes will harm the economic recovery. He's a good friend and a partner with us in our work at the Grass Root Institute. Please welcome to the program Tom Yamachiga. Tom, so good to have you on the show again. Aloha. Aloha, Kelly, and thank you for having me on the show. You're absolutely right that there are a lot of tax proposals being bandied about at the legislature. We have our own list of bills that we are following. The list is about 300 bills long. Well, that's something out of the 2,500 or so that have been introduced. You do a lot of good work at the Tax Foundation. Just at the outset, let our viewers know what the Tax Foundation of Hawaii is all about. Well, we call ourselves a taxpayer watchdog organization. We take a look at taxes and public finance, we especially take a look at the legislature. We want to make sure that both the legislators and their constituents and anybody else who wants to know has good information on these tax proposals, how they work, how they dovetail with each other, because a lot of times legislators are not going along with these tax bills because they want to because they're following somebody else who is. So I want to at least make sure that they have enough information to understand exactly what they're doing and what they're voting on. So they vote actually means something. Well, you know, that's very important work, and I know that a lot of lawmakers and citizens rely upon what your organization does. You know, one of the things that you've been talking about is how lawmakers plans to increase taxes actually will end up hurting the economy and actually hurting struggling residents at this time, especially trying to recover from the COVID lockdowns and so forth. Tom, last year, Governor Igay suggested that there might be a need for new tax increases this year. But aside from a tax on sugary drinks, which he proposed, and we could talk about that if you care to, he really hasn't proposed any new taxes in his legislative package. Now he says tax increases should be a last resort. I was really glad when I heard that. But sometimes we have to interpret what lawmakers and politicians tell us. Why do you think ostensibly he's changed his mind? Well, I think it's because it plays well, plays better with the public. The fact of the matter is that he submitted a budget to the legislature. The budget had a section on revenue enhancements of a billion dollars, a billion dollars with a B. And it was unclear at that time what was in that billion. It still is unclear despite the governor's package having been unveiled. So we don't know really what their plan is. If they want to increase the taxes, what kind of taxes, how much, we don't really know. We do think that in order to get to the numbers that they're talking about, if you want to get to a billion dollars, you have to basically move one of the two big taxes that we've got. One of them is the GT and the other one is individual income tax. So you go to work, you get a paycheck, you get some tax withheld from your paycheck. That's individual income tax. So those two are the big elephants in the room. Everything else brings in an amount comparable to what one of those two taxes would bring. So you're fairly suspicious when there's a category called other revenues, quote, unquote, you know what they're really talking about. Why, Tom, is it a bad idea to raise taxes at this time in particular? Well, one thing that we've been seeing all along is that taxes act as a break on the economy. When people are working and producing goods and selling services, they have to make more to work harder or sell more services if tax is imposed on those goods or services. So it depresses the amount that is produced. And otherwise acts as a break on the economy. Now, one thing you have to realize is that the amount of tax revenue depends on the economy. So if people make less money, there's going to be less tax. Not only because the tax system depends on that in their calculations, but because even if you assess tax on a person that has no money, that person will be able to pay it. So taxes slow down the economy. A slower economy means people make less money, which means the people and the businesses pay less taxes, which means the government doesn't get as much as it wants in the first place. So what's the logic of raising taxes in the first place? I mean, regardless of these warnings, legislators have introduced so many numerous tax hike bills. I read a list of them at the start of the program. An income tax hike, a real estate tax hike, carbon tax hike, GET surcharge, and so forth. What is the rush behind these proposed tax hikes, especially when the logic tells us that that's actually going to slow down the economy and reduce state revenues anyway? Well, the question then becomes, well, what's the alternative? I mean, you have expenses, right? And you got to pay them somehow. The revenue isn't coming in. So what do you do? You have to either decrease the expenses or increase the revenue. Decreasing the expenses entails such things as layoffs, furloughs, you know, getting the public employee unions irritated because their members get damaged. And increasing revenue basically hurts the rest of us. You know, perhaps including, you know, the state workers, but not as much because they've got counter-reeling increases. So what do you do? Obviously, state government's caught between Iraq and a hard place. And there is pain that's going to go around. And the question is, who's going to feel the pain more? You know, when people talk about reducing government spending, it's almost always couched in terms of cutting services or cutting employees. But is that the only way to cut government spending? I mean, do you think that there's enough fat and enough inefficiency that can be reformed? For example, government runs many businesses that could actually be handed off to the private sector and run at a better cost, as well as more efficiently. Do you think there's room to do this? Well, there's, I think, a number of different places. One is we know and we've seen the auditor, the state auditor document, the fact that monies are being squirreled away. Okay, the auditor... You're talking about special funds, is that right? Yes, special funds, among other things, yes. But primarily in the special funds, there is, and the state auditor has identified a lot of money that's in these special funds. It's not being used because they've tested the funds against how much outflow is imposed on them every year. And a lot of them have been showing excess balances, and that's what the auditor reported on. Now, the constituent departments, of course, don't want these funds to go because they have other plans for them. But get real, folks, we're all hurting and nobody has helped by having money just plain set around when we all need to make better use of it. So that's number one. Number two is that you have some departments that are very, very large and you look at most management studies that have taken place all over the country. You find and you see that the larger a government or private entity, even businesses, get, the easier it is to find considerable amounts of waste or inefficiency in how they spend the money that they have. So we've got some huge departments. We don't have a lot of transparency into what they spend or how they spend it. A case in point, for example, is the Department of Education. There is another nonprofit that has made it their life's work to try to get expense records and other kinds of accounting records out of the Department of Education. They've spent, I think, a year and a half so far in a Uniform Information Practices Act lawsuit. They finally got some information out of them, but then the information was from the year 2017. So much work, results of questionable relevancy, but it's a start. You add that among other large departments like Department of Health, Department of Human Services, and you're likely to find a lot of stuff that is available for repurposing. You know, when it comes to the growth of our government, we're really dealing with a behemoth. Isn't it true that the rate of growth of the government sector in Hawaii is faster than the rate of growth of the private sector in terms of the economy? Well, I think your group has done extensive research on that, and I don't have any reason to question that. You know, many people are defending the tax proposals that are surfacing at the legislature now, and one of the defenses is that these taxes, they say, are aimed at the rich and therefore would not harm most residents, for example, increasing the upper marginal tax rate and so forth. What are your thoughts about that? What kind of thinking is that to say that if we're really only taxing the rich, we're really not going to be hurting the general population? Well, I think the first thing is if you really want to only tax the rich, you're not going to get enough money. We're in a 1.4 billion dollar a year budget hole for multiple years. You can kind of scratch the surface at it if you just go after a very small slice of the population. That may make you something, but it will scratch the surface. If you want to address shortfalls to the tune of a billion or a billion four, you got to do something drastic. If you're going to do that with the individual income tax, you're going to have legislatures saying two things. One, yeah, we're just taxing the rich, and number two, you're rich. Congratulations. So the good news is we're only taxing the rich, and the bad news is now you're rich. We'll come back after a quick break and pick up on that point. My guest today is Tom Yamachika, president of the Tax Foundation of Hawaii. You're watching Hawaii Together on the Think Tech Hawaii Broadcast Network. Don't go away. We're back with my guest today, Tom Yamachika, president of the Tax Foundation of Hawaii. We're talking about why raising taxes in the way that many legislators are proposing right now is not the best idea for Hawaii. Tom, we ended the first segment talking about the defense of raising taxes that is given, which says we're only taxing the rich. But as you pointed out, even a strategy that only tax the rich wouldn't be sufficient for raising the money we need, and isn't it true that if we tax the rich, we have a very high possibility that we will be reducing tax revenues ultimately because the rich actually provide quite a bit of our tax revenues. A lot of them vote with their feet. Ah, yes. We have the exodus of productive workers leaving Hawaii. Well, not only productive workers, but also, you know, with the rich. People who are in a position to employ people, entrepreneurs with ideas, people with ambition. Well, this sounds like California almost. I mean, we've been watching over the last few years, a massive exodus of major corporations and wealthy individuals leaving Texas for places like leaving California. I'm sorry. I've got my state's backward. We're talking about leaving California and heading to places like Texas because of the tax situation. Do you think that's on the specter here in Hawaii? Yeah, it's not only California. Connecticut is another one where big corporations have left. New Jersey, I think, is another one. Texas, which is what it's affectionately called. The phenomenon is not unique, and it's not unprecedented. People do it, and you've seen our population shrink in recent years. That's well documented. What more is it going to take for people to realize that you can't tax people to oblivion and expect them to just take it? Well, one of the strategies that's being used to pass some of the tax hikes is calling them temporary. Many proposed taxes this year, like the proposed tax on liquor, are called temporary taxes. Well, what's your history here, Tom? Does the legislature have a good record of at repealing temporary taxes? It really doesn't. My favorite example of a temporary tax is the tax that was imposed to build our convention center. This was in 1986. It was a 5% tax, then called the Transient Accommodations Tax, and it was supposed to be over and done with and repealed once the convention center got built. Guess what? We still have it. It's 10.25% now, not 5%. It just keeps on going. There were some temporary hikes that were in de-temporary, or some suspensions of GT exemptions that were in de-temporary, but even more numerous, I think, are the instances where the legislator said, well, we're going to make this temporary increase. But a year after the increase expired, there were bills to raise it again back to the old rate. Lawmakers, I think, thinking that the public got used to it, so they'll pay it. Tom, last year in 2020, we went from being the state with lowest unemployment rate to the state with the highest unemployment rate in response to the COVID lockdowns and the demise of our tourist industry. As a result, we absolutely depleted our already underfunded unemployment insurance fund, and we triggered a mechanism in law which says that in the following year, which is 2021, the tax rates on businesses to pay for the unemployment insurance will virtually triple in many cases. Do you think that the lawmakers should lower the tax rate on the unemployment insurance tax for our businesses? Yes, I do, and I think they want to kind of soften the hard edge that is there right now because of the massive depletion. See what happens is our unemployment tax is a series of rate schedules, lowest being A, highest being H. We have been on schedule C for a number of years, but because of the coronavirus effects, we have started off with our unemployment trust fund, which was actually not that bad off, but it was like $600 million in it, but that got decimated, and we also had to borrow money from the federal government to keep our unemployment payments afloat, so we're now owing the federal government $700 million as a result. Under the law, if nothing happens, the law is designed to self-correct and charge more tax when there's less than the fund, so it'll go automatically to schedule H unless we do something about it. There are several proposals to do something about it, which I think is good, because at least there should be some cushioning of the shock as opposed to going from C to H right away. Tom, lawmakers are also considering closing off of some of the tax exemptions that exist. What are your thoughts of here? I think closing off on the exemptions needs to be applied very carefully. I mean, we did it in 2011 to 2013, and I'm not sure what beneficial effect it had. It certainly got people upset, especially in the construction industry, because one of the biggest exemptions got taken away there. There are proposals to do just that again, and I'm not sure how much thought had been put into figuring out how much of what you shut off. Typically, when the literature passes a tax exemption, it does so for a reason, because they want to incentivize a particular business that they think has growth potential, because they are concerned about accumulating costs in a certain industry or series of industries. A bill like you described would take away and reverse all those policy choices in one fell swoop. You got to do that really, really carefully. In essence, closing these tax exemptions would in many ways be like adding a tax and have that effect you described earlier of putting breaks on the economy and ultimately resulting in lower revenues for the state as well. We seem to see, once again, short-term thinking versus long-term thinking. As you've looked at the proposed tax increases or hikes for this term, is there anyone or are there any few that really bother you that would really be bad for Hawaii and for business? Well, I think what bothers me most is that there really is no overall plan. There is no overall game plan. There are various and sundry tax bills out there, a lot of which contradict themselves. There are tax increases proposed, but at the same time they're proposing to continue credits, create more exemptions, enact more incentives. I just wonder if they're talking to each other. I think it would be, I mean, maybe the legislature is the time and the place for this cohesive strategy to be built, but it certainly doesn't seem like there is any right now. Ideally, somebody like the governor should come in and say, you know, look guys, we're in a bad way. I think we need to go along this route, this strategy, to get out of this mess. If there was leadership shown like that, I think it would be a lot easier to take, but right now it just seems like a bunch of cats yowling in the wind and, you know, which are going to get picked to eat the fish is just discordant right now. In absence of such a strategy that would really take us in the right direction and make our economy more feasible for businesses to flourish, we're seeing this flurry of tax proposals. Ultimately, what will the harm be to the economy and to the cost of living if many of these tax proposals are passed this term? Well, I mean, you guys are the economists, but you know, we are already starting to see some of the ill effects. We're starting to see businesses close. We're starting to see people get on planes and not come back. We're starting to see businesses default in rent payments and have no prospect of paying them back. Consequences like that are visible and they're starting to build up. Just a last question before we end the program today. Many have looked to federal loans as this salvation for our economic condition now. What are your thoughts on that? Well, I mean, federal loans are fine, but you've got to pay it back. So it helps kick the problem down the road. Sometimes that's what you need, but it shouldn't be looked at as a long-term solution because it's not. Well, Tom, I appreciate you being with us today. Great insights. And if anyone wants to get a hold of Tax Foundation of Hawaii, how do they do that? Sure. Our website is, I think, very approachable. It's tfhawaii.org, tfhawaii.org. Go check it out. We have a lot of resources available for free. If you join and become a member, we have more resources available to you, and we appreciate any of your support. Great. Well, Tom, you're doing great work, as is the Tax Foundation of Hawaii. I thank you for being on our program today. Aloha to you. Thank you for having me on the show. My guest today, Tom Yamachika, and we'll be back again next time on Hawaii Together on the ThinkTech Hawaii Broadcast Network. I'm Kaley Ikeena with the Grassroot Institute of Hawaii. Aloha.