 Okay, we're back. We're live. Welcome to 10 o'clock here on a given Thursday. We're talking tax with Tom. That's Tom Yamachika. He's the president of the Hawaii Tax Foundation. Thank you for joining us, Tom. I was glad to be on the show, Jay. You concern yourself with fiscal policy as you should because it's so directly connected and intrinsically involved with taxation. But we have an interesting problem these days because revenues have been down. They're likely to go further down before they come up. I mean, tax revenues that is receipts by the state. At the same time, the state is called upon to do lots of special things. And one third thing is that we have a lot of state employees who are home but not working and who are nevertheless paid. We don't know exactly how many so the state has all these things tugging at it. The legislature was out of session for a long time. It came back for about a week, then went into recess yet again, and it's going to be a recess until middle of June. I'm just describing the universe of our discussion here and the council revenues is supposed to be meeting what next week I think they're going to try to tell us what we have coming in. You don't need the council. I can just tell you right now what's coming in. Nothing's coming in. So Tom, where are we? Where is the ledge? What are the burdens of the ledge? What can the, give us options, will you? Save us. Let me tell you first what, you know, what the ledge has done. And it's a very interesting situation. And there was an article that Senator Laura Thielen wrote in Civil Beat this morning. A lot of the action in the legislature in the last few days has been in deciding how to deploy the, you know, many millions of dollars that have been given to the state by the federal government for COVID-19 relief. And yeah, in the CARES Act, there was, I forget how much additional was sent to the state, $1.25 billion, pretty much directly. And so what did they do with it? Well, we earmarked $1 billion for budget shortfalls in 2020 and 21 to avoid furloughs and cuts. We gave neighbor islands, you know, some money because the city and county of Honolulu got some federal money directly. So, but the less populous counties, you know, weren't large enough to be on the federal radar, you know, which is something happening across the country. And so some of that, you know, billion dollars went to them. And then about $650 million went into the rainy day relief fund. That is kind of troubling to me because it seems, you know, according to the Senator Thielen's article, it was there so the governor couldn't touch it. Now, one of the requirements of this federal money is that you got to spend it by the end of the year. You don't spend it by the end of the year, it goes back. You mean fiscal or calendar? Calendar year. By 1231-2020. You don't spend it by 1231-2020, if that's won't give it to you. Now, this is a phenomenon that's not unprecedented at all. We've had problems with spending federal money before. Department of Transportation had this issue, Department of Hawaiian Homeland had this issue, water supply had this issue. We lost it. Because we didn't spend it and we lost it. I remember some stories like that. Yeah, there was some tension, or at least we got some nasty letters from the Fed saying, you know, you don't lose this money. I mean, you don't use this money. You know, we're not going to give it to you. And that's, it sounds like. What about the rainy day? What about the rainy day fund? Is that using it? No. You see, using it doesn't mean squirreling it away. So you have to actually spend the money by the end of the year. Okay. Now, there are a couple of problems with that. One is kind of a self-made problem. And that is, okay, so the rainy day fund now contains like maybe 300 or $400 million. You're adding another 650. Okay. There's a stipulation in the rainy day fund statute that says you can't spend more than half of it in one year. But I think the legislature feels that it isn't a problem for them because when they appropriate the money, they can, you know, put another sentence in the appropriation act saying, oh, this provision doesn't apply. But there's one other thing that I think they haven't thought about. And that is, we have a governor who has declared a state of emergency and is not shy about suspending the laws. And there is a provision in the emergency power statutes that says if you want, laws can be suspended by the governor to relieve suffering. And I think it's not a very large stretch of the imagination to say, oh, we've got needs of the people like touring up the unemployment, the unemployment insurance fund. And having it squirreled away in the rainy day fund where I can't touch it is a hardship. And in order to relieve the suffering of the people, I will, I will suspend that law and spend the money. So are you telling, are you saying that there's a contention going on between the legislature and the governor wouldn't be the first time. Okay. And it's not like the governor hasn't done that already, because as I wrote a couple of weeks ago. The governor already has suspended the, the, the distribution provision in the transit accommodations tax to basically stop TAT money from going to the counties. Aside from all the other suspensions that have nothing to do with fiscal policy. Right. Like information practices that sort of thing. It has nothing to do with the emergency he declared. I mean, the suspension of the of the money going to the counties. I think that's really sketchy. The possibility of suspending the restrictions on the emergency budget stabilization fund. I think that's also sketchy but it's I think it's less sketchy. We have a definite need for, you know, use of the unemployment monies. For example, because, and this is another symptom we can't get the money out the door fast enough. You know, we have these administrative backlogs. We have, you know, so much money in unemployment claims, we're in the participants haven't gotten you mean the other claimants haven't gotten a dime. They've lost their jobs. They're entitled to unemployment help from the state, and no money, no money's moving. Wasn't there a move to try to get some of these state employees who were at home collecting their paychecks, not doing anything, and move them around to help on processing these claims. They, you know, continue to pay them for their other job but have them deployed to help on unemployment insurance payments. Yes, there's a program to do that it's voluntary on the employees part they have to volunteer to do this and you know staff of several departments including a legislative staff could and did sign up to do that. They went down to the convention center where they've got a few, you know, 100 workstations ready and deployed. So they can help with that process. But number one it's voluntary. So, the people who want to stay at home and watch TV and still get their full payers are staying at home and watching TV and getting their full pay. Some of the unions basically say no you're not you're not moving my people around. UPW for example explicitly said that. So, I think there's some pressure for UPW members not to not to even do that. Well you know let me let me say that in this show about New Zealand just last hour. I'm going to talk about Karina Lyons and Tim Woods out of East West Center. And they talked about New Zealand they talked about how, and this was reported in a number of international journals that everybody in the cabinet was on the same page. They were listening to the scientists and they were listening to the people. And making reasoned decisions reasoned balance decisions. It was admirable. I say that not because somebody will find in one newspaper, but because the opinions were the same in multiple newspapers. And, and I would have to say that although you know people give Hawaii credit for having low COVID numbers. I don't think we get all credit for being on the same page. I don't think we get credit for coordinating efforts and being efficient and finding, you know, efficient policies efficacious policies. Yeah, I mean certainly the the snap around opening opening the shopping malls illustrates that. So, so the governor issues, or was on the on on on TV saying oh yeah we'll reopen the shopping malls, called well says no, and, and the governor backpedals. So, so we had to wait a few more days before we can get our shopping malls. No problem with it is we get back to the fiscal in a minute. The problem with it is if you open the shopping malls the restaurants and everything, or a lot of things that you take a risk that the infections will increase again. And you can't be complacent about it. You have to be on guard. And the question that's what you got to do. Nonetheless, right. Otherwise what happens is you have a resurgence and you're unprepared for to have to keep on pushing on the public health side. And I'm not sure that we're doing that. I think we're making the same mistake that Trump is making where we're focusing on reopening the economy but we kind of taken our hand off the stick on developing testing and tracking and social distancing as necessary. So that's an example of sort of confused government policy here. But anyway, let's go back to the fiscal management side. So, Council on revenues is, is going to come in, you know, we don't have too much issue. It's going to say we don't have revenues. We've got a billion plus that we got from the cares act. That's not going to carry it or our annual budget in the state is worth an 1112 billion something like that. Yeah, 1414 we're going to be way underwater. What happens. Well, we do we do have stuff coming in. It's just, it's just not as much as, you know, there was some revenue numbers from April that came out yesterday. There is money coming in. Of course, not as much as, you know, people would like but it's it's not like it's going to shut off. Some people are still working there. They are getting income tax withheld that's going in. G tax is still getting paid that's coming in corporate taxes way down. TAT is down a little bit. I thought it would be done more. That's kind of what's been happening. Yeah, you know, one thing is if you, if you say, okay, everybody, you can, you know, we can return to normal. That doesn't excite me as a potential consumer in the new normal. I'm still going to be concerned. I'm not going to go into a crowd. I'm not going to go to a shopping center. I'm not going to eat at a restaurant not now. I'm going to have to wait and see, you know, whether this is going to work. I think it's a lot of people right. It always is that's. And a lot of a lot of people are going to be feeling the same way that it is rushed back in and start consuming and spending money and taking risks and not going to do that. So, if you if you say that the revenues of these various establishments, the tax from those revenues is is is going to be meaningful increase, or at least an increase the way it was. I don't think that's true. I think it's going to take a long time before you have the same revenues and tax going into the state coffers. So, you know, suffer a lot more in terms of tax revenues. One thing that I've been seeing is that the legislature has been kind of very strongly emphasizing. No cuts to the public sector. Whereas, you know, people mean no cuts state employees. That's correct. You know, no cuts at all. No position, you know, no position reductions, no salary reductions. Yes, they'll be further their pay increases until a later time. It doesn't mean that the pay increases won't come until it'll just happen later. And here in the public in the private sector. We got disaster we have a disaster. We have layoffs in an unprecedented scale. We have businesses that are closing. In Marcus declaring bankruptcy was a J crew, declaring bankruptcy. We have a number of establishments that have, you know, shut down temporarily for for COVID-19, but they're not going to be open. We don't know it. We don't know now what the extent of it's going to be. But not everybody's going to reopen. Some people, a lot of people are going to, a lot of people are going to file bankruptcy. A lot of these small businesses are going to go away. They can't pay the rent. They're going to lose their leases. They're going to be subject to foreclosure. They're going to have no relief coming in. I don't think CARES has given them enough to really make the difference, a lot of them. So what, you know, so let me give you a scenario here. So the public sector, okay, no, no increases, not for now, but everything else is frozen. A lot of them are not working there at home. We don't know how many, but the cost of running the public sector, I guess that's, you're referring to both state and county. It's a flat, it's a flat, it's essentially 100% and the legislature is supporting this 100% of what it was. In the case of the private sector, it's decimated. And let's say I'm being charitable in somewhere between 40 and 50% of what it was could be could be less. There's something grossly inequitable about that. Aside from the, you know, the sense of fairness, the sense of inequity about it. It's more than that, it's going to twist our economy, it's going to twist the way the state works. It's going to make the state system, the state employees, which many people feel is bloated anyway, has been bloated for decades. Hiring, hiring, hiring, and so forth. And it's going to make the private sector, which has been under pressure from the state sector, right? This is not a friendly place to do business. Why is it unfriendly? Because the state has state employees have all these controls, permitting, for example, and processing, which they don't do very quickly. So the private sector, which has been under pressure for a long time, now is under much, much, much greater pressure. What do you get when that happens? Because after all, the private sector has to pay the cost in ordinary times. It has to pay the cost of running the state and the counties. So if the private sector isn't making any money for a long time, maybe forever. How do we pay the cost of government? Well, yeah, you can't. What I've been talking about and writing about for a very, very long time is, you know, those in state government, those of us who are lawmakers and leaders, need to understand that we have an economic engine. And you've got to take care of your engine, or it's not going to spin around and produce the money that you need to run your government. Because if you think about it, a lot of the taxes that are imposed are imposed on business and are premised on, okay, if business earns money then you've got to share some of it with the government. I mean, well, what if you got no business? Or what if the businesses aren't making money? They can maybe pay their costs, but that's it. And that's kind of the situation we have now. Some of them can't pay their costs. Some of them can't pay their costs. They go out of business. And then they got nothing. And in the meantime, we have, and I don't, you know, I don't say this is going to be a permanent fix, but we have money lying around. Okay, the legislative auditor has gone and queried our state financial system. And he's come up with, you know, a couple of reports saying, Oh, have you considered this special fund or that special fund or, you know, all this kind of stuff where there are millions of dollars and let me give you an example. This is the high five fund sometimes known as the deposit beverage container program fund. Previous auditor's reports complained of irregularities, but even after all of that, the program special fund has been steadily swelling over the years to the tune of around $5 million each year. We've got $49 million in the fund. We're not spending nearly that much. So, so why don't we do something with that 49 million. We have, let's let's take a nice juicy one here. EBIT has a dwelling unit revolving fund with 154.9 million dollars balance and average cash out per year 17.2 million. The rental housing revolving fund has 362.7 million dollars in a current balance and average cash out of $61.7 million. So six times or six years worth of expenses is now in the fund. EBIT has a Department of Transportation account related with the couple on military reservation improvements. It now has 109.9 million dollars in it, an average cash out of zero. And not making these numbers up they come out, they come up over the legislative auditor's reports that have just come up. And as a matter of fact, we have a an auditor's report that has just come out. And, you know, they listed funds with monies available for transfer. Check with the AG about whether they can be transferred. And eliminated the ones that said, oh, the, you know, where the AG said, no you can't do it. Potential funds available for transfer 483.6 million that's half a billion dollars. Okay, what's it doing? What is that money doing? Why is it sitting around? Why isn't it going to help people? Has anybody thought of that? Well, the auditor has. Yeah. There are other funds too, by the way, I'm thinking of the, that special energy fund, which has 150 million dollars in it, which is probably not going anywhere right now. Sitting is a little pocket of money. So I don't know if the auditor has it all, then maybe sort of marginal funds like that that could be used. So, okay, so they're not being used. So I guess, and you have a big reduction in, in tax receipts, and you have the likelihood that that's not going to go dramatically back to where it was. And you have this, this, I guess it's a union move and the legislature is following along with a move to preserve salaries and preserve positions in the, in the state workforce. And that sounds like a recipe for disaster. So what's the ghost of Christmas future here, Tom? Where are we going on this? It's not hard, not hard to see what's going to happen next couple of three years with regard to the fiscal variables that the state faces. What happens when we just run out? Well, to an extent it's already started happening. Before, even before the pandemic struck, we were having a negative out migration of people. People were voting with their feet. They were heading for the hills. So, and they, and they were heading for the hills because they just couldn't make ends meet here in the economy that we have. So dealing with the cost of living issues primarily. High cost, low pay. Those are, you know, that that's a recipe that adds up to, heck, I can't make it here, I gotta get the, get the heck out. Right, then you'll lose, then you'll lose your workforce. And your tax base. Yes. So, you know, a number of over the past few weeks, we've covered this in from various angles and a number of people have said, well, we got to get out of the, you know, the mono economy around the hotels. Because it's a lot of revenue controlled by relatively few companies and those companies are in large part offshore. Profits from, you know, the big hotel organizations are spirited offshore and the jobs are, they're not, they're not management jobs in the hotels, they're Western management jobs. And so it's not a good economy in troubled times. It's not a good economy in good times either frankly. And so what we have to do in the new Hawaii, the transformed Hawaii, the new normal that we have to build or fermentively build has to be some other industry. Doesn't have to be a mono economy industry but something in the array of industries to take us off relying on tourism. And everybody, you know, they say, well, let's go back to technology. Let's go back because, you know, the idea of having a tech community here goes back to John Burns and George Arioshi and all the way through. Would that solve the problem. Is that something that we collectively should consider and if so, you know, how well would it do. I mean, we should have been considering all along. And I think we have been considering it all along we just dragged our feet so much that hasn't really happened. We have to diversify our economy. But it hasn't happened. Well, what, what can the legislature do. I mean we do rely on them to solve this problem and I see it as their problem and well the governor of course he should be, you know, providing leadership to them and us. But what, what can the government do to solve this otherwise insoluble problem. I think for one thing you got to cut government costs. We, we are focusing on, you know, there are there are no losers in government but you know the private sector can get decimated is I think, you know, very wrong headed. It's it's totally unfair. And it's not the way our government should be run. We should. There's a lot of pain. There's a lot of pain out there. And seeing, seeing people who get off scot free or more than scot free like the folks who are paid hundreds of people who are paid, you know, without having to do any work. It just makes my blood boil. But what would you do if you had control of this if you were the ledge legislature, the governor, what would you do in order to alleviate this one problem. This one disparity this one inequity. What would you do would you knock off state employees would you reduce their salaries, or both probably a combination of both. So you have to dig into the programs and services that the government's offering, and you got to classify them as must have, like to have, maybe should have, or, you know, aren't needed anymore. And, and, and, you know, get out the scalpel. Yeah. Well everybody talks about we have to reinvent ourselves post COVID, or else. And I don't think, you know, apropos of this discussion, I don't think that the burden of reinventing themselves should fall only on the private sector. It has to fall on everything and everybody in the state. And the legislature has to make sure that that happens. Everything it touches should be reinvented or at least considered for reinvention, everything the governor touches the same thing. There's time in the, in the, in the week or two they'll have, after they return from their second recess. But this is something that I think we agree they should, they should consider, not, not because it's emergent right now today, but because it will be emergent on a long term basis, in terms of losing the way we want to call the economic viability of the government to agree with me. Oh, yes. We have, we have a war going on. And the war isn't being fought with the missiles and guns. And it's being fought with the, you know, monetary units. You make it harder for a society to exist. You're not going to have people cooperating with the, you know, support of our government. Yeah. And the cavalry is not coming to our rescue. Things are so dicey in Washington, you can hardly expect regular understanding and contribution to the problem, the problems in this state and in other states. When I was growing up, it was very important in Washington for, for there to be collegiality to, you know, work with people across the aisle now, you know, these days, it's a war zone. The people across the aisle are the enemy. And I think they actually freeze it in those terms. Wow. Life has changed. That's sad. Thank you, Tom. Let's let's do this again and take a snapshot in a couple of weeks. I think there'll be lots of things happening that we can talk about in that period. Tom Yamachika, president of the Hawaii Tax Foundation. So appreciate you coming down. Great. Thanks so much.