 We're back. We're live. I'm Jay Fidel, 10 o'clock block on a Thursday, December 17th already. Whoa, we're really getting on there. Seems like the year only began a minute ago. Interesting how that works. And the legislative session only began like a minute ago, except it was a dud. Sorry. Talking tax with Tom. Tom Yamachika. Hi Tom, welcome to the show. Hi Jay, Grant. I'm glad to be back. Interesting. You're talking about legislative session because that's what we're going to talk about today. What I hear so far is that we may see a repeat of 2020 and that it's going to be an abbreviated session. What is abbreviated meantime? Like they'll only consider a fraction of the bills they normally do. Yeah, what I've heard is they're going to have all the hearings remote, whatever hearings there are, they'll all be by remote, which means a different paradigm and maybe you can't get as much done as you say. But one of the things on the agenda is dealing with a very walloping large deficit which should not be happening. We break the constitutional provision, like all the time, we're at 300 million over so many years in the past 10. And now we have this prospective deficit of 1.4 1.5. And this is only one thing that presents itself and that's a tax increase. So you must be hearing about that. Of course, you know, at first the talk with Governor Ege was all about furloughing and reducing the cost to government. Okay, so the plan was that he was going to make everybody take two days a month as furlough days without pay, and which would save around 10%. And then on top of that, he would ask each department to basically lock their budget between 10% 20% depending on the department. And so that that was kind of the narrative for a while. And then of course, the unions get in the picture. And they say, you can't do this, because we have a collective bargaining agreement and, you know, we have collective bargaining laws that protect the collective bargaining agreement, and we have a contract and you can't break it. Are they right? Well, there are a lot of nuances to it this time. Because when one of the things that Governor Ege did when he made his emergency proclamations is he wiped out the entire collective bargaining law. Can you do that? That's a matter of dispute. So the, the, the unions took him to task for he said you can't. And you really didn't intend to do any, you know, citing correspondence between high level state officials in the union. And so they brought it before the Hawaii Labor Relations Board sometime in July. And the Hawaii Labor Relations Board in an oral ruling. It's not written down as far as I can tell. They said, Well, yeah, the governor didn't really mean to suspend the law in its entirety, although that's what the proclamation says. So, you know, we are going to keep going with the case and we're not going to proceed on the assumption that the, that the law under which we're operating has been scotched. Okay. Okay. But there are a couple of problems with that. Number one is that apparently cooler heads prevailed and in a September ruling. The Hawaii, Hawaii Labor Relations Board itself walked that position back a little bit, and they said, Well, okay. In the Hawaii Labor Relations Board, we make it we interpret and make decisions on the labor relations laws unfair labor practices that kind. Okay. We don't have enough pay grade to consider what the effect of the governor's proclamations are. So, we are going to proceed. And we're not going to make any decisions on whether the law is suspended or not, which is, which is kind of interesting because they can't proceed unless there's a lot. Right. So, they are proceeding to say they can't proceed, they can proceed. And inherently they're they're upholding the law because otherwise it wouldn't be able to proceed. So, so, so implicitly they're saying it's, it's, it's valid. Yeah. Okay. So there's not, there's not a lot of courage in that. Well, not only that right about it. Yeah. Not only that. But if you look at the emergency powers law itself. You know, chapter 127 of the Hawaii revised statutes. There's a section that says even courts are prohibited from declaring emergency proclamations invalid, unless there is a three judge panel in the circuit court that is convened to consider such a question. And they say it's about. And it provides, you know, for expedition of court business and all that kind of stuff. So yeah, this is this an important case. And we want to make sure that gets hurt and decide very quickly so you know, expedited in all possible ways, etc. etc. Those were the statutes. But I don't think anybody. This year has convened a three judge court panel. And, I mean, certainly, the Royal Labor Relations Board is not the three judge court. So they really don't have the authority to say, well, we're not going to follow this. They have the authority to kick it up to a three judge panel. I don't know what the procedure is inside of the Labor Relations Board, but I suppose at one point either party, either the government or the union could take it to circuit court and get that kind of. You know, if they either A, where were the process or B, wanted to do it. Now, I have heard in the news media of, you know, a single judge. I think this is on the big island. Saying that the the governor's proclamations are valid. And I suppose that because the judge isn't saying they're invalid, you know, the judge can certainly, you know, profess that opinion. And the case, not involving Labor Relations, but basically involving somebody who said, well, you know, emergency proclamations are only good for 60 days. That's the law says. So, what the heck is this, you know, re issuance upon re issuance upon re issuance of the emergency proclamation. You know, for, you know, several months at a time. And that tells me about this and footnote to my, my comment that was a thing in the paper about. I guess it was the bars. Yeah, the bars in Honolulu, who have been closed most of the time this year. Went to federal court for an order from the magistrate Leslie Kobayashi. And I think that that that that be set aside and it be permitted to open the bars. Bars are notoriously dangerous for COVID. So you say, hmm, you know, does anybody get it that we are in a pandemic, does anybody get it that our economy is in the in the tank. Does anybody get it that that the legislature doesn't have the money to provide basic services. You know, I mean, it's these various institutions and structures that they understand how dire our circumstances are. That's it's a rhetorical question time. Yeah, no, I certainly don't think they do. Matter of fact, when the, you know, when the governor was looking at, you know, what departments to cut 10% with what departments to cut 20%. It looks like, you know, the 10% is being saved for the, you know, the large and already bloated departments like education, health, human services. Okay, the 20%, they're going to foist upon like the department of taxation. And, you know, my, my comment to that is, look, you want them to bring in money, you got to give them people. If the money doesn't come in, how is that going to help your situation. That happens on the federal level to you know, they've been defunding exercises with the IRS for decades. Everybody wonders why, you know, they had trouble collecting. Yeah, and it's, it's because Department of Taxation is not a, you know, politically sexy place to, to spend money. Yeah, right. Last on the list. Yeah, we have to learn how to do priorities, you know, Yeah, it's right after defund the police, I guess, right. It's off the list. Exactly. Okay. But so, so all of this turmoil is happening with the, with the furlough situation. So, so then the legislative leaders are taking a look at it and they're, and they're saying and I'm not making this up. There is a, with Senate President Koichi on this, it came out just a few days ago. And, and the way G's, you know, there is the prospect of lengthy litigation over whether these furloughs can be implemented. I mean, certain certainly there was under governmental angles. Right. It's not in big trouble with furloughs, big political problem, and ultimately was in court wasn't it. Yeah, well, of course it was. But, but she did it. And so, so so the legislative leaders are looking at the prospect of litigation around this. And they're saying, well, geez, we're to come up with another plan. Revenue tax, you and me. Hang on to your wallets because there will be there, there will be tax proposals. There will be tax proposals. Well, it's, you know, it's like exhaustion of remedies, you'd think that they would take dramatic steps to cut the state budget. Step number one, but they can't get there because people don't recognize the exigencies of the situation. And so we wind up, you know, laying it on the taxpayer. Yeah. Somebody, some, some people think that the collective bargaining agreement is the law in the left, the Supreme Law. In the state, maybe it is who knows. Political. That's what it is really. It's a political situation. Who are the governor, who are the governor of the legislative leaders going to pay attention to. Okay. Is it the unions who are in their face all the time? Or is it the business community who is in their face, maybe sometimes. Well, maybe it's a question of degree, but I mean, I can't believe that the collective bargaining agreement is a law no matter what kind of emergency we have. There must be some kind of exception to that. Must be. For example, suppose it's not a $1.5 billion deficit. Suppose it's a $2.5 or 3.5 or $5 billion deficit. You know, there's got to be a point where we treat it as an emergency. Suppose it's. But give me my meal break first, give me my mat break first. Exactly. Exactly. I mean, I really, it's not a credit to the people who negotiated those agreements in the first place. They should have seen the possible possibility of emergencies. Suppose it was a big storm knocked off, you know, knocked out half of Honolulu suppose that does the collective bargaining agreement still apply. I suppose you can say there must be a force measure in there. Isn't this a force measure. As far as I'm concerned, this is a force measure, just the same as the storm. So I don't know, I don't know why people take the position that the agreement is binding no matter what happens, no matter what. That's not being flexible. It's not good public policy. Anyway, I, you know, the first thing the governor should be doing is cutting expenses and I, to his credit he tried. And let's see what happens. Meanwhile, as you say, there will be bills for a tax increase. Yeah, and tend to make things worse. Civil beat that a good an interview with the governor. And asked him point blank, you know, will there be tax increases. And you know, kind of hemmed and hard and said, Well, you know, there's a couple of things that I'm thinking about myself just to make things work out. Oh, so he's not not only not ruling it out. But he's bringing up the possibility of submitting something yourself. So let's talk about that. What kind of tax increase are we talking about? I mean, if it's a 10%, let's say a 10% tax increase on income tax, what does that look like? How, how much of a bath of cold water would that be? How would it affect the tax paying public? Well, here's what I think. I mean, I think that, you know, and I've talked about this on the show before. There are only two tax types that are big enough to move the needle in any appreciable. One is general excise. The second is individual income tax. So, you know, the first line that the lawmakers are probably going to say is, Oh, let's tax the rich. We're already taxing with 13%. Which is, I think, the second highest rate. I think only California is higher than we are. Well, when you say tax the rich and all that, these days, if you look at the income tax, it's a function of income. A lot of people aren't earning any income. So it's kind of a skewed result. Sure. Theoretically, if you have income, you're going to be taxed with an increase in the income tax. Oh, no, it's a question that you basically finesse by giving you good news and bad news. The good news is we're only going to tax the rich. Bad news that you're rich. Wait, wait, what about all the poor people who are not making anything at all, who are out of work? The taxing, an income tax increase is not going to have any effect on them. It's not going to be able to collect. They know that. You can't take blood from a stone. They know that. So they're not planning on getting any more from those guys anyway. Yeah, there's nothing there. So are you, are you, are you, are you tending to move the needle now to the gross exercise tax? That's Tom, you know, that's regressive. So it's a penalty on board people. What else can you do? So, but, you know, back in the income tax space, you got income, you can pay tax because most of the people who are there don't have income. They can't pay tax. So, so those of us who haven't, we're rich. Anybody with income is rich these days. That's right. Well, so. Okay, so I assume he puts in a bill for that, or someone else does puts in a bill for say I'm making this up at 10% income tax increase. What's the pushback and who's pushing. You know, people like our organization will push back. If there are some business groups that are, you know, immediately affected they may push back. But it's, it's unlikely, I think that you will run into resistance from, you know, the unions, or ERP or other of the other of the groups that traditionally are organized and show up at the Capitol. Well, you can't get there from here. What I mean is, so if we have this deficit and we need money in the state to provide essential services and all that, and we're not getting any money from the federal government or at least not now, then you have to do this. I mean, that's a pretty good defense on the attack against an increase. You have to do this. What's the choice? There's no choice. What would you like to do? You'd like to see the state collapse. You know, you need the state to have money. Yeah, I mean, I think, you know, if it were me, I'd want to turn the budget paradigm on its head in that you have the big departments, you know, education, health, human services. Probably that's where the waste is. I mean, you look at, you know, there have been several studies on, you know, what happens when you have a very large organization and, you know, the larger the organization is, the more chance you have to get stuff slipped in under the cracks, right? Because it's a bigger beast and you have no idea where all the tentacles are. You look back to the first point, we should be saving money like crazy. And the government didn't go far enough and there's a lot of fat in the state budget and it's time to pare it down. On the same idea, though, just having say a rate increase in the income tax is really not surgical. If you want to do surgery, that's probably better, you know, nuanced amendments, rather than some gross across the board kind of amendment to encourage or discourage activities you want to encourage or discourage, you know, implement policy. I think tax is always an implementation of policy, whether you intend it or not. And so it ought to be done carefully. But the wound is too big for surgery. You need something, you need something gross to come up with the kind of numbers we need. Okay. I mean, what about like nailing passive income? Not big enough. Interesting. So, again, you know, the big, I mean, if you really want to bring money in the door. You basically have to do some kind of rate increase for income or GE. I don't even know if the, you know, the tax, the rich mantra is going to work. I think what you would have to do is lower the thresholds at which, like the, you know, the higher 1112 and 13% rates kick in. That's, it's at 400, 500, 600,000. That would have to be, I think, drop much lower. So, you will be money that way. Yeah. You will be rich. It's all relative. Well, I mean, what about these big projects to, I mean, I'm thinking of rail, I know that's a city project, but, you know, as billions are going into that and billions will continue to go into that. There's a lot of momentum on moving that ahead and finding. We've got contracts in place. So, you know, we've, we've made some commitments and then there's, you know, a very limited opportunity to get out of that. And, you know, what about real property tax increases in the various counties. Those are the rich guys they, they own the owners would, you know, of course they would pass it on to the tenants and so forth. But, but what about that? The counties are in dire straits also. And there's talk of having property increases. Well, of course there are. Yeah, I mean they would, I think they would have to do that. Because, you know, up to, up to, up to now we've only been talking about the state we haven't been talking about the counties. The counties have basically one, one source of revenue and that's property tax. The second source of revenue, which was like a sharing of the transient accommodations tax that got ripped up in May. When, when the governor through one of, you know, one of the emergency proclamations think that they've been 16 so far said we're going to stop sharing revenue with the counties. Yeah, talk about, talk about the rule of law. What happened there. What excuse that statute. I, that was really kind of a maneuver wasn't it. I mean, he can't do that, can he. Well, he did. Okay. It doesn't sound like the rule of law to me. And, and, you know, none of the counties have come forward. And what they what they should have been doing is, you know, send some of the legal vehicles into the court saying, you know, give me a three judge panel. I want to know what the hell that cutting off county aid has to do with the pandemic. None. None, or at least that's the argument. Grab. Yeah, grab. It's a money grab. And of course this table come back to you. We need the money. Well, sort of the counties. Yeah. The counties are, you know, shouldering a lot of the burden of COVID. And they need money to operate provide essential services. You know, fire, police, roads, sewers. Let me let me go to another point that we should catch before we're done here today. Because there's been talk about allowing DHHL to do gambling on its properties. And of course it's, I don't want to say slippery slope but that's sort of a pathway to having gambling in general and it's something seductive. In a time of crisis about having gambling it means the state could raise money by, you know, various types of gambling activities. And people would like that would support it. For one reason or another. There are also lots of negative things about gambling and it, you know, over over the last oh well since statehood, every governor has opposed gambling. And it hasn't really got its foot in the door although Lord knows there have been lobbyists here from time to time trying really hard to get gambling through. Yeah, what about gambling now. One of the things that that, you know, we all have to be worried about when it comes to gambling is, you know, once the, once the genius out of the bottle, you really can't put it back. Okay, and not that you can really limit it to DHHL, like if DHHL has this law passed that says gambling is allowed on DHHL property. There's federal law applying to the Indian tribes that basically say they can come in here, set up shop, pretty much anywhere they want, and they can run casinos. Why? Because the state is allowing gambling period. The only defense against that is if the state doesn't allow gambling. And I think only two states qualify, which is us and Utah. Are you saying that Indian organizations from the mainland could find a way to come here if DHHL allows gambling? Yes. Wow. That is original slippery slope. That is big deal. Yeah, and you can't keep them out. Right. We have the US Constitution, which gives the right to travel. So, and they're allowed the same privileges and immunities of any of us who live in Hohoi and have lived in Hohoi since, you know, the beginning. All of a sudden we have a lot of gambling. All of a sudden we'll have a lot of gambling. Yeah, and I think that's one of the reasons why the political leaders are being so cautious about that, because they are, they have been advised of this consequence. Nevertheless, it may happen because a lot of gambling means a lot of revenue to the state, right? It's taxable, isn't it? Even from Indian tribes, right? Yes. So if the state wanted to raise Ukubucks fairly quickly, they would say, okay, boys and girls, it's time to do gambling. You can do it. You can do it on cruise ships to extent there are cruise ships. You can do it in casinos. And you can do it on DHHL or Indian lands before you know it. You know who would oppose that? The people who support their junkets to Las Vegas. The Las Vegas community wants those junkets to come to them and they would oppose it. But I think at the end of the day, if the state is in dire straits and arguably it is, the gambling is a, at least from a fiscal point of view, it's a solution, isn't it? Sure. I mean, you have to watch out that, you know, you're managing it properly, regulating it properly. And, you know, that's kind of the first, you know, buzzer point here because, you know, we've not done this before. Here in Hawaii, we have no experience whatsoever with gambling. So how are you going to make sure that it's being done correctly and that the United States is receiving a fair amount of it? Well, I don't think we have confidence in our regulators. That particular principle shows up, you know, whenever we address a new issue, a new risk. And I think it's a valid point. Our regulators are, they're just not up to it. It's a big question anyway as to whether they're up to dealing with gambling interests from out of state who would come here real pros and get into the legislature, learn how to sidle up to the legislators, sidle up to the regulators. And before you know it, there's nobody stopping them, nobody regulating them. That's a real possibility here in Hawaii. Of course it is. Well, do you think, do you think that in fact, Tom, to close here, do you think there will be a tax increase this year? All things considered, even the vaccine. What I can assure you is that tax increase proposals will be made. That will be considered. Whether or to what extent it'll pass. That is, I think, a more open question. I think that, you know, people who are invested in the outcome of it need to make their views known. They need to let the legislative people know what they're thinking. Because if you don't, you do know that the unions and the others supporting tax increases will be there and they will be making their presence felt. And if you don't do the same, you know, kind of deserve what you get. Yeah, I can't complain later. Okay, the next question is what prospect do you think gambling has in this 2021 session? I think a lot of leaders like Senator Kowich here are still flatly opposed to it. But who knows. We have a big revenue book. I think we should always have something humorous in our shows. Tom, that's why my final question is, it travels along the line of humor. My question is, so what do you think the prospects are that there'll be a tax reduction this year. I'm going to freeze over first. Okay, there is humor in that. Tom Yamachika, president of tax foundation away. Thank you so much for helping us understand what was likely or not likely to happen in this year's session on taxes.