 Welcome back to Think Tech. I'm Jay Fidel. This is Thursday and we're talking with Tom Yamachika about tax, talking tax with Tom. Tom is president of the Tax Foundation of Hawaii and we are in a strange legislative session, namely a session where it looks like we're going to have $1.4 billion deficit where everybody's scrambling to raise the money to cover the deficit because the Constitution doesn't allow a deficit at all. So this is very troubling and there are two ways that you can resolve that. One is you can cut expenses and the other way is you can raise taxes and we're going to talk about that today. Welcome to the show, Tom. Thanks for having me on the show, Jay. So okay, we still have this huge looming prospect of a deficit. I thought it was interesting that the governor is having a party at Washington Place for $63,000. I guess that is an exception to the whole problem, that parties come first. But beyond that, we're having problems in raising the money and I suppose we're having problems politically in cutting the expenses. So let's talk about raising the money first. I think the governor came up with a very modest tax increase bill on some kind of lesser tax and then other bills were introduced by other legislators for a sweeping array of tax increases. What's happening there? Yeah, I mean at the moment I've been through like two thirds of the bills and I've already flagged 300 of them for us to follow. That's quite a bit more than most use. So it's going to be rough for us I think in terms of tax foundation following the bills that are in the legislative hopper. There are a lot of the usual suspects, a number of bills come up time and time again. There are some that are very troubling. We've talked about some of those in prior years and we'll talk about some of those here. For example, we talked about a bill that was in prior sessions to impose a massive surcharge on what we call flip transactions. If you buy a house and sell it within a few months or a year, there's a bill to impose a conveyance tax surcharge of 25 percent of the proceeds, which is a huge bomb, at least compared to the Treasury. I mean that's not a tax. It's a confiscation. There are bills to raise the income tax massively whereby if you are in the highest bracket, you will not be taxed at 11 percent anymore. It will be 16 percent. But you don't have to worry because it's only for six years. Yeah and then when six years comes around then guess what happens? It gets a life of its own again. Taxes never go down, do they? It's very rare. A lot of times you see measures that start as temporary taxes and like I said take on the life of the road. My favorite example is the Transient Accommodations Tax. It was supposed to fund the convention center. It was five percent when it was enacted in 1986. It's still around. It's now 10 and a quarter percent. And the convention center has been built and was finished a long time ago. Yeah and look at how the barrel tax has been kicked around over the past few years. It's really a long way from its original intention. Oh the barrel tax is another one. There are proposals in this session and let me just kind of backtrack a little bit. The barrel tax is imposed on fossil fuel whether you, you know, when it's imported and it doesn't have to be gas. It doesn't have to be petroleum. It just has to be fossil fuel so it could be, it could be propane, it could be coal. It could be anything that you know comes out of the ground. It started off as a five cent barrel and then a few years later it was raised two thousand percent to a dollar and five. The current proposals would replace it with a what's called a carbon tax which basically is the same thing except it's now expressed in terms of dollars per metric ton of carbon dioxide that is emitted. And the proposals are you start off at 40 and you go to 80. And what that translates to is about 50 cents per gallon which when you're talking about a barrel is 21 dollars for a barrel instead of a dollar five. So another two thousand percent increase is what they have in store for that one. How many gallons in a barrel? 42. 42 so and and that's not the worst bill. There's there is a bill that would raise the barrel tax to one dollar a gallon. So 42 dollars a barrel corresponding to I think 145 dollars per metric ton. So and you know it all comes in gradually. It sneaks up on you over you know over a period of 10 years but when you're at 23 you get the full head of it. Yeah. Where does this stuff come from? Do you say 300 bills to raise taxes? That's very discomforting. It's like everybody in the world wants to raise taxes. But who is actually introducing these bills? It comes from various sources. Each has to be signed off on by a legislator. Some of them come from the administration. Some of them come from the counties. Some of them come from other groups that ask legislators to introduce these bills for them. So they come from everywhere. So some of them are like full in line with existing tax framework and others it sounds like they do violation through the framework and through the rates. Yeah and then and some of them are really couched in terms of you know not you know being a tax at all but but but being a social a social measure like for example the governor in his package has a sugar sweet beverage tax. It was it was spoken of in an article this morning. It would raise the estimate $60 million a year which is you know not much but the governor is thinking it's an important tool of social policy and and and so that bill is not being introduced by the Department of Tax but by the Department of Health. It's a healthy thing. We want to uh impose this tax and establish a healthy or on a special fund into which the proceeds of tax. I just wonder what goes through the mind of the person who introduces a bill like that. Whether it be at the Department of Health or otherwise you know we we have crises going on. We we have COVID which is very threatening especially now with the various we have the economy which has taken a big hit and is likely to fall much further before it stops falling and you know we have we have social problems about people who can't eat and we're talking about the tax on sugary drinks. It just seems to me out of proportion. Why can't we get together and focus? Can't we focus down there? Why do we have to have 300 bills on doesn't don't they talk to each other? Well I think they will after all the bills have been introduced and the committees start whittling these down. We're expecting 2,500 bills in in total to be introduced of which maybe 300 will pass. Yeah well let's talk about the you know it's always thus it's always in the thousands and you really wonder why they get introduced in the first place. I mean I think the mark of a better legislator is a fellow who says thank you Mr. Jones for your suggestion but I'm not going to introduce that. But they always do they always introduce everything that crosses their desk and then we get a lot of crap to deal with. It would be better if they said no when it was an inappropriate bill. But anyway looking at that's not how it works Jay. I know you have to satisfy your constituent. Yes I'll introduce the bill and then you know torpedo it later. There's something deceptive about that. Of course it is but we won't be the first legislature to do this and we won't be the last. It goes on everywhere. We got to straighten this government out I mean in the country. Anyway people are too interested in you know in satisfying their constituents and not in actually having and engaging with their constituents. But let's let's go to the tax increase bills. I mean what are the chances that we're going to have a whole spate of increases here that will make your heart sing. Well I think what's going to happen realistically speaking is we're going to go through the legislative session for a while and have you know initial hearings on lots of these to kind of weed out the really really really bad ones and then at some point somebody's going to sit down at the budget table and say okay are we going to institute furloughs are we going to do cost cutting and if the answer is no then we got a puka and we got a and we got to fill the puka and what do you fill the puka with. Well so bill number one has a price tag of x bill number two has a price tag of y so you keep adding items from the menu until the puka is filled. That's what's going to happen. So it's interactive then. In other words while you're looking at the tax bills you're looking at cutting costs. Yeah I mean that's that's I think how it should be. You know the question is going to be how much spine the legislators are going to have to to deal with some of this stuff. You remember the constitutional amendment that we were dealing with you know just a few years ago on giving the state power to over the property tax once again. Well that's that's here there are more than one bill to propose a constitutional amendment. One just says oh let's give the state additional power over the property tax not really specifying what it's going to be used for. Another is basically saying oh we need to support our educators and uplift our k-key so so we need another revenue source to do that so let's go bang our speculators through the property tax. You know it's a very new variation on the old theme and we've seen this before and the voters shot it down once but the question then becomes are the legislators going to put to the voters again. If that hasn't happened just yet though. That hasn't happened just yet. I mean there are bills to do that but it remains to be seen whether they'll advance. Yeah so when you go down and testify on these bills you know what's your philosophy about it. Do you try to see it and testify about it as a comprehensive you know saying you know we can't afford this tax unless you drop expenses or if you take this tax along with the other taxes it'll be you know over taxation inequitable and out negative. I mean do you look at them in silos or do you look at the comprehensive when you go and testify. Well when I testify I you know try to make sure that our policymakers know of you know different consequences that maybe fall in the state and its economy if you pass this stuff. You know I'm not there to balance the budget. I'm not there to you know know what is the best social policy for a state. What I am there to do is say okay you pass this here are the consequences so people at least have an idea of what they're voting on as opposed to just blindly following someone else. Is it normative where you say this is really this is not a good bill. There's the consequences here are so draconian you should not take this bill one inch further. You ever say that? No no I'm not I'm I don't take positions on any bill because of my tax exempt status. Again what I do is I say you know here are the consequences. Is this really what you want? So it's up to them to figure out what those cons whether those consequences are acceptable in the larger picture. In some cases I do say okay what you got here is unconstitutional and here's why or it's prohibited by federal law and here's why. But in theory the attorney general should be telling you the same thing. Okay well how about other people who testify do they come down and take positions? Of course they do. What is what is the general approach that they take in a year where there are 300 bills to increase taxes? Well it depends on on who you are and what your interest is. A lot of times the the government employee unions will come down and say yeah we need more revenue. What they may not say is you know to fund our raises. And they say yeah go ahead go ahead and raise taxes. We can you know we can do this. And what they're really saying is what they're really saying is we we need the state to have the revenue so they can pay our membership. Oh yeah. Isn't that transparent? Sometimes. Then of course you have some business groups not enough but some business groups come down and say you know this is an outrage this is you know our businesses will close down our investments will dry up and so on and so on. And you you know this is the year after the year in which the legislature was closed essentially. They're still closed. I mean last year they were closed to the point where they really weren't doing any legislation. This year they're committed to do legislation even though it would be virtual. And my question to you is do they understand we're in a crisis or is this just business as usual? I don't know. I haven't really had a chance to engage with a lot of them because you know like as the bill is closed. So I you know usually by this time I would have been down at the Capitol a few days and you know speaking to people you know whoever I can kind of catch in the hallway can't do that anymore. Well so what's your sense of it? I mean this good and good and valid reason to increase the taxes to avoid a shortfall. Are we going to have a big increase in a sweeping increase in taxes this year? Is that what's in want to hear for us? You know with a $1.4 billion shortfall I mean that's huge. And you know something huge has to be done about it. If you can't do your furloughs if you can't do your cost cutting and you got to find a big number out of the tax system that's not easy. So if you want to get say half a billion dollars you have to do it with a GET increase or you have to do something drastic to the net income tax. Yeah sugary drinks is not going to do it. Sugary drinks may raise you $60 million which is very short of $1.4 billion. Yeah Okay so I guess that's got to be clear and the money committees will be saying that and the I don't know I guess the governor's office will be saying that or maybe the tax office will be saying that. So you have you have a whole push on trying to comply with the constitution trying to cover that shortfall. Yeah and there are going to be other things happening like for example you know how the transient accommodations tax normally is siphoned off a bit for the counties. The governor has stopped that by emergency proclamation and there are some bills to continue that so so basically you know counties are on your own. Yeah I'm very troubled by that you know when I when I went to law school my one of my early professors said you know the problem with these bills is that they don't give you the level of intensity that the legislature you know has adopted in passing the bill. What they should have is at the bottom of the bill there should be a little thing it says we mean it and then the effective date very bottom and in cases where the legislature is even more concerned at the bottom of the bill they would say we we really really really mean it and what a reason I raise a silly story is that the the bill for the transient accommodations tax specifically allocated that tax but to the counties and and then the governor emergency proclamation said no I'm not going to follow that and then the legislature has to come in and say no no no we mean it we really really mean it we meant what we said when we adopted the bill in the first place it's like it's almost like an emergency override isn't it. Well that that I think brings up another you know separate question which some of these bills do address and that is you know how much emergency power do you give the governor the the current framework is you know you give the governor emergency powers for 60 days but the governor found a kind of a way to to work around it by by on the 59th day coming in and saying we still have an emergency so I'm going to exercise my powers for 60 days more right so now you have um 119 days instead of 60 and then it goes to 100 you know uh 178 then you know well you know this now that takes me to the question of just how much powers the governor have to reduce expenses you talk about furloughs is is that the stroke of a pen um does that require legislative action does it require legislative action to override the stroke of the pen I mean you get you really get a little confused as to who's in charge here in the time of an emergency which repeats itself and you know extends beyond anybody what anybody expected so if he really wanted to knock off a substantial part of that 1.5 billion by reducing by slicing and dicing um expenses at the state level including expenses that go to the union members including those okay can he do that with the stroke of a pen Tom uh that's that's in dispute uh he tried to do that uh and the and the HSTA came and said we'll see your butt because uh you've got a contract we have a contract and you can't just you don't let early alter it like that well what happened you backed off yeah of course he backed off well I didn't mean it so maybe maybe your furloughs will start in six months maybe they won't oh and and by the way a DOE uh you know we asked for them to to drop their budget by 10 percent we really meant to it in half so well I'm using this is a problem because you know when you do that what happens is that the public winds up paying the public has all these tax increases on the horizon here and it makes up the shortfall out of squeezing the public but if he has and it really makes the governor look like a wimp yeah uh you know he comes out makes big body and says I'm gonna do furloughs I'm gonna do cost cutting uh because the public's had it off or maybe I didn't mean that that's a you know another flaw in the system as far as I'm concerned that he would make what what might be a very good decision a decision appropriate to the times and the and the true emergency that we're in the middle of and then somebody can throw throw him out of that which is I guess what's happening so could he assuming that that he has the you know the force of will to do this sort of thing could he resolve the budget shortfall all by himself have you made a calculation could he raise 1.4 or 1.5 billion by the stroke of a pen and thus make it unnecessary for us to have tax increases theoretically yes and you would it would start by you know having the governor submit a balanced budget to the legislature but you know in past years he hasn't done that he submitted a budget to the legislature with with severe gaps and and he's and he's kind of you know left it to the legislators to you know to make the painful cuts which they don't appreciate I'm sure no too bad too bad it's not it's not working well and we'll we'll pay a price because we because the public cannot afford to pay tax increases that's that's another question I don't know if the tax foundation makes an analysis but if I if I raise you know so the real estate capital you know sales sales capital capital gain tax on real properties that 16 percent confiscatory as it may be can people afford that what effect does that have on the economy have you have you organized testimony on that point it seems like to me as you say each one of these increases has consequences it has an effect beyond just raising the money it could be undermining the economy and the the life and quality of life of the people in the state yeah and ultimately what happens is the people vote with their feet okay it's it's been well documented that Hawaii's been losing population uh two places like you know Nevada where there is no income tax no personal income tax uh Florida same um Texas sure and uh if you have a smaller tax base can you you know maintain the same level of spending no no no then then it's a spiral down isn't it yes it is and and the fewer people are left they they have to pick up more of the slack yeah so um what what would your advice to the governor be at this point knowing all of these balls are in the air what would you suggest to him what I would what I would suggest to him is you know uh show leadership stick to your guns do what you think is right for you know for the people and um uh follow through with what you what you say you're going to do you stand for something uh yeah you have to uh yeah you have to walk the walk that's said Tom what what's your advice to the legislature I mean for them to be consistent with that they would say to him in the cloakroom they would say we want you to stick to your guns and we are not going to give you um the tax increases so you might otherwise consider we're gonna we're gonna let you swing on this or would you say to them well why don't you make a determination of um tax increases that you know should happen were the governor to stick to his guns what would you suggest to a sitting legislator on this uh what I would say is you know look um know your constituents not just not just the ones who are you know beating on your office door and sing raise taxes uh you know look at the you know the the people who are actually in your district and trying to uh live and work and and and have a life uh you know how how heavy is the how is the hand of government going to be on them are you going to you know put uh you know more monkeys on their back uh just to just to just to get by uh or are you gonna you know help make the burden lighter and uh to deal with the consequences of that amongst the uh you know the special interests that come yeah you gotta look further into the future so um you know it's it's funny I take away from this conversation that on the one hand um the the reason that the governor is um less than um less than strong um on on reducing expenses is because the unions are coming to him and saying no you can't you can't reduce the expenses as far as our membership is concerned and further that the people who are asking for tax increases although it may be the administration itself those people include the very same unions who say we want you to raise taxes so there's enough money to continue paying our membership it's really an odd configuration when you put it all together um anyway last question Tom what's gonna happen well um we don't know right now but we'll we'll see how the process plays out I mean there's going to be hearings starting uh we had the tax foundation have you know gone through a number of these bills we have them on our website so you can you know you can see snippets of you know what people have proposed and then as the days and weeks go by you'll see some of these start to fall off bills will die and we'll see what remains standing at the end yeah and you can come here to think tech and check us out on talking tax with Tom every other Thursday and we can give you a snapshot of how those bills are doing right Tom absolutely thank you very much Tom appreciate you coming down and I am no less frightened than I was when we started perhaps I'm more frightened thank you for being here have a good time