 your co-host again today for the latest episode of Talking Tax. I understand this is our last show of the year. So it's the holiday season. You can see I've got my holiday season color shirt on. But in any case, my co-host and the real man of the hour or the half hour, as the case may be, for this show is Tom Yamachika, president of the Tax Foundation of Hawaii. And the man you really want to talk to when it comes to tax policy in Hawaii. And we also have a special guest today, Dan Mitchell, Daniel J. Mitchell, founder and president of the Center for Freedom and Prosperity in Washington, D.C., all the way from Washington. He joins us today. We're so very grateful. And he is also an expert on tax reform as well as international tax competition and the economic burden of government. We brought him out to Hawaii. I didn't mention it, but I'm with the Graduate Institute of Hawaii, Comps Director and Managing Editor. And we actually had Tom out here a couple of years ago to talk about spending caps and how to control spending in Hawaii. But today, we're actually talking about the flip side of spending or the other taxes. We're talking about taxes. You can't spend if you don't have money to spend. And the way they raise money around here is through taxes. So the springboard for our discussion is a column that Kali Iakina, president of the Graduate Institute, wrote this past week. It was about the easiest way to raise taxes. Hawaii's economy, as the title of this episode indicates, isn't doing so well. We had a $3.5 billion surplus estimated for this year at the beginning of at the end of last year. But then the legislature kind of blew through that like crazy. And now we have a sluggish economy for reasons that are somewhat out of our control. And we had the event on Maui, which was a tragedy and is going to be costing a lot of extra money here and there for the government of Hawaii and the counties to try to help them out over there. So the point of the column ultimately for Kali Iakina was, well, how are we going to raise taxes to pay for everything? Coincidentally, the government, the state is also going out to market right now, trying to borrow $750 million. And they put out a forecast saying, you know, putting on the rose-colored glasses, making it sound pretty good. But really, things aren't looking so good. And what we're afraid of or what a lot of people are afraid of is that we're going to have to raise, that a lot of the legislators are going to look for ways to increase tax revenues by raising taxes. Kali's argument essentially in the article was that we might do better lowering taxes because there's a lot of research shows that that's a good way to do it. So kind of a less, more philosophy. And so that's one reason we've invited Dan Mitchell here to join us today. He's an expert on that topic. But let's start with you, Tom. What did you think that, what was your thoughts about that thesis of Kali Iakina that less is more, that lowering the taxes might be the way to increase revenue in Hawaii? Does the Tax Foundation ever look at that idea? Well, I mean, it has a lot of support in the economic literature. But I'm just kind of afraid that, you know, with politics at the state capitol the way it is, it's going to be very tough for that argument to take root. We, at the legislature, we go and do our budgeting based on projections of the state economy that the state council on revenues puts out every so often, which is a board of economic types that is appointed by the governor, confirmed by the Senate, and it remains kind of intact from session to session. So there's a lot of continuity there. The forecasts have kind of gone south after Lahaina burned down, which is, of course, not surprising at all. And it's kind of going to stay going to stay that way. And like in order to fund some of the repairs in Lahaina, the governor this year had to divert, you know, many millions of dollars from other programs. And when once the legislative session starts, you know, the constituencies behind said other programs are going to come and say, well, look, we need to be made whole, etc., etc. And there's going to be tremendous pressure to, you know, to get that revenue back. And certainly if you cut taxes and you get some long-term economic effect, I mean, that'll be a, you know, a good thing and the budget and the budget may balance eventually, but in the short term, that's going to be a tough sell. In the short term, it is an election, and that would make it a bit harder, I would imagine, also to raise taxes. But in the short term, we're already the highest tax burden in the country. Would that be, are you saying perhaps that instead of raising taxes, they would at least control their spending? Well, that would be a, that would be a viable alternative, yes. I mean, I think we ought to be, you know, putting pressure on our legislators to do that. I mean, we can't, as a government, be all things to all people. So we have to concentrate on what we can do and what we can't do, you know, we leave to others. Dan, what are your thoughts on this subject, the balance between spending and taxes? And I should add, too, that the governor did cut $100 billion from the 2023 legislature's spending package, and it was still over the legal spending cap, as was the governor's own budget, but he actually cut a billion bucks away from the, from the budget, and we still are in this mess. And also that Kalii, Akina in his column, had targeted three taxes in particular to try to cut. One would be the state personal income tax. That's another one was the corporate income tax. And then the estate tax, he said there's others, but he thought those would be a good start. So what's your idea about this less is more cutting spending and those three taxes? I'm all in favor of having the lowest possible marginal tax rates on productive behavior have a low personal income tax, a low corporate tax. I mean, heck, I actually like the states with zero income tax the most. Having said that, I'm not sure that you can make an argument all the time or even most of the time that lowering tax rates raises revenue. I'm a big believer in the Laffer Curve, but the Laffer Curve simply means that when you lower tax rates, you get more taxable income. It then becomes an empirical question, well, you lose revenue because of the lower rate, but you gain revenue because of the increase in taxable income. And which of those two things is bigger than the other? In some cases, like when Reagan cut tax rates significantly in the 1980s, we got a lot more revenue from rich taxpayers would lowering the marginal tax rate and Hawaii does have a very high personal income tax. If you lower that by a point or two with that raise revenue, at least in the short run, that would be probably a difficult sell. But I don't view that as a problem because good tax policy is one half of the equation. The other half of the equation is have some spending restraint. Now, it's kind of ironic talking to you guys out in Hawaii about this because normally when I'm speaking to an audience, I say what you need is a spending cap. Well, you guys already have one. The problem is your politicians just wave it. They say, oh, it doesn't count for this year. You do that every year, year after year. So maybe you need a spending cap, but instead of what you have a 60% or two-thirds requirement to wave it, you maybe need 105% of the legislature to wave it. That way it would actually be a real discipline. But yes, control spending, and I guess it's good that the governor cut a billion dollars out of an ever-growing baseline of government, but obviously more needs to be done to get spending under control because Hawaii also, by the way, not only do you have a high spending burden and a high tax burden, but your government pension debt is among the highest in the country. So there are a lot of fiscal issues to work on. Well, Tom, as you know, one of the other suggestions that the governor made last year, well, early this year, last legislative session, was to peg the personal income tax to inflation rate. I think we have 11 brackets. We have the second most brackets of personal income tax in the country. I think California is 13 and I might be wrong about those figures, but we're way up. I think we have 12. Yeah, 12. Thank you. You would know. And the problem is many of the brackets are almost meaningless now because somebody who earns at the federal poverty line is already in the fourth bracket. Wow. So you can kind of expect, right, because the brackets were enacted, I think, in the 1960s, which makes them a little bit dated, but that kind of gets into one of your other issues and that is, you know, what tax types we should be looking at. And to kind of refocus a little bit on the personal income tax, I think, is good because when you look at how much revenue is produced by the corporate income tax, it's not very much. And by the estate and gift tax, not very much. Well, I mean, we don't have a gift tax. So the estate and generation skipping tax, it's not very much. Those are two drops in the bucket. The two 800 pound gorillas in the room for our tax system are the personal income tax, not the corporate income tax, the personal income tax, because so many more people are affected and the general excise tax, which is our equivalent of the sales tax. Now, the likelihood that people are going to touch the general excise taxes is very, very small. It's just too dangerous because even a little bit of adjustment to the GE tax is many, many hundreds of millions of dollars. So people tend to leave that alone if lawmakers are considering, like, you know, 50 basis point or 100 basis point increase in the general excise tax. People are going to notice and people are going to start calling legislative offices and they will be upset, which of course is not the greatest thing to have happen in an election year, like you mentioned. So let's talk about the personal income tax, which I think is the lever out of the three that were mentioned in the article, the one that has the most punch. And I think, yeah, we really shouldn't be taxing people who are at the federal poverty line. You know, having them in the fourth taxable bracket from the bottom is absolutely insane as a policy matter. So my recommendation would be at least, you know, to eliminate the bottom brackets. And, and yes, last year, the governor had proposed indexing the brackets for inflation. A lot of, you know, most states do that, we don't. We haven't done that for many, many years. And all kinds of different excuses were given. I think the most recent one being, well, you know, our computer system can't take it. But that was, you know, but that was before 2000. Now the computer system is different. And it can do a lot more things at lower cost. And it doesn't necessarily mean reprogramming, reprogramming the entire system with a million dollar price tag. So it's a good idea, but it's not feasible? It's a good idea. But I think there's going to be a lot of effort that's needed to make sure that legislators understand what's going on and buy into it. Last year, when the governor tried to do that, the Speaker of the House came out and said, well, this is too complicated. And I'm thinking to myself, what's too complicated? You look at your income in a table to get your tax anyway, if the numbers in the table change a little bit, how much more complicated is that? You're doing the same amount of effort. Dan, are you aware of any other states or countries even that might do this, index their income tax to the rate of inflation? Certainly, the United States, we went to indexing back during the Reagan years. And that eliminated what's called bracket creep, where over time you just wind up being in a higher tax bracket simply because the overall price level increases. But there's also something called real bracket creep. And that's when your income goes up and you just wind up being in higher tax brackets. And then you're facing higher marginal tax rates, so your incentive to further climb the ladder is a little bit diminished. I don't know what the status is on other countries. I suspect most of them do index, especially since we had that horrible bout of inflation in the 60s and 70s. I suspect there was pressure in all countries to make those reforms. And then, of course, we've almost globally, we had another bout of inflation just in the last couple of years. But even though we had that bout of inflation, I do follow international tax developments. And I did not see much reporting at all about bracket creep. And so I suspect that most countries do index, but I'm afraid I just don't have that kind of information on my fingertips. Oh, well, about the GET, what's your thoughts about that here in Hawaii? It's not really a sales tax. It's a gross income. It's a grocery seat tax. You know how it works, right? Yeah, it is a remarkable tax compared to the normal sales taxes in most states in America. Now, of course, the normal sales tax in a state might have different items exempted like groceries or clothing or things like that. So it's not like they're simple and pure revenue raising mechanisms. But your general excise tax, if I understand correctly, you have a lot of what's called cascading in that, whereas a good moves through the production process, it might get taxed over and over again. And so it's not the most efficient tax, but it certainly, as was just mentioned, it's a major revenue source for the state. And politicians would be very, very reluctant to do anything that curtailed their ability to generate that revenue because they want the money to spend so they can buy their way to re-election. Well, that plus when people talk about the general excise tax, they look at the nominal rate, which is 4%. And they go, oh my God, amongst all of the states in the country, that's pretty darn low. So why don't we get up there, jack it up 100 basis points, 200 basis points, get it on par with some of the other sales tax states. And that is, I think, a real fallacy because most sales tax states, the only tax tangible personal property sales, and maybe a service or two, we tax everything. Tangible personal property sales, sales of services, intangibles, interest, rent, lots of things that most sales taxes just leave alone. Our tax is broader based than even the New Mexico gross receipts tax. Tom, can I ask you, is my memory correct that there's a problem with cascading with the GT? Well, of course there is. All gross receipts taxes have a permitting problem. Ours tries to compensate for that by assigning a lower rate to B2B transactions. So instead of applying like the full 4.5% with county surcharge, we apply only 0.5%. But that's still cascading, that's still permitting. And yet we do have a lot of exemptions for the GT. I wonder, a lot of people would like more. Dr. Governor was proposing more initially last year for the 2023 session for food and groceries. What's your thought, Tom, about exemptions for the GT? I think just like last year with the current economic conditions, selling a GT exemption, even a small one is going to be very tough. You try to sell a big one, it's going to be DOA. Well, I was surprised because the general population, I would think, if you did polls, would say, yeah, we want a GT exemption for food and medicines and whatever. Who wouldn't? Right. So why wouldn't the politicians respond to that? Are they so concerned? Isn't this where they should be cutting their spending? And what's the problem here? Why do we have to pay such high taxes on necessities so-called? Well, I think the problem happens whenever you try to cut something. There's a constituency behind it and said constituency goes to the politicians and says, you can't do this. Like for example, if you want to try to cut an environmental program, hordes of people go into the hearing and say, you can't do this, you know, got to save the planet and all that kind of stuff. You cut another program that subsidizes agriculture. All the farmers show up and say, you can't do this. We're going to decimate our industry and so on and so on. There's always a constituency and there's always people who show up and say, you can't do this. Well, those are people that would not want their exemptions taken away, right? That's right. Right, but I'm suggesting maybe we should have more GT exemptions. I'm just trying to look at how we could lower increased economic activity going back to the idea of the article. There's never a good time to raise taxes if you ask politicians and if the times are good, they'll say, no, we can't do that because we have to look ahead for the future or we have all these new ideas about where we want to spend our money. Well, I think in our state it's been kind of more of the latter. Yeah, we have all these great ideas to spend our money like this centralized training hub for first responders in the middle part of our state. That's one of the projects that got cut in that $1 billion slice that the governor gave the budget last year and there was a very powerful constituency behind that one. Well, I'll go talk to you here for a minute. I'm constantly amazed at how many people in Hawaii, well actually everywhere, but there actually is a prominent think tank here that all they ever talk about is raising taxes, either that or spending programs, which obviously means you got to pay for it. And that idea of having progressive income taxes special funds, taxes, tax credits, on and on as a way to manipulate policy. They really believe that using the tax system is the best way to achieve our goals here. But if you do that, how do you actually lower the cost of living and increase opportunity and generate a friendly business climate? We have one of the worst business climates in the state. I'll throw that out to you, Dan. Hawaii's problem is that people vote with their feet. Now, obviously it's easier to vote with your feet and move from California to Texas or to move from New York to Florida. But even still, people move in and out of Hawaii. And when you have one of the highest income tax rates in the country, not to mention the death tax, which plays in the minds of rich senior citizens. And it's not just fiscal policy, by the way. If you look at the Economic Freedom of North America published by the Fraser Institute, Hawaii's in the bottom five for overall economic policy. You look at Freedom in the 50 States just published by the Cato Institute, Hawaii's in the bottom five of all states looking at overall economic policy. And these kinds of things add up. It doesn't take that many successful people moving out of your state. Maybe it's only a couple of hundred a year. But when it happens year after year, it just creates this wedge effect of lost income for the state and lost tax revenue for the politicians, which sort of brings us back to what we were talking about earlier, Mark. Yeah, as a matter of fact, our sentences have told us that we lose about 11,000 people a year. And it's been that way for the past few years. And that adds up, and it means lost revenue. So it's more evidence that there is a lack or curve that politicians should be paying attention to. Yeah, it always amazes me that this could go on for so long. It's kind of like the housing crisis, not the switch gears here, but what does it take to shake up the legislation or the capital building, the square building, I think you call it, Tom. Well, we're coming close to the ending here, but about spending cuts. Dan, when we brought you out here to Hawaii a few years ago, you talked about a spending cap with teeth. And you talked about Colorado being a good example. We have a spending cap that has no teeth. What do you think about that now? And Tom, jump in if you got any thoughts about that. Is there a way we can really bring the state legislative spending under control so that taxes isn't always the big issue? What makes the Colorado spending cap called Tabor taxpayer Bill of Rights? What makes the Colorado spending cap effective is that it limits tax revenue to population plus inflation. Anything above that automatically gets rebated to taxpayers. So every year taxpayers are now expecting, I want this money back and it makes it very hard for politicians to say, no, no, we're going to keep it. We're going to spend it on some of our buddies and our friends and our campaign contributors. So I think maybe if Hawaii's spending cap also was modified to include a revenue cap with excess revenue going back to taxpayers, that might create a different political dynamic. Yeah, certainly it would require a constitutional change. And even, you know, when Colorado did change its constitution to adopt Tabor, there were lawsuits challenging it as an infringement on the legislature's power. But that, fortunately, the Supreme Court at the time said, no, no, it doesn't. Taxpayers are kings. So that's a word being the taxpayer Bill of Rights. Well, gentlemen, happy holidays to both of you and to all of our listeners and viewers out there. I want to give a special thanks for Dan to join it from for joining us all the way from Washington DC through the wonders of technology here. Have a great day on the program, Mark. Thank you, Dan. Good to see you. And go go Bulldogs, right? I'm an FSU grad and he's a Georgia tech. He's a no Georgia grad. And and they're both facing off in the orange bowl in a few couple of weeks. And Tom, what was your what was your alma mater? Oh, I'm a Yale Bulldog. Oh, wow, that's cool. Yeah, so so I saw. Um, I saw Daniel's Connecticut license plate with, you know, go dogs on it, and I went, Oh, must must be a bulldogs. It's blue also, right? Which is that so are you by default? Would you be for the for the Georgia in the orange bowl? I'm nonpartisan in the orange bowl. Well, like a politician. Thank you both again. And thank you viewers again for being here today. Hope you learned something and enjoyed the conversation. And we'll see you. This is our last show of the year. We'll see you next year. All the best. Aloha.