 Potholes, tax potholes ahead for drivers here on Talking Tax with Tom Yamachika. Welcome to the show, Tom. Thanks for having me on the show, Jay. What's going on here? I'm a little worried that, you know, we have all this tax about driving. Well, we're looking at a war that's going to be waged in the next legislature, maybe. And the war is going to be between a road usage charge and a carbon tax, and we're going to talk about both of those. Well, theoretically, A, they both get paid by the drivers, I suppose, and B, they're asking this more as a question than a statement. And B, they're pointed in the same direction at trying to improve the environment. Or is that not so? That's not so. Okay, help me, help me. Okay, so let's kind of go through what the war is going to be about. Right now, as you may recall, we have a fuel tax that goes into the state's coffers for the highway fund whenever we go to the gas station and fill up at the pump. I think it's like 16 cents a gallon is what the state charges. Now, that's separate from the GET, which is another charge on the fuel, and the county fuel tax, which is separate. And that goes, I think, between 18 and 23 cents goes to the counties for whatever they are using to improve county roads. They go into the various county highway funds. And there's federal tax too, right? Yes. There's some federal taxes as well that goes into generalist support, and they usually match, to some degree, what we spend on our highways, so the feds then kick in some. And we've seen that in the dialogues for our Honolulu Rail project. We've asked the feds to come in with some matching monies, and they are kind of exercising their oversight about the project and saying, well, we're not going to give you the money unless you come up with a reasonable recovery plan, and stuff like that. What does recovery mean? Recovery in the sense of the financial plan that the city of Honolulu has submitted so far ain't cutting it. So come up with something that looks more realistic. You pay the expenses. Repay the cover. Recovery for what? Well, not only does a transportation system take money to build, but you also have to maintain it. So you have to take a look at what's going to come in, what's going to go out. Yes, it's going to be subsidized, but the question is to what degree? But that, but we digress. Yes, we digress. So the question is really the larger question is this war. So who's on what side of the war and why? Okay, so our Department of Transportation is, and has for the past several years been studying implementation of a road usage charge, primarily based on what New Zealand has now. That charge would be assessed to a driver based on how many miles they've driven on our highways and byways, and it's at least in theory designed to replace the fuel tax that is now the primary contributor to the state's highway fund. Now, the Department of Transportation is concerned because we have, you know, many, many more alternative fuel vehicles on the highway now. We have your electric vehicles, we have hydrogen vehicles, we have hybrids, we have other things, but they are not paying as much into the fuel tax as a gasoline car would, obviously. So, so they're concerned that their funding source is drying up, and they want to, you know, try to find something that at least in their mind is more fair. So, you know, you could make the argument that for say electric vehicles, not to charge them a gasoline fuel tax is actually an incentive to have more people buy electric vehicles. Has that been considered? Of course it's been considered, but the Department of Transportation is saying we're running out of money, and we have to figure out some way to keep our highway fund sustainable. Can I just interrupt with a thread that I'm probably going to mention more than once in this show, but why do we have to have these little pockets of tax? If the government, if the Department of Transportation needs money, let's give them money out of a carefully, you know, organized budget out of the general fund. Why do we have these little pockets? You know, this is like special funds. Why do we have to match the needs of the Department of Transportation with a specific tax on a specific thing? That just seems to me really archaic and inefficient. It also complies with federal requirements. Federal requirements require them to have a highway tax? To have a highway fund, yes. I mean, was they going to feed it with a tax? Yeah, but the highway fund can come out of the general fund, right? In theory, yes. I don't understand why we have all this baggage about these little funds here, need little funds there, and raising it or not raising it. It just seems like a lot of unnecessary... Because the government can make more money that way. Well, there you got it. That's it. It's a thread for me in all of this. I probably will mention it to you again. I'm sure you will. So, but the Department of Transportation has been busy selling Hawaii taxpayers on its plan. And, you know, they've been coming with publicity campaigns, supporting this Hoy-Rudy should share saying it's fairer. It is based on everybody's usage of the highways and byways and pays for the damage that these cars and other vehicles cause to our roads and bridges. It doesn't matter, they say, what is causing or what is powering the vehicle. The fact is the vehicle is on the road. The fact that the vehicle is on the road causes wear and damage and that needs to be paid for in terms of annual maintenance. Well, you know, if you have attacks based on how many miles I travel, rather than how much fuel I put in the car, then there has to be a huge logistical technical issue. How do you determine how many miles I travel? That's actually very easy because every year you go in and do a vehicle safety inspection and they take down your mileage at that time. So that's one thing we have in our state, right? The annual vehicle safety inspection. So you go in and you get a little sticker to put on your bumper and at that time, your cheerful mechanic takes down your mileage and that will then go to the Department of Transportation and they will compute your bill. At least under one scenario. So they don't have to install new equipment, they don't have to do sensors or anything on the highways, they just take it off the inspection. That's one way. Obviously, there are some people who would rather have more intrusive means like an app collecting data or a device in the car, which is kind of more like Big Brother, but those are other options. A huge expense. Can you imagine putting a device in every car in the highway? Wow. Yeah. And the Department said in a recent report that they've surveyed the public on this road usage charge and they found that Hoy drivers have a high level of understanding and high initial acceptance of road usage charges with more support than opposition, noting, of course, that they're presupposing that the RUC will replace and not be in addition to the current gas tax. Okay. It's being sold as a revenue neutral alternative. The way you put it, it sounded like that was not a guarantee at all that we might have both in the legislature, anything can happen. You know that and I know that. And again, this is one of two warring proposals that the legislature will be considering in the coming session. The second one is the carbon tax. Carbon tax collects money to pay for the societal costs of pollution, global warming and other environmental damage wrought by fossil fuel burning. Okay. Now, this one is not going to be revenue neutral. Why? Because given that many of the environmental damages in our state have already occurred, the goal of the tax is not only to compensate for current social costs, but to fix the past damage. So and it is also there as a social policy measure to penalize the use of fossil fuels. So rather than getting rid of the existing tax on gasoline, they want to jack it up big time. And by big time, let me give you some numbers. This past session, there was a bill called House Bill 2278. It proposed to change the barrel tax on gasoline. That's what it would replace. Right now, the barrel tax, and you've heard me say this before it started off as a nickel, it's now a dollar five per barrel of gasoline and barrel being 42 gallons of gas. Okay. Okay. House Bill 2278 would have would raise the dollar five to five 27 initially. So it's five x initially. And it's going to phase in. And when fully phased in would be 33 dollars and 16 cents per barrel. That translates to 12 and a half cents a gallon initially, replacing the two and a half cents that the barrel tax accounts for today. How many how many gallons in a barrel? 42. And 79 cents a gallon when fully phased in. That's that's that's big money. And is there any talk about whether that would be on top of the other taxes that you're talking about? Not yet. So far, both proposals in the past legislative session went through a separate bills. They both died. So nobody thought of leering on top of each other. But it's possible that in a future legislative session, maybe the one coming up, that both would pass. Then what do you do? So how exactly does the carbon tax work? I mean, I've heard the case made that, you know, this oil in everything, you know, a good example or a strange example would be furniture, you know, import furniture, this oil all over the furniture, the manufacturer of the furniture, the finish on the furniture and so forth. How do you feel about that? Well, the carbon tax as proposed wouldn't have. It's only imposed on the importation into the state of fossil fuels. So there's a there's a schedule of substances and a tax rate for each basically corresponding to the amount of carbon dioxide that it would release into the atmosphere upon burning. You know, one of the questions that come to mind, you're always so provocative and questions come to mind, is that, okay, so now you raise it to, you know, some extraordinary amount of money for a barrel of oil. Exactly what are you going to do with that money? Because what's happened with the barrel tax so far is the barrel tax has been, you know, everybody's source of funds. I mean, everybody picks at it politically every year trying to get a bigger piece of it. It's not clear that the way it's distributed around to government agencies and missions is rational or useful or what was intended. Now, you know, we have this pragmatic possibility of a lot more money coming out of the sale of a barrel of oil. But where does it go? Who decides? And is that locked? Is that locked in amber or is it going to change every year the way the barrel tax has changed the existing barrel tax? Well, it like any other tax would be in law, legislatures meet every year and legislatures can and do change laws. Well, I mean, you know, so you say it's a carbon tax, that's nice. And it's supposed to, you know, disincentivize the importation of carbon. Okay, so let me answer then your main question and that is what would be done with the money. Now, our tax review commission, which has been one of the entities proposing that idea, has said, well, you know, we want to enact this as a disincentivization of fossil fuel use, but we really don't want this to be a revenue raiser so much. So our recommendation is that 80% be rebated to the taxpayers. How that would work, they didn't specify. Why do that? Why tax and then rebate? That's what the lawmakers are going to be asking. They're going to say, why don't we just keep the money? What's the point? You know what happens though? I mean, let me throw this at you. Okay, tax and rebate, real nice. What a wonderful thing. Everybody loves to get a rebate after they paid the tax. But then in year number two or three, the rebate goes away. Isn't that what would happen? There's certainly a danger of that happening now. I mean, you take a look at what's happened in our state constitution in 78 or so. We passed a constitutional amendment that said, look, if our general fund balance goes over a certain amount for two years in a row, then we need to rebate the money to taxpayers. Okay. And law shall be passed to do that. So, yeah, in the first year, I think they re-added like maybe a hundred bucks. Then they changed it to a dollar. And then actually it was a dollar. And the year after that was a dollar. And the year after that was a dollar. You see a pattern emerging here? Yes. It doesn't take too long. Well, let me go back to my theme. You know, we're behind in paying our bills. Our roads are not up to snuff. We haven't been taking care of the social safety net. We haven't been taking care of the environment. I could go on. The state is falling into a, what do you want to call it, a fiscal backwater. And yet, you know, here we are working on one thing at a time without really, you know, developing a policy and a plan. And it just strikes me strange. You know, if you need the money raised to taxes and then have some smart group decide where it goes, really smart group, instead of throwing it away or worse rebating it. It just seems to me this is all, may I say, chaotic? I think you can. Yeah. I won't stop you from using it on the show. We're not paying our bills. I understand why we're not paying our bills. If we need the money to pay our bills, let's raise the money. Of course, one way to raise the money, and I don't want to go too far off base here, but one way to raise the money is incentivize the improvement and development and expansion of our economy. But I don't think we're doing a whole lot on that. If we did that, we'd have a bigger tax base, right? And we would, you know, collect tax without increasing rates or doing fancy, fancy funds. But we don't do that. The fact of the matter is we have a tax environment right now that is conducive to losing people. Exactly. People are buying one way tickets to the mainland and they're getting the heck out. Okay. We've seen this proved time and time again. The most recent proof is from our own Department of Education, but that's another story. They have found that they're losing students and they're losing students because their family is moving to the mainland, more than half of the students who are going away are going away because their families are moving to the mainland. Wow. Well, okay. That's the thread, I suppose. Let's go back to the war. So, okay, the Department of Transportation wants to have this mileage usage tax, which sounds very clever, I suppose, to fill their fund and I guess satisfy the Fed that they have an adequate amount of money in there for road maintenance and the like. But who's on the other side of that? Who would oppose that? Well, you know, the carbon tax folks, they are, like I said, premised on not being revenue neutral. They want to penalize- Are they environmentalists? Is that what it is? Yeah. Environmentalists and others, they want to penalize fossil fuel use. So, they will not be satisfied with the carbon tax that's revenue neutral. Okay. Now, somebody apparently, I mean, I don't know for sure, but somebody is going to ask the question, well, can't we do both? I'm sorry you said that. I'm sorry you said that. Which is why I'm very, very nervous that, you know, these competing plans, the road usage charge and the carbon tax, are going to be put together and morphed into something entirely more gruesome during this upcoming legislative session. Carbon tax for a moment, carbon tax. What is the profile, if you will, of carbon tax on the mainland and elsewhere outside the country? You know, we've been hearing about it for a long, long time, but it hasn't really come to our shores except, you know, in aspirational ways. What about other states? Yeah, go ahead. I don't think any other state has adopted one yet. I think a couple of cities have. I think a city in Colorado, maybe Washington state, but nothing on a statewide basis yet. Has any city been successful? I mean, has it run into snags on the city level? I'm not sure what you would call snags, but, you know, even the fact that that no other states adopted it yet has not been a reason to dissuade anybody who's pushing forth on the carbon tax. They're saying, yeah, we got to be a nation, the nation's leader in this. We have to show, you know, we have to show those other, you know, lowly states how environmental protection is truly done. Yeah, is it, is this reflect as the carbon tax reflect the way environmental protection should truly be done? I go back to my theme, if you need to do something for the environment, you know, make a policy, increase the taxes across the board and implement the policy. Why does it have to be, you know, linked this way? Well, we, we got, we got two out of three. We made the policy. We're gonna, we're gonna be green by 2045. We're proposing the tax and then implementation. Well, that's, that's a whole another story. Well, you know, I mean, there's so many ways to skin the cat that seem easier. For example, we had a speaker vice president of General Motors a few days ago, and he said General Motors is not going to be selling fossil fuel cars after, I forget what year, but it's coming soon. And if you, and isn't it California is saying after a certain year, you can't, you can't buy fossil fuel cars, you're gonna use them, but you can't buy them. And so why don't we just do that? That seems so elegantly simple. Well, then our highway funder went out because our highway fund is premised on fuel tax. And we, and the highway fund won't have money to, you fix the roads and bridges. Why is the Fed requiring this anyway? I guess what it's saying, I'm guessing here, what it's saying is, if we don't have a requirement that the highway fund be funded, then there'll be communities and states around the country that won't put money into highway maintenance and our roads will deteriorate. Footnotes, they're already deteriorating, but hey, that's another issue. And what did Joe Biden do in the infrastructure bill to improve highway maintenance around the country? We have multiple ways to do it. Is this the only way? And is this good federal policy? Well, you can debate federal policy. I mean, the Feds, of course, can decide what to do about their own roads, like H1 and so forth. But most of the roads are owned by the state and counties. That's so odd, really. I mean, it's so odd to have a federal highway in the state that doesn't connect with any other state. But aside from that, it's so odd to have city roads and state roads and federal roads all subject to different policies, funding, and maintenance schemes. That's true all across the country. I'm not saying it's good anywhere else either. We need better roads. We need electric cars, period. Somebody should get out and do that. Did Joe Biden's infrastructure bill a few weeks ago, did that deal with this? And what was the mechanism? I'm not sure. Yeah. So, okay, so the environmentalists on their own motion want this carbon tax, and we would be really pushing the edge on it because it hasn't been done. What are the risks of adopting carbon tax, such as the one proposed? Well, there are a couple of places that the carbon tax would hit very, very heavily. One is on electricity generation. We now burn bunker fuel to make electricity. Second is the commercial use of transportation. We truck goods and services from place to place. That's how we get them into our stores. And that's how we can go buy the things that we need, the food that we eat, the equipment and utilities that we've got. They all come to us by way of road transportation. So if you jack up the cost of the road transportation in whatever form, it's going to bubble up into the cost, into the price of goods and services, and i.e. our cost of living. And our cost of living is sky high already. Yeah, those charges, those additional taxes will be passed on to customers. You can bet on that. There's no ambiguity there. They will be passed on. And everybody, and I have to say that in that sense it becomes regressive, sort of like the gross exercise that we've talked about. Everybody, including people who are less able to afford the additional tax, will have to pay for it. You go buy something in the store, it's going to be more expensive because the shipper, the liverer has to pay the carbon tax. Isn't it easier just to increase the income tax, for example? Okay, let's talk about the disincentive aspect. So if I tax the use of carbon, is that going to have a significant effect on the use of carbon? Well, there are studies that say it does. We haven't really tried it here. We have no high-cast prices, but people still use cars. So I don't think the jury's out on that. That's true. I'm not going to change my driving habits. Maybe you're an electric car guy, but I'm not going to change my fossil fuel driving habits. I'm just going to pay the tax. Yeah, I have a hybrid and it helps a little bit, but I still shed a tear every time I go to the filling station. 50 bucks, oh my God. And this is peanuts compared to trucking company, for example. So how does this all settle down? May I say, there's too many things on the table. And again, and you and I have discussed this many times. Again, you know, there's a kind of a vacuum of leadership where somebody should come up and say, look, this is what we should do. This is my gubernatorial initiative. This is what I'm asking the legislature to pass. Here's my program. I don't hear the sound of that. But if there was a sound, what would it be like to rationalize this, to simplify it, to get the job done somehow, without punishing us for what happened in the past? I don't see that as a legitimate purpose for taxation. That's just me. I see, you know, trying to incentivize and disincentivize public behavior in the future, but not in the past. I'm not punitive. So what's a good policy here, Tom? Well, there are different schools of thought on that. As you know, there's the free market school of thought to the effect that you just lay off the heavy hand of government and the market will fix itself through the principles of economics. The roads won't fix themselves. Yeah, the roads won't fix themselves, though. So that has limited applicability here because the government is definitely fixing the roads. Certainly, there are economic aspects that if the taxes are less, then supposedly the road repairs would cost less because the people repairing them are not pinched as hard as they were before. So there are two ways the effects of greater or lesser tax can trickle up or trickle down. I'll make a prediction. I'll say the carbon tax is not going to get passed right now. The forces at play in terms of lobbying and all that are or the environmental lobby is just not as strong to do that. And without having precedent on the mainland, without having a clear pass, a clear statement of benefit, it'd be hard to get that thing passed. On the other hand, the Department of Transportation presumably would have the support of other agencies and the governor. They need the money for the roads. People want the roads. There's a lot of reasons to fix the roads. It seems fair to charge everyone for the use of the roads whenever fuel, although my argument about how a use of the roads tax would incentivize electric vehicles, I think there's other ways to incentivize them like a tax credit and if the feds are going to do a tax credit and they are doing a tax credit, that'll be enough kind of thing. So therefore, I think the likelihood is that the Department of Transportation will get what it wants. Well, I think if you handicapped the war right now, that's probably how it would, I mean, I kind of agree with the chances, but you never know. I mean, you never know what happens in the legislature. People may think that a compromise would be passing both and implementing both because right now the don't conflict. The road usage charge affects one part of the fuel tax and the carbon tax affects another part. Bicycles. Yeah, let's get our bicycles. So our tax is going to go up in the next session in general. I mean, are we looking into the more of increase in taxes, not only in road usage and barrel tax and possibility of carbon tax, but in rates, income tax rates or increases in, God forbid, in the increases in the general excise tax. Are we looking at, do we have a fiscal problem that requires us to increase taxes next year? We have a fiscal problem, but I think it's on the spending side and not the tax side. Well, you just talked about the shrinking of the tax base, that all by itself, assuming constant spending, assuming no issues in spending, and that's a big assumption, of course. But if our tax base is being reduced, if people are leaving, then we don't have the same economies of scale, and we have smaller receipts in taxes. That's where it's going, isn't it? And if that's happening, and this is a horrible result, then you've got to make up for the shortfall by increasing taxes, the rates. Or by decreasing the size of government because there are fewer people here to service. Yeah, I suppose so. If kids are leaving school, for example, you still have a lot of, what do you want to call it, base services that have to be provided for education. It's not like you're going to save a lot of money by terminating a lot of teachers. They still have to be there. The school building must still be there. So I think even if a huge number of kids leave the schools, we still have a big education bill anyway. Yeah, but it'll be hard to justify three deputy superintendents. Yeah, right. It's all in the administration anyway. That's where the big money is. Well, I think you're right. But take a moment and tell us why you feel that the fiscal problem is in the spending. We've heard lots of anecdotal evidence that there's a lot of inefficiency in government. One of the biggest problems that we've had is transparency getting to actually see how much is spent on what. I think once the transparency increases and we find out exactly what's been spent on what, then the public can see that all of this has been mismanaged and they put and they try to clamp down. That's what happened in OHA most recently. And I think OHA is not an island unto itself. I think it's representative of state government. So I think there are a lot of other big problems to be found and we just have to kind of increase the transparency, open them up and root them out. Okay, I wouldn't argue with any of that. But how? How do we find the problems and root them out? You and I have talked to the state auditor a few times. Is there more than the state auditor? How do you do that? Does the governor get involved in this? Do you need to root out corruption in the criminal sense? What do we need to do to clean this up and make state government more efficient? Well, we need to find out what's going on first. I mean, you can't really figure what the solution is if you don't know what the problem is. So we have to increase transparency. We have to open these agencies up to disinterested reviews by watchdogs like our company, the Education Association, the other nonprofits who are there to keep watch on this government spending. So if I wanted to find out what the tax foundation is looking at in terms of transparency and efficiency, where would I go? Well, we have a website, tfoy.org, and we have lots of information there. We have new articles that come out every week and other neat stuff on the tax system. And we have prior rants and raves by my predecessors who have seen issues like these over the 60, 70 years we've been in operation. Anybody else notable? Any other organizations you'd care to mention? We have organizations that look at fiscal health generally, Grassford Institute. We have Appleseed Center. We have a few others that whose names don't come to mind immediately, but they're out there. What about federal organizations? Let me change that. What about organizations from the mainland? Federal and NGOs who may be interested in making comparisons between states and letting us know how we stand in terms of efficiency as against other states? Well, we have a tax foundation based in Washington, and this one's just called Tax Foundation. They're not related to us, but they do the kind of comparison studies that you're speaking of. Yeah, all that makes me think that this is good, and we should encourage those organizations and the tax foundation to do its work and peel away the layers and find transparency and then take steps to make things more efficient. But on the flip side of the coin, just one minute more, there are in my view, an increasing number of organizations that lobby in Hawaii. They're from the mainland. They have their causes. Some of them are more enlightened and others are less enlightened, but they come here and they lobby our legislators, and they seek to have their own agendas incorporated in our public policy. Is there anything we can do to make them transparent? I think it's very troublesome, for example, to see lobby organizations from the mainland, from the NRA come here and discourage any gun control, and I think that's really not a fair representation of how people in Hawaii feel about it. If people in Hawaii have opinions, they should make their opinions known to their legislators. I mean, they elect them. They can send texts, phone calls, emails to the legislators during session or before. November is probably going to be a proven ground for a lot of them, because we have all of our folks in the big square building in Baratana Street being elected, except for the ones who've already won one of the primaries for lack of opposition. Now, I think it's really important in our democracy that we take an active role, we follow the stuff, we learn about all sides of the issue, and then we speak out, and I'm so glad you're doing what you do, Tom. Tom Yamachika, president of the Tax Foundation of Hawaii, coming around every couple of weeks and telling us about interesting and sometimes troublesome issues, let me say often troublesome issues that are taking place or could take place in our state government with regard to taxes. Thank you so much, Tom. Thank you for having me on the show today. Aloha. Thank you so much for watching Think Tech Hawaii. If you like what we do, please like us and click the subscribe button on YouTube and the follow button on Vimeo. You can also follow us on Facebook, Instagram, Twitter and LinkedIn, and donate to us at ThinkTechHawaii.com. Mahalo.