 Okay, here we are, I think tech community matters in this beautiful house, so you'll see more of this house. I'm not sure whose house it is, but it's really nice. We're talking about tax today, with Tom Yamachiko, who else would you want to talk about tax with? He's the CEO of the Hawaii Tax Foundation, and it's an appropriate discussion these days, given all the issues that are bouncing around in Washington and how they would affect us here. Thank you for coming on the show, Tom. Thanks for having me on the show. Yeah, that's great. It's not my house. None. Okay, well, I don't know anybody who might have a house like this, but I'm sure somebody does. It must be one of those top 1% wealthy guys, you know. We can talk about them. They're part of the landscape. They are. So tell us about the tax foundation these days. What is it? What do you do? Who supports you? How do you function? Well, we're a taxpayer watchdog organization. We basically keep an eye on what's happening at the legislature primarily, and we do keep tabs on some of the other things that are happening at the county levels. But most of our workers at the legislature follow what's going through, we make comments when appropriate, and try to make sure that lawmakers are making good decisions. So you're there. I mean, if I know that a taxpayer is going to be heard in a given committee in the state legislature, hopefully that matter in the county, you'll be there. A lot of times we are, yes. Way in on it and all that. Yes. Is your general drift to prevent taxes from going higher? Do you ever want them to go higher? Is your general drift to focus on one kind of tax versus another kind of... What are your hot points, so to speak? Well, one of the problems that we have here is that taxes do remain a very serious burden to individuals, families, businesses. The state collects a lot per capita. We're trying to make sure that, at least on the revenue side, that they're doing it responsibly. Responsibly means with due regard for the impact of the tax on our citizens and our community, I take it. Right. In our system, we're supposed to have taxpayer rights and protections so that the enormous powers that are wielded by the Department of Taxation don't get used irresponsibly. I remember a quote back when, the power to tax is the power to destroy. Yeah, that's from the US Supreme Court case. Yeah. How does the lawyer and the accountant both... Actually, I'm not an accountant, I'm just a lawyer, but I'm sorry. In an accounting firm, which is probably why you didn't have it a curve. I understand. Okay, so right now everybody's fascinated with the tax reform bill. I always do this when I refer to it with the tax reform bill in the Trump Congress. And I don't know all of the provisions, I doubt he knows all the provisions, but a couple of them come to mind and I wanted to see what kind of effect that would have on our people here. I think there's an agreement between the House and the Senate now that they want to douse the medical deductions provision in the Internal Revenue Code. This is very hard on anyone who's having a medical emergency, a medical problem in the family where he or she is spending tons of money and sometimes we do, we have to. It's not voluntary. Under this new approach, in this new tax reform bill, we wouldn't get a deduction even though it was usurping all of our disposable income in the process. Every so often, the folks in Washington think about replacing the system that we have, which has a lot of deductions with another system that has far fewer deductions. That happened in 1986, as you recall. The idea was, you used to have deductions for consumer interest, you had deductions for this and that. A lot of these were taken away to get a broader base and a lower rate. In a sense, what they're trying to do this time is do the same thing, namely, they're trying to take away a lot of deductions but make up for it by a lower rate and for most of the population that would achieve savings as a result. I'll bet if you did a macro analysis with a big computer on that, you would find at the end of the day you reduce the rates such as they are ostensibly reformed and you take away the deduction. It hurts the new class tax payer more than it helps, am I right? Well, the National Tax Foundation, we're not associated with them more than casually, but they just happen to have the same name, they're in Washington. They've done scenarios based on upper, middle and lower income taxpayers and their conclusion is that almost everybody benefits. Benefits? By having the reduction on a lower rate. But we've heard so often, we're hearing every day that a lot of journalists anyway are saying that this will favor the wealthy, the 1% and it will hurt the middle class. We can't, we don't really want to hurt the middle class, it's bad for the country and I'm not sure if it's revenue neutral or not for the lower classes or the disadvantaged or the poor people. What's your take on that? Well, the models of the Tax Foundation did kind of show broad based tax relief, which is kind of surprising because there's like giving and taking going on. But one thing that you do have to remember is that when you give tax relief you have to kind of start from the proposition that 95% of the taxes are paid by the top 20% of the people in terms of what they make. So if you're going to give tax relief at all, yeah, there's going to be tax relief when you're the wealthy. So the National Tax Foundation is saying that this tax reform bill, which a lot of people feel is deadly, is actually not so bad. That's correct. I mean, it's very easy to look at a particular provision in isolation and say, okay, well, yeah, you remove this deduction, that must be bad, right? Because if that's all you're doing, then you've got to pay more tax. But there are so many levers and dials being turned and levers being pulled, there are a lot of things going on. There are, for example, you're going to eliminate the alternative minimum tax. Now, one of the things that has been talked about as well as like eliminating the medical deduction is limiting the deduction for state and local tax, okay? Right now, most of us like you and I who pay taxes to a high tax seat like ours can get a benefit on our federal tax return for state and local tax, itemizing the deduction under the tax reform, yeah, the quote-unquote tax reform proposals, that'll go away. But the interesting thing is a lot of people now can't get the benefit of state and local tax deductions anyway because state and local tax deductions are what's called a preference item for alternative minimum tax. So you have too much state and local tax deductions, you get thrown into alternative minimum tax and then it doesn't help you. But that alternative minimum tax is for people at the bottom end of the curve, right? How about for the middle class? For the middle class, yeah, you'd get a benefit from it, typically. Yeah, from that deduction. Yes. So if that deduction goes away all of a sudden you got stuck. I don't know what, say $10,000 for state and local tax, maybe more, actually. I don't get to deduct that at all. Therefore, I have just lost, say, 50% of that in the deduction I could have had against income and my federal income. Yeah, but then what you have to figure out is what is the offsetting impact of the lower rate you're going to be paying? Right. Well, how dramatic, I mean, this all suggests this National Tax Foundation analysis you're talking about. Well, it suggests that there's going to be serious reduction in the rates, so serious that the repeal of these, you know, tax deductions like interest and the, what do you call it, medical deduction. Yeah, and for interest. The state tax deduction, the three of them are actually going to be balanced or improved on by the reduction in the rates. And so I wind up with a good deal even though I'm losing my customary deductions. So right now, now they're going to, I mean, the current plan is for them to keep the mortgage deduction in some form with some limits and to keep the child care credit. I think the other couple of things are keeping the charitable contribution deduction. Why? Why those? I mean, I have an answer I'd like to throw at you. It's because politically that's... Yeah, it's politics. That's dangerous water for the Republicans to do that. People will, you know, march against them. Yeah, it's politics. Yeah, politics. The whole thing is about, why, I mean, if we can discuss this, why are the Republicans so interested in this tax reform? They don't seem to be, they don't care about raising more money for infrastructure or for military expenses. They want to reduce those, they want to pull the wings out of the bureaucracy, they want to spend less in federal government at the same time. That's right. Ideologically their platform has been that we have too much government, that it's getting in the way of things like the free market and that we should be, you know, shrinking that back. And if it's shrunk back enough, we won't need the money that we now take in to support it. Yeah. But, you know, brilliant is for a wall. I don't know if he's ever going to be able to do that. Brilliant is for infrastructure. I don't know if he's ever going to be able to do that. Brilliant is for the military. He's beefing up the military. He wants to have more nuclear weapons. How is he going to get the money for that? No, it's a very good question. You know, all kinds of negotiations are happening in Washington right now. It's all politics. I talked to Roger Epstein a couple of weeks ago. He was in Washington and we had him on Skype. He said, big concern about this tax reform bill is that it throws about one and a half trillion dollars into the economy because the taxes will be extensively lower. And that's not a good thing on a macroeconomic basis. You can't just throw that much money into the economy. You wind up with inflation, major inflation. And nobody's ever done that before. And so it's unpredictable exactly what will happen, except that it's clear, he believes, and others, that there will be inflation and inflation will damage everyone. That's about that. I mean, the macroeconomic level, what effect will this reform bill have? Well, I mean, that's obviously one way to think about it. The other way to think about it is you kind of look at what happened in 1986 and, you know, were there some favorable economic results that the reforms that took place at that time? I mean, I think some people say the answer is yes. And so you can look forward to the same this time around. What would be the result? According to them, you would stimulate the economy. The trickle down theory. Yeah, the trickle down theory. If the 1% of the rich have more money, they'll spend it. Didn't President Hoover try that just before 1929? Maybe, I don't know. What's the trickle down thing? That was a little bit before my answer. It has a history on the trickle down thing. But it's not, I mean, people, nobody agrees that the trickle down thing is going to actually stimulate the economy or do damage to the economy, or that the phenomenon is really valid that if the rich have more money, you know, and under this bill, you know, I guess it's still the way it was announced recently, it's a repeal of the estate tax. So that means the rich not only don't pay as much taxes relative to the rest of us, but the rich keep the money. They don't have any tax from generation to generation, and they can become royalty over time, over years and decades and generations. What does that fit in the customary tax policy? I mean, it seems to violate the basic reason for the estate tax, which goes way back to what, in 1916 or something, that we don't want wealth to accumulate among the wealthy, the robber barons in those days. We want to cut that off generation by generation so nobody gets too wealthy on accumulated wealth. What does that fit as a matter of policy? Well, I mean, it is a policy question. So on the one hand, you have socialism, which is kind of, let's not let anybody get too wealthy. And then on the other hand, you have capitalism, which is why if you earned it, you get to keep it. So where is the proper balance between the two? I don't know. Well, Republicans, especially the extreme Republicans, they're right-wing extremists, they have a different view of that than Democrats for sure. Oh, yeah, definitely. And that's really what we're talking about. Let's take one minute break. Tom Yamachika, he's an attorney and he's the CEO of the Tax Foundation of Hawaii. We're talking about taxes in 2018. And when we come back, we'll talk about the effect of these changes in Washington and how they will play out here in Honolulu, in Hawaii. We'll be right back. This is Think Tech Hawaii, raising public awareness. Aloha. I'm Carol Mon Lee. Think Tech Hawaii is volunteer chief operating officer and occasional host. And this is Minky. For the first time, Think Tech Hawaii is participating in an online web-based fundraising campaign to raise $40,000. Dear thanks, Think Tech will run only during the month of November and you can help. Please donate what you can so Think Tech Hawaii can continue to raise public awareness and promote civic engagement through free programming. I've already made my donation and look forward to yours. Please send in your tax-deductible contribution by going to this website, www.thanksforthinktech.cozvox.com. On behalf of the community enriched by Think Tech Hawaii's 30-plus weekly shows, thank you, mahalo, and sheshe for your generosity. Okay, we're back live. I'm Jay Fidel. This is Community Matters. We're here with Tonya Machica. He's the CEO of the Hawaii Tax Foundation. We're talking about taxes in 2018. Then we've identified the first part of the show that there are three things that are going to... If the bill passes, we won't have a lot of views about whether it should pass as a matter of principle, but if the bill passes, the real estate interest deduction will be affected. The medical deduction will be affected or repealed completely. And what was the third one? Oh, the state and the old tax deduction will be repealed. So this is going to change it and hopefully, you know, it's not a bait-and-switch kind of thing where they say, yes, we're repealing all these deductions, but don't worry because you have lower rates. The other thing about taxes is that the rates tend to go up over time. So they can take away the deduction, give you a reduction in the tax rate, but then next year, we could give an increase in the tax rate and then we just... That's kind of a more of a state-level phenomenon. At the federal level, I think 39.6 has been around for at least 20 years. It hasn't gone above that. That's the individual top income tax rate. There's a reduction in that rate now coming. It's going to be the same, but it kicks in at a much higher level. I think a million dollars or something like that. It's even more subtle. You don't have to change the rate. All you have to do is change the level. That's right. A lot of people wouldn't even see that coming. They wouldn't know the difference. This is tricky. Talking about this bill, health care has an emotional charge on it. People were parading around about it. People were coming up on legislators from various states on the mainland not to vote for health care reform. But now with the tax bill, it's much more sophisticated and it's numbers. In order to see it, you have to be interested in the whole country, the whole demographic. Most people don't do that. They don't see the implications for the other guy. They might see it for themselves but they may not either. They may say, I don't care. It'll be what it'll be. That's the problem. You don't have anybody camping out in front of a congressman's door on the mainland over this because they don't see it as particularly involving them and they don't see it as a point of national policy or national tax policy. Tax in general is a very complicated subject. Attesting to that is that most people hire somebody to prepare their taxes. Sure. I kind of prepare my own because I'm in the business so I should be able to do that. Most other people do go to some professional and the reason for that is the computations become very, very complicated. If you have trouble with the computation and you want to get involved in that why in the world would you become involved? Would you study up and take a position on national tax policy? People just don't do that. Like I said, it's like pushing on a balloon because you push on one side and another side pops out and you really have to keep track of all the branches or facets to see if the balloon is actually getting smaller. One thing is, it's profound. It affects the economy. It affects our lives. For somebody, for example, who has a sick spouse who needs help in a care facility and is spending $10,000 a month on that, now all of a sudden no deduction. It's real personal and it's really too bad that it works that way. You tell me that the National Tax Foundation has made a report but I remember in the health care issue a couple of months ago there's been no hearings. Not a single NALY-01 on this tax reform bill opposed to ordinary congressional procedure of hiring hearings and getting evidence and talking to people in the community and experts and this and that and the other thing. In this case, NALY-01 can we achieve good tax policy without having hearings on a bill which very profoundly affects everyone in the country? It's very tough, I think. There are obviously people up there who think they know what's going on. Tax bills have been testified to many times before. Some have the provisions under consideration now, some of them don't. They think they know what they're doing. Is there any other organization aside from the National Tax Foundation that has weighed in and made a report for Congress, made their analysis with the government budget office and all that it was doing on health care? Yeah, I believe CBO has, Congressional Budget Office has made one. There are other organizations like nonprofits like myself that have popped up and done various aspects of it. Have you weighed in with Congress? Yeah. We would be more interested in what happens if there's something that passes in Washington which we're trying to figure out whether and to what extent it's going to apply to the state. Yeah, absolutely. I remember in the last session we interviewed a couple of legislators and they said, well, Trump will pull the wings out of a lot of federal programs that are funding Hawaii projects and activities and we will have to make up the difference here if we want to see those projects go forward and they were talking about building an initiative that would raise money and fill a gap that was left when Trump started cutting these projects. I don't know the status of that but that's and that question still exists I suppose in terms of funding projects where the federal government decided to, you know, can it for me for 2018 is more sophisticated. I think it's what do we do when he cuts these three or more type deductions on federal income tax reporting? We also have interest, medical deduction, state and local taxes. Those are going to change the way people report their taxes and as we discussed before state tax, the state income tax law, the federal. So what happens when the federal changes in such a traumatic way? Well then what happens is the state every year drafts a bill to pick up the federal changes up to the end of the previous count. It's a major kind of thing but ever happened in Washington the state tax office wants to conform the state tax code. Is that something in our income tax law that requires the state tax office to prepare such a bill? It's required. And we do. And I would imagine, correct me if I'm wrong, I think a wild guess is that every year that bill passes. Yes it does. But the question, the $64 million question is what's in it. Because they don't necessarily pick up what the feds do. Some notable exceptions are like when the feds passed and expended what we call section 179 which is expensing for businesses. We didn't pick that up. We thought it would cost too much money. So we didn't pick it. And the deduction would have left more money in the hands of the taxpayers and we wanted to make sure that we were getting the revenue we were getting before. So when the feds raised the section 179 limit to I think $500,000 we left ours at $25,000. Okay. So there is a certain amount of discretion happening here. And that takes me to the whole thing about say these three deductions. How are they going to change on the federal side if this bill passes? What happens to us? So if it's a mirror image if we just adopted wholesale then the way we fill out our state, the way we pay our state taxes we'll follow what the fed is doing and I guess that could mean the state is getting more money because of the... So what happens is one of the things that's not picked up automatically is the tax rate. We have to do that ourselves. So if we just pick up the federal changes and don't do anything with the tax rate the state will take lots more money. Okay. In 1986 when a tax reform happened we in Hawaii did lower the top rates to know what was going on federally. Whether it's going to happen this time around assuming the bill passes I don't know what the... What it sounds like though a possibility at you so the state, by virtue of the regular procedure the tax office goes to legislatures, would you please conform the state tax code to the federal changes about these these three deductions I mentioned and we'll leave the rates alone for now so that results in more revenue for the state and you can make the argument the state needs more revenue the state has all kinds of deficits and unfunded liabilities of tens of billions some people estimated it's close to 50 billion that we are going to have to pay but we don't have any prospects of raising that much money including rail, including the homeless including the employees retirement system deficit and all that so you can make an argument let's just leave the rate the same take the advantages that we get out of following along on these federal changes for sure there will be lots of people who would want to do that what about the tax foundation what would your position be, would you have a position on that well we would I believe we would urge lawmakers to at least adjust the rates to be competent with the federal change that's the issue isn't it coming up in 2018 that is a big issue for it will depend on when the feds adopt their program if they do if they adopt it by the end of the year then we will be considering the conformity in this coming legislative session in 2018 if they don't if they adopt tax reform in early 2018 then we will be considering in 2019 so we we get a year of confusion thank you Tom it's great to talk to you there's more coming down the pike this is exciting would be the long term for him it's certainly mind-doggling anyway it is mind-boggling definitely Tom Yorichika CEO of the tax foundation of Hawaii thanks so much thank you Dave