 Aloha, and welcome to Hawaii Together on the Think Tech Hawaii Broadcast Network. I'm Kid Lea Ikeena, delighted to be with you today. My good friend Tom Yamachika will be joining us. I think there are fewer individuals who understand taxes as well as Tom does, and he does so from the vantage point of being president of the Tax Foundation of Hawaii. Well, I'm sure that you'll agree that you pay too much in taxes, and it would be wonderful to pay less. What's going to happen now with the new Trump tax package from Washington, D.C., which is in full force and growing in its impact upon Hawaii and on the nation? Tom understands this in detail, and he's going to share with us today a little bit about that. So please welcome to our program Tom Yamachika. Tom, good to have you on the show. Thanks for having me on the show. You're my go-to guy when it comes to taxes. Thank you. Not how to prepare my own, but to answer big questions like, is this good for the economy or good for people? Here's the policy questions, right? Well, you know, we were talking a little bit about this today over lunch. Hawaii is pretty impacted in terms of state, local, and federal taxes altogether. A recent study showed that Hawaii is now the number two in terms of the marginal tax rate at 11% second only to California. What do you think about that? It's definitely a drag on the economy. Another study from Wallet Hub came out this morning that's basically said, when you look at the return on investment that taxpayers are getting under dollars, Hawaii ranks dead last. Oh, that's the ROI. That's terrible. Well, let's play a little bit of one-upsmanship in terms of our Hawaii ranks last statistics. The economic freedom of the World Report and the economic freedom of North America rank Hawaii 45th out of all the states in the United States in terms of economic freedom, largely because of the tax impact upon individuals and on businesses. The good news is that we now rank higher than three states in Mexico. That's great. You know, you've been observing taxes in even some of the strangest places, like the Honolulu Rail and its impact on the GE tax. I think you're with one who made a lot of noise about the fact that the GE tax increase was actually resulting in a skim by the state on taxes raised on the rail. That's right. That effort is still ongoing. We don't have a final decision from the Supreme Court of Hawaii yet, but hopefully soon. Well, you know, recently at a conference that you and I put on to talk about the impact of the Trump taxes or the tax package, we opened up with a little bit of levity. I told the audience there was good news and there was bad news. The good news is that only the rich will now pay more in taxes. The bad news is now everybody's rich. Everybody's rich. That's not completely true, but you know, that's part of the confusion, I think, over what's taking place, whether you're rich or poor, what's the impact of Trump tax package upon the individual? Overall, what do you think it is? Well, the Trump tax package, as it relates to individuals, basically did two things. One is it took away a lot of the write-offs that normal people were expecting or enjoying for many years, but to counteract that, the rate went down. So you see two different dynamics taking place. When you say that the package takes away the write-offs, it kind of broadens that territory or broadens the base on which we're getting taxed. Right. It broadens the rate base. What kinds of things, for example, are now included for the average person that in the past were not really taxed? You mean the kinds of things that were broadening? Okay, so for example, under the new package, you can only write off $10,000 of state and local tax, and then this is for individuals now. It doesn't affect the tax on business because those get calculated separately, and you can take those without limit. So when I talk about state and local tax, I usually talk about state income tax or real property tax. General excise is usually associated with the business and can get written off by the business. Now, although the base on which we're taxed is being broadened, you mentioned that the rates are actually coming down, and that applies to people at both the ends of the spectrum financially. Mostly in the middle. Yeah, mostly in the middle. So what's the net impact of broadening the base for taxes and bringing down the rate of taxes? Yeah, when you take a look at the effects together, most people are better off. There was a study that was done by the National Tax Foundation, not our group. I mean, you know, this is some people in Washington with more money than we do. And they found that even in Hawaii, the net effect for the middle class people in Hawaii would be that most people are taking home more money, on average, $800 more a year, you know, per family. Now, overall, then, that's good news for most people here in Hawaii. But there are going to be some areas in which it may not look like good news. You mentioned one earlier, the salt, the state and local tax deduction, which was fairly generous up until recently. Now it's capped at $10,000. What is it? Who does that affect, for the most part? It affects people who make a lot of money because they typically pay a lot in state tax. It affects people who own lots of land because there's lots of real property tax. But in Hawaii, it's more of the former because our real property taxes are not that high relative to other states in the union, but our income tax is. So the state and local tax change in deduction to $10,000 isn't going to affect the majority of taxpayers. How about mortgage taxes? I think the new cap is going to be somewhere around, what, $750,000? Yeah, so the way that works is that under the new rules, you can write off the interest that you pay on a mortgage as long as it's not more than $750,000. So if it's 750 or less, you can write off all the interest on it. If it's more than that, then you can write off the interest that you pay on $750,000. So the median price of a home in Hawaii is a little over $800,000 So for those who are starting off with mortgages, it's not a great impact on the median priced household owner. But for those who are buying multimillion-dollar homes, that could be substantial. That's right, yes. Although, right now, the interest rates are not that terrible. But if they were like they were in the 70s, then it would be much more of an impact. It's tax preparation season now, almost April 15th. Some of us remember our favorite little 2% tax deductions. What's happening with those? Those are going to be going away. Under the old law, you could accumulate a number of these little expenses like union dues, tax preparation fees, expenses that are paid on behalf of an employer but are not reimbursed. And if you add them all together, and the sum total is more than 2% of your artistic gross income, you're able to deduct the difference. But under the new law, you can't deduct them at all. Now, I would imagine under the new law that fewer people are going to be itemizing in that way, in any case. They'll probably be taking the new standard deduction, which I think is more generous. Yes, the standard deduction actually doubled from $6,000 to $12,000 to $13,000. So, and most people who file tax returns do take advantage of that. So, it would seem that a lot more people would be able to take advantage of this standard deduction without having to go through all the record keeping and you know, keep the shoeboxes and add them up and do all those kinds of calculations that you have to do at the end of the year when you have to write off stuff and substantiate that. Are tax preparers going to like this? I don't know. Maybe if they're not working on the hour. That's true. I think tax preparers would hate going through shoeboxes anyway. Absolutely. It seems as though what you're saying substantiates your initial claim, and that is that most people are not going to be worse off. In fact, most people are going to actually find some financial advantage to the new tax package. Right. In February, the Trump administration was quick to put out a new series of withholding tables and encouraged employers to get on them as quickly as possible because employees would be taking home more pay on average. But again, withholding is kind of a two-edged sword. Any taxpayer would have to really try to figure out what income and tax they're going to be paying at the end of the year and try to match that with the withholding and to not either give too much money to the government as an interest-free loan or at the end of the year if you're too short, then you have to do hand springs to get the cash necessary to pay it off. It sounds like all the more reason for most people to want to take the standard deduction rather than to go through all of that calculation and preparation. Well, again, you would do the calculation if it's to your advantage, so people will still be doing that. And given the state of Hawaii's current tax conformity bill, you know, we're still in the legislative session now, so things can change. But the current version of the tax conformity bill basically freezes stuff at 2017 levels. So you can still take your 2% write-offs. You can still take your deduction for mortgage just with a higher mortgage, but only for state purposes. So only on your N11 or N15, but not obviously not in the federal return. Let's talk a little bit about the impact of the tax package on businesses. Now here in Hawaii, most businesses are what we call individual or small businesses. They're not corporate in the larger sense. But yeah, when we talked about rate reductions, one of the biggest rate reductions was for corporations. So the top rate for corporations went from 35% to 21%. And as you mentioned, about 75% of businesses are not in corporate form. But let's talk a little bit about those larger corporate businesses. That's a huge drop in the actual rate. And isn't that the reason we saw that flurry of bonuses and other compensations to employees before the December 31st, 2017 deadline? Oh yeah. For a corporation, at the end of the year, if they wanted to do something nice for their employees anyway, it was much more advantageous for them to do it in 2017, where they could get a 35% write-off as opposed to 2018, where they get a 21% write-off. Giving to their employees was a good thing for the company at that time. Oh yeah. And a lot of larger companies did take advantage of that. I'm not sure that the popular news media got it completely correct at the time. Some of the reports seem to imply that this would be an ongoing feature of the Trump tax laws. But in reality, this was an attempt at the last minute to take advantage of the old rate of deduction rather than wait for the rise to change. Yes, it's definitely a one-time thing. So it ultimately benefited those who received bonuses. In Hawaii, how many companies do you think took advantage of this? I know there were some celebrated cases of banks and larger firms, but… You know, that's kind of all I've seen in the news. I don't have inside information on that. How about smaller businesses? For smaller businesses, and some pass-through businesses are not small, but like I said, 75% businesses conduct their affairs through like an LLC or an S-Corporation or a partnership where the individual owners of the business are taxed as opposed to the business itself. In a partnership, for example, each partner gets a share of the business's income that is then reported on their own individual return. Can you explain the 20% flow up? Yeah, so what does that mean? Okay, so for example, if you and I were partners in a partnership and our partnership made, let's say $200,000, then each of us would have 100,000 that we would report on our own individual tax returns. So the partnership doesn't pay tax. We, as the business owners, would pay the tax on that business. Okay, under the new Tax Act, there is a special deduction for the 100,000 that you get and the 100,000 that I get that is potentially worth 20% of that 100,000. And again, it's because the business rates went down for corporations that did give something to individuals who own businesses and pay the tax of businesses as well. Well, good. And thanks for explaining that. And when we come back from the break, one of the things I want to ask you about is how well the state of Hawaii is doing in terms of implementing the new federal tax updates, because that's a huge amount of work for state government to be doing, not only state government, but the private industry of tax preparers and attorneys and others. We'll be coming right back in a second. I'm Keeley Ikekeena. I'm Think Tech Hawaii's Hawaii Together. Don't go away. I'm with Tom Yamachika and we'll be right back. Aloha and Richard Concepcion, the host of Hispanic Hawaii. You can watch my show every other Tuesday at 2 p.m. We will bring you entertainment, educational, and also we'll tell you what is happening right here within our community. Think Tech Hawaii Aloha. Hi, I'm Ethan Allen, host on Think Tech Hawaii of Pacific Partnerships in Education. Every other Tuesday afternoon at 3 p.m., I hope you'll join us as we explore the value, the accomplishments, and the challenges of education here in the Pacific Islands. Hello, everyone. I'm DeSoto Brown, the co-host of Human Humane Architecture, which is seen on Think Tech Hawaii every other Tuesday at 4 p.m. And with the show's host, Martin Desbang, we discuss architecture here in the Hawaiian Islands and how it not only affects the way we live, but other aspects of our life, not only here in Hawaii, but internationally as well. So join us for Human Humane Architecture every other Tuesday at 4 p.m. on Think Tech Hawaii. Welcome back to Hawaii Together on the Think Tech Hawaii Broadcast Network. I'm Keeley Ikeena and my guest today is Tom Yamachika. We're talking about the impact of the Trump tax laws and what that impact is on businesses and individuals here in the state of Hawaii. But before continuing, I just want to remind you that one of the most noble sayings here in the state of Hawaii is a pule kakou, a pule. Let's pray kakou together. And one of the things I love to say based on that saying is a hana kakou. Let's hana, let's work together. Because if we don't work together, think of how terrible it will be. There's nothing that would get done. Working together, we can build a better economy, government, and society. And that's kind of the theme of what we do here at Hawaii Together. And I hope you'll watch frequently the work that is done on Think Tech Hawaii. About 30 hours of programming each week is produced here in our downtown Honolulu Studios. And you can access all of that on ThinkTechHawaii.com. Now back again to Tom Yamachika. Tom, before we continue in our discussion, could you tell our viewers a little bit about what your work is at the Tax Foundation of Hawaii? I think some people are familiar with this under the founder and former president. What was his name? Lowell Colapa. Lowell Colapa, who is well known down at the state legislature as an advisor down there. Tell us a little bit about the organization. Yeah, what we do is we typically concentrate on the tax-related bills that are going through the legislature. We focus on how those work. We look at fiscal bills for fiscal transparency, accountability, and we try to help explain to legislators especially how these tax bills work so they understand what they're doing when they're voting on them. And then when the voting is finished, we turn our attention to normal people like you and I and we try to get the information out about what the tax law says and does and what these tax bills actually said and did. Now you have a newsletter at the Tax Foundation. That's available to the public? Yes, we have a weekly commentary that goes out. And how does somebody get a hold of that? It's on our website. You can sign up for electronic delivery of that newsletter if you want one. What's your website? It's at tfhawaii.org. Very easy to remember, TF, short for Tax Foundation, tfhawaii.org. Now I think many people became familiar with you when you took on the state in a challenge in terms of watching out for how tax dollars were being spent. We passed a law allowing the Honolulu Rail to receive some funding from an increase in general excise tax. And the state, as I understood it, took an administrative fee out of that. I don't know if that's the technical term, but took a portion out of it for administration. You challenged this. Well, what was going on? And why did you challenge that? Well, what had happened was the state was skimming off. And I think we either coined or came up with the phrase the skim to reflect the fact that 10% of what people thought of was going to the rail project was actually being kept by the state and being used for heaven knows what. Now you pointed out that 10% was actually a very large amount because it's not exactly needed to manage that transfer of funds. Yeah, in the first couple of years when the law was into effect, they asked the tax department how much they needed, and they made them give them a report as what we call a budget proviso. And they said, well, yeah, we need like maybe a million, million and a half a year. But what was being kept was 25 million, which is a little bit more than a million or a million and a half. So we got the courts involved. We tried to get some judicial relief to get the money going back where it should be going, namely, the city was imposing this tax for rail. Let's let it go to rail because that's where we, the voters, thought the money was going in the first place. In this past special session, even though our lawsuit isn't concluded, it's still before the Supreme Court of Hawaii, in the special session, the law changed and now the skim got dropped from 10% to 1%. So they took away a zero. What impact will that have on the court case? We don't know. State and we both briefed on that issue and again, the court's considering that. Well, I want to thank you for standing up as an advocate of the people, and that's one of the things that Tax Foundation of Hawaii does. It's there to be a voice, especially on issues that the people don't readily see without the level of analysis that you bring to them. We try to get the information out there so people can make their own decisions. This one we thought was more of an egregious, clear case. We put action where our mouth was. I think that we also stood with you in the Grassroot Institute of Hawaii and wrote an amicus brief and agreed along with you that this is something that wasn't in the interest of the people. Going back to the last segment, we were talking about the impact of the Trump taxes on corporations and on individual businesses. Did I understand correctly that in general, the impact is going to be fairly good? Yeah, the changes generally are there to favor business. So I think that's part of the realization that businesses, the economic engine that we have, when the engine spins, tax revenue is generated, and that's what drives government as well as the economy in general. Well, that's maybe a good point to take you a little bit off topic from accounting to economics, but maybe it's worth saying a bit about, and that is who's going to pay for it all? The critics of the Trump administration say that this is a massively costly tax package that's going to ultimately result in a greater debt for the country. On the other hand, the Trump administration and the people who support the tax package say this is actually good for the country because it's going to stimulate the economy. It's going to put money back into the hands of businesses and individuals. That money gets spent. It produces more product, more jobs, and ultimately more tax revenue in the end. What are your thoughts about this? Well, you've accurately described both sides of the debate, and I don't have a crystal ball that's any better or worse than yours, so I don't know how it's going to ultimately come out, but I'm hopeful for the best. So we'll just have to wait and see. And in the meantime, we implement this, which is something I wanted to ask you before we ended our program today. What special challenges does the new Trump tax package pose for the state of Hawaii in terms of implementing and complying with it? I know we've got some work being done in our state legislature on that right now. Right. I mean, with anything that's a big change, the biggest challenge is going to be getting the information out to everybody so they can know what plan for it. So it won't be a big surprise when they're doing their taxes next year. The thing that we recommend all of your viewers to do is that if they don't have the information in front of them to get it, if they are not comfortable doing the numbers or the analysis, go to their tax professionals or somebody who can do the analysis for them. So again, the last thing they want is for a big unhappy surprise at the end of the year. Certainly you don't want that at the end of the year, but along the way, there are a lot of pleasant surprises. For example, businesses can take advantage of a new change in business depreciation of equipment that is purchased. That's right. We call that bonus depreciation. Okay. Is that section 179, I believe? There are actually two ways a business can get benefit for buying new equipment. One is section 179, which is what we have now. The other is called bonus depreciation. All right. And how does it now work? And right now for the next couple of years, both systems are pretty much the same in that they will allow a business to write off the entire cost of a new equipment or new machine or new computers. In what time frame? In that same year. Immediately. Immediately. So it'll be more coterminous with the or matching better with the actual cash outflow that was used to... Well, that would be a tremendous incentive in terms of businesses actually reinvesting in their own equipment base or updating old equipment and hopefully doing more business and doing something that would have been too costly so much so that they would have put it off in the past. Right. And that's where the two schemes have some differences. There are limits on 179 and bonus depreciation only lasts for two years in 2020, I believe it goes down to 80% and then drops down further. So again, a lot of these provisions are very complicated. I've tried to explain just the highlights, but there are lots of grainy details and businesses do have to work out and find, you know, work out those numbers and find out what's missed for them. Well, just like the change in the rate of business tax and this bonus depreciation will probably result in a flurry of activity in the short run. Well, that's what they're hoping for, yeah. And that's the intended activity in terms of the idea that this package is a trickle down kind of economic package in which the money gets down to the businesses and individuals and then out to the economy and back into the government in the end. That's right. So there's incentives to, you know, to buy stuff with the additional money that the business has, you know, they buy stuff and then the businesses who get that money, they buy other things and it goes around and around. Well, any advice in the end here, well, let's not use the word advice, but any perspectives for the typical taxpayer who prepares his own taxes or takes advantage of a tax preparer, anything to look out for the average consumer? Yeah, well, just be aware that there are lots of changes. Don't be surprised if you want advice. There are plenty of preparers out there who can help with that. But again, the main thing is not to be surprised at the end because surprises can have nasty consequences. It looks like we have to be alert, very alert. Or have we moved closer to or further away from doing our taxes on the back of a postcard? It's certainly, we're not going to be doing it on a postcard anytime soon. Okay. Well, Tom, thank you very much. And if people want to get ahold of the tax foundation of Hawaii, how do they do that? It's on our website, it's come to our website and all the contact information. TFHawaii.org. That's correct. Thank you very much, Tom. Thank you, Kelly. Appreciate having you on the program. My guest today, President of the Tax Foundation of Hawaii, Tom Yamachika, has shed some light on understanding the impact of the Trump package of taxes and tax changes. And I hope you've learned a lot. Go to their website, TFHawaii.org, and see what they have to offer. I'm Keeley Akina on Hawaii Together on the ThinkTech, Hawaii Broadcast Network. Aloha, until next time.