 5. It's ThinkTek. It's Talking Tax with Tom on a given Wednesday the day before Thanksgiving. Have I got that right, Tom? You do. Thanks for having me on the show. Tom is the president of the Tax Foundation of Hawaii and it's always relevant because tax is always there. It always forms the sort of the foundation of our fiscal policy and economy all year round. It's not just when the legislature is in session. After all, when the legislature is in session, no man's or woman's life of property is safe. Yeah. Anyway, so let's talk about sin today. If you put that word on YouTube as a title for the show and they come from miles around because they all type in the word sin on their search and then they'll be here. They'll be here looking for sin. But we don't really mean that word. Yes, we do, don't we? We're talking about sin today. What are we talking about? Well, when you have taxes being imposed and, you know, taxes is kind of the reason why we have this program. You think about, well, why do they have particular taxes? And there are a couple of different rationale. One is you just need to figure out what everybody's fair share is of the cost of running government. And typically we use the income tax to do that. So they figure out, okay, you're making so much. I'm making so much. You make way more than I do, so you pay more. What way more than I do? That's what's called a progressive income. And it gives you an answer for how much you should be paying toward the cost of government. But then there are other things that litur slatures and governments like to do to regulate social policy. So they look at certain different activities like consumption of intoxicating liquor, tobacco. Sin. Right. Those are sins, at least in somebody's perception back when. Or even now. Or even now. Yeah. So what they typically do is they look at certain activities that they think are socially undesirable or that create costs to the government for cleanup and other kind of incremental costs. And they say, well, okay, we like this activity or we're going to incur more costs as a result of it. So to be fair, we'll let you pay those costs. So there are additional taxes on such things as tobacco or alcohol or fossil fuels. That's after tax money or taxing. That's right. So I've already paid my income tax on it. I suppose that's so with any kind, even with gross sexized tax, I've already paid my tax on the money I spend and get taxed for the gross sexized tax, same thing. Right. Except the except, you know, one good thing is that if you're a business, and you pay these taxes, they're deductible expenses because they're costing doing business. So at least that gives you a little bit of recourse if you're an entity doing business or a person doing business. Yeah. Okay. Well, so but you, you, I don't know why, but I'm thinking back to the good old days to where Hong Kong, this is not recent, I think, but Hong Kong had a tax of some flat percentage of tax. And you just paid that tax on your declared income. And that's it. That's all. It was 10% in those days I remember. And you're done. No deductions, no exclusions. Nothing. That's 10% on your income. Do whatever you want with the rest. And you know, it seems to me that that's a pretty good, you can argue, a pretty good way of doing it because it's simple. It's not a lot of loopholes. There's not a lot of ways, you know, you can avoid the tax or evade the tax. Except by not declaring your income, which is what a lot of people do. Yeah, sure. I mean, it's, you're less likely to evade if you, if the thing is simple. And we know exactly what's supposed to happen. Yeah. I mean, one of the big problems that people complain about, at least with our federal tax system, is that it's got a lot of complexity. So in order to try to, to compute what your fair share of tax is, you have to compute your taxable income at least two different ways, right? And there's regular tax, and there's alternative minimum tax. You got to compare the two and pay the higher one, right? And then even in computing regular tax, there are exemptions, exclusions, deductions, you know, some for this, some for that, you know, some for preferred activities of other, you know, taxes for so-called sinful activities, and so forth. Now, so, so there's this kind of a sin component to even regular income in terms of there, there are, there are credits for socially desirable behavior and penalties for socially undesirable behavior, at least in the minds of these environmental bodies who rate the tax law. You know, it's almost like, you know, they have all these sunset provisions and everything, and some of them, some of the sunset provisions apply, you know, in, in syntax. It doesn't last forever, or at least it shouldn't. So it's just like, maybe once in a while, we should just sweep the thing clean, start fresh, go back to pay 10%. You pay 10%. And then, of course, you're going to have the lobbying effect by groups that feel that some, some activities, some social conduct is more or less, you know, desirable from a, from a public policy point of view. It seems to me that what, what happens is that like a Christmas tree, coming up on Christmas, the tax code gets decorated with all of these, you know, I'll never forget when I was in law school or tax school. We looked at section 1245. 1245 allowed, allowed for, this is the federal allowed for accelerated depreciation on elevators and escalators. There was a section there, elevators and escalators. What, what is that about? Why would you specifically, you know, separate elevators and escalators from, from other such infrastructure? And the answer from the professor was, because the lobby, they had a strong lobby, the elevator and escalator guys had a strong lobby. And that's what happens over time. The lobbies get involved. And you can say it's public policy, but it's just a lobby being stronger than the other lobby. And they get it through. And it gets festooned all over the, you know, the basic concept of, of the tax. And some of this, it seems to me, and if you want to be revolutionary, like Elizabeth Warren, for example, you sweep it all the side, and you have a sort of flat tax, and then you let the lobbyists come and try their thing again, and let them reprove, you know, what they were, what they festooned before and see if the legislature or the public would agree with that way thing. That's an interesting concept. Operationally, it's very, very hard to achieve. Because, you know, there are agencies who have, or people within agencies who've kind of grown up with the tax, so as we now know it, and if you sweep that aside and put in something very new, they won't know what to do. You got another argument? As Martin Pence used to say, next. Okay, but I mean, but the practicality is of the matter are if you got people who need to be retrained a lot, that's going to cost money, it's going to cost time. And those are practical obstacles. Think of the money you save by not having people do, you know, administer lobby exceptions, additions, whatever, tax, tax, tax, tax features. Well, it's a great, it's a great theory, Jay. Yeah, it's a great theory. I mean, you know, the problem I have with this is the syntax is some of the some of the sins are no longer sins. And the other thing is there are there are things that we don't treat as sins. We should. I mean, I'm not saying the flat tax is the best answer. I think you have to, you have to change, you know, public conduct. Government has an obligation to shape the society. And, you know, moral obligation may, for example, for example, the piece on 60 minutes was it? No, it was on PBS, the news hour on Monday, about Italy, the rural areas in Italy, nobody's having children. So the bell curve is upside down. The demographic is is really in trouble. And it affects at least economy already, when you know, the fertility rate 1.2, 1.2 children for every couple, you know, that's not going to work over time. Italy's economy is going to collapse. There'll be no workforce. And when there's no workforce, there's no companies to hire them or who would otherwise hire them. And then the ones who are left leave, they leave Italy, this is happening already. And you find large areas in Italy that where everybody is octogenarian, there's no, there's no new business. They just, you know, all in retirement mode. This could happen elsewhere. It is happening here. It could happen here. We know, for example, that we've had a population exodus. We've lost 2% of our population over the last 10 years. So you want to change that? You want to, you know, you want to have an incentive or distance. So an incentive would be, have a kid, you're going to get paid 500 euros, or whatever it is, $500 to have the kid. And that's not going to, you know, bring everybody into have a kid, but it will change the demographic and there'll be more kids. And then maybe you have a positive effect on the economy. We have that in our current tax system. It's called an exemption for kids. That's why, you know, lots of people claim, you know, 30 or 40 kids, even though they might not have them. It doesn't always work, you know, there are ways around it. And what's interesting is in France, they do have some kind of, you know, payment for having kids, because they have the same demographic problem, they're trying to deal with it. Okay. So all I'm saying is you can shape public conduct with an incentive or a distance center. That's the government should be doing that, in certain cases, to some extent, maybe. Well, what about the the wealth tax that's proposed by, you know, since you brought it up, Senator Warren and Senator Sanders, they basically are saying, Okay, we need to impose an additional tax on wealth. But that is people over, you know, a certain amount of wealth, like, you know, millions of dollars. And, and, and, you know, what why is that be the only rationale I can figure out behind that kind of a tax is that wealth is a set. Okay. And, and Bernie Sanders, for example, has said as much, he says, I don't want any billionaires in the in the USA. Let's get rid of all the billionaires. What do the billionaires say? Well, let's let's put it this way. Guess who pays the tax? Not the billionaires. They do. Yeah. A lot of them find a way not to pay any tax. That's very rare. I mean, more often than not, you have a lot of these businesses, you know, 75% of businesses conducted in the US are done through what's called pastor and that means that individuals rather than corporations are actually paying the taxes that are keeping us afloat. What happens if, you know, these guys are elected, either one of them, they try to tax the billionaires out of being billionaires. The billionaires are not going to go for that. They want to hold the money in their family for years and generations and millennia. Maybe they'll move to Italy. But seriously, you know, those are the kind of people who can get on a plane and go somewhere else. Yeah. Yeah, they can vote with their feet. Yeah. And that and that's what's been happening here. You know, people have been leading you've seen story after story of people who have moved to the mainland because they just can't, you know, can't live here. Expensive for their incomes. The cost of living is way too high. Yeah. Yeah. So I mean, whenever we spot these problems, I mean, you and I could make a list of these problems that affect ordinary people. And, you know, we could come up with all kinds of taxes, incentives, deductions, exclusions, what have you. It's what it's about over time. You want to improve the society, improve the lot of people who you don't think you're getting a fair shake. And sometimes there are lobby groups that go to do that. Sometimes, sometimes not. But I think it's an ongoing ongoing exercise for government to do that. And so, you know, the answer, the question I put to you is going back to the syntax. Is it working? Is it the way it should be? You know, it strikes me that this never really comes to rest. Because society is always changing. Yeah, society is always changing. So that's that's why you see phenomena like, take the fuel tax, for example. We've imposed a fuel, a fuel tax on, you know, on fossil fuels for a very, very long time. And now guess what? The cars are getting more efficient. Right? You have you have EVs, you have hybrids, you have alternative fuel vehicles. And so the fuel, the revenue that is being generated by our fuel tax is going like this. Okay, that has gotten our department of transportation in a panic, in a panic. How are they going to fix the roads? Their costs aren't going down. How are they going to fix our bridges? We already have, you know, some of the worst maintained roads and bridges in the nation. There are reports that came out about that. Came out recently. Yeah. So how do we pay for those? And one answer that they are toying with is, well, let's let's replace the model altogether. We will charge people for their road usage, ie, you know, what's what's their mileage, we charge them per mile. Depending, you know, irrespective of what they use to travel those miles will ask people on their mind. I have a I have a question. You know, why is it why is it that these these things are treated in silo? You know, when you say we don't have enough money, because you don't have enough, you know, what, barrel tax or road tax or, you know, whatever, what was it barrel tax you're talking about? Fuel tax, fuel tax. We don't have enough fuel tax to pay for roads. Why does it have to be a link? It's like creating a separate profit center, but it's government creating a profit center, it doesn't it's not going to be tuned to the reality. So why do that in the first place? Why not just tax people what you need to fix the roads that serve us all and take it out of the general fund? Why are we going through these logical contortions about fuel tax? That's just fixed that roads. Yeah, so one of the one of the reasons for that is I think is historical. There's something called the Federal Highway Fund, and they give, you know, subsidies to the states. You build a freeway, you get certain subsidy, you, you build a rail, you get a certain subsidy, you know, that is probably open to debate, but that's how it's supposed to work. But they but they want you to have a state highway fund that's just dedicated to those roads. Okay, then we take the money from the general fund, put it in the state highway fund, and we put it in when we need it as much as we need, because we know the roads are important. We don't want to be the number 50 in the quality of our roads where we are now. No, I think it's a good idea. I mean, I had discussions like a couple of years ago with, then was the Department of Director of Transportation. And, you know, he kind of talked about that there was a real real mindset in the legislature that the Department of Transportation, because they had this highway fund, was supposed to be self sustaining, right? Like, like DCCA at least is in theory, it was to be self self sustaining, and, and, you know, living off the fees, the user fees they charge for different business services. And so there was a mindset that Department of Transportation is supposed to be the same way. I'm troubled by this, but yeah, I don't like it either, but those are the facts. Okay, you know, we're not the only state that thinks that way, but we're probably at the high end of when you when you when you put the states on a continuum. And, you know, on one end is, you know, most dependent on on specific road taxes to do road things. And on the other end is, you know, more dependent on the general fund, you know, we're way over here. We're very, very dependent on our, our specialized funds to do fiction, because we don't really do the job. I remember the I was chair of the high tech development corporation. Now it's called the Hawaii tech development corporation. And it has nowhere near the funding that it used to have. And when Linda Lingle was elected, she put the word out that she wanted it to be self sustaining. In other words, she wanted to be the budget at all. She wanted this organization, which was supposed to develop the tech industry in Hawaii, find a way to raise the money to be self sustaining. It was like a profit center. I said to myself, gee, that's backward. It's supposed to its mission is supposed to develop the tech industry. That's the statutory statement of its mission. Instead, its mission changes by de facto. Now it's gonna, it's got to do things to raise the money to exist and pay staff, but not necessarily do the programs. It's got to simply survive. And that was I felt that was so wrong. And you know, and she was perfectly happy to let it fall apart, because she didn't want to give it any money. And little by little during her administration, it got less money. So what I'm saying is, if you use the goal along, say, maybe that was the goal all along. I mean, but if the legislature feels or felt that we need a tech industry in the state, then you build the tech industry the way San Diego, California built the tech industry and, you know, is fantastically successful now, not only for the tech companies involved, but for the whole area. You know, there's a there's a tendency when you're talking about syntaxes to to link the revenue from the syntaxes to to programs that are that are antithetical to the purposes of the syntax. So like, for example, you have the tobacco tax funding, the Johnny Burns School of Medicine and the Cancer Center, right? And then guess what happens? People stop smoking. Now there's no money in the thing. Yeah, the revenue that's that's going to the to the to the School of Medicine and the Cancer Center goes down. And then suddenly those institutions, you know, they they start screaming bloody murder because they have no money. There's no fix for it. I mean, practically, there's no fix for it. So I mean, the whole thing is flawed. Like you said, is to is to give them more general fund money. But but a lot of times, the people who set up those taxes, you know, kind of think of funding, you know, related related things that are at cross purposes with the activity that's funding them. So it's just it's just kind of it's just kind of nuts. Well, at the end of the day, you have a dysfunctional organization, like, you don't have enough money to run it, like the School of Medicine. I mean, we need to fund that. It doesn't matter whether we're collecting it from this, what they call it antithetical organization, the other side of the street organization, you got to you got to fund it. It's the medical school. And why why put everybody in a lather about it every single year for the budget, they don't have enough money. You're building in a problem. You're building in a whole lot of effort that you don't need to build in, just support it. And if you don't have enough money, then find a way to get the money from the general fund. If we're not charging enough taxes to run the state, not to charge more taxes, I'm sorry, we have to do that. And if you want to end the flip side of that is you want to cut things. And sometimes you simply have to cut them, you have to make the hard choices, the hard choices of supporting and the hard choices of cutting. Everybody's afraid of cutting. They're also afraid of supporting. That's why these artificial structures have been built. We're going to give you money, but it's coming out of the tobacco fund. That's all you get. No, you want the medical school. We want the cancer center. We want it to be nationally recognized. We want it to be accredited. We want the school to stay and exist and train doctors. Yeah. So we have, you know, serious problems that come out of this, because it tends to get institutionalized. And I think the legislature sort of turns its back when the cancer center isn't getting enough money. It's a problem. But you know, it's a function of how much money is coming in the tobacco fund. That's not our problem. Yeah, I mean, the existence of these sin taxes gives rise to these silos. And those create even more problems within government, as you pointed out. Because there's a there's a tendency to say, okay, everybody else hands off. Right. And then when the desired, when the desired behavior, socially acceptable behavior, you know, starts coming to pass. Well, yeah, then then the amount of money you get goes down. And and the silo you're feeding is getting very dry. Self fulfilling a self self deprecating process. You know, and we should talk a little about the fuel tax, rather the the barrel tax, right? So the barrel tax was supposed to incentivize clean energy. The first question comes to mind is, you need a barrel tax to incentivize clean energy? How about just incentivizing clean energy? Don't you think that would be we care enough, simply write them a check and support clean energy? Or do you want to make it conditioned on something? And then of course, what happened is a legislature started digging into the barrel tax and taking it for other reasons. So the original purpose, which you know, the original purpose of the barrel tax was to create a oil spill cleanup fund. Okay, it's environmental. Yeah, because I think that the year before or two years before, there was the Exxon Valdez accident that totally followed up Alaska and, and no, environment south of there. And and the sentiment here was quite rightly, we don't want something like that to happen. If it does, we we got to have the means to clean it up. So so the so the instituted an environmental response tax at, you know, five cents a barrel, which was reasonable at the time. Well, then guess what, it morphs into other stuff. It, it gets raised from five cents to a dollar fire. It's a long year. And it now goes to serve food security, environmental remediation, land conservation programs dishonest, isn't it, Tom? I mean, the public gets lulled into paying this amount is this tax, they get lulled, they get used to it. And then you, you know, like, it's a bit and switch, it's a bait and switch, that's what it is. That's not the way we should. That's why I really don't like these silos you call them, which are which are phony, which do not reflect the needs, the societal need. What happens is in this case, that might have been a good and valid societal need at the outset, but it got all perverse, perverted, and then it's perverted now. So in closing, like your reaction, why don't we just scrape all the stuff off the tax code and start again, reevaluate what is the real sin? And what sins do we not tax? And what incentives should we have or not have? For example, we dropped the, the electric car tax. And right now, the state is doing nothing to incentivize electric cars. I mean, you can park at the airport for a few hours. That's about it. So you know what my, my problem is, we need to reevaluate these things all the time, because the society is changing. We need to make make make a clear, you know, public policy connection between the sins and the nonsense. And we have to adjust it all the time. We're not doing that. Yeah, I mean, theoretically, we have a mechanism to do that. It's called the Tax Review Commission meets every five years. But at least for the past decade, for the past decade, that's, you know, they've been kind of instructed that that's not their mission. Their mission is to raise more money. Right. Which, which I think is, you know, not what they were there, what they were created for. That's not what our Constitution says. That's not what the enabling statute says. That's what it is. Well, public policy tax is the most important tax and all the attributes of tax, the most important part of expressing public policy. It's the power of the purse. It's the power of collecting money. And ultimately, because, you know, have the funds, you can't spend the funds without having them. It's the power of spending money. And so we have to really be careful. It's not just a matter of being tight at the far end. It's not a matter of letting, letting people get away with stuff. It's a matter of making sure the whole system works. So yeah, and I agree with you that if you had a simpler system, it'd be easier to enforce. People would know what they're doing. There would be, you know, fewer gotchas, and get better over, you know, better overall compliance. Yeah. Oh, good. I really enjoyed this conversation, Tom. Did we cover all the points you wanted to make? I think so. Tom Yamachika, tax foundation of Hawaii. Much more to come. We're only beginning this discussion.