 Welcome back to Think Tech. I'm Jay Fidel. It's a 10 o'clock clock on a given Thursday. That means we're talking about tax on health care today. Welcome to the show, Tom. Thank you for having me on, Jay. So the good, the bad, the ugly, it's not a nice story about what's happening with tax and the health care industry. Can you talk about it? Sure. Let me kind of give you graphically what the, what the problem is. Can we put up the supply and demand graph, please? This is a series of projections or actual data points that were collected by the John A. Burns School of Medicine. They tried to project the demand for physicians in Hawaii against the actual supply. So the demand keeps going up, up, up. The supply kind of, you know, goes in fits and starts and is kind of like dropping off. There is now a shortage and the shortage is likely to get worse before it gets better. One of the things that the health care community has talked about as causing this shortage is general excise tax. Why? Because the general excise tax is imposed on health care services. It isn't in most states. And because it's kind of a rare thing, the insurance providers who pay the physicians in most cases, they won't cover it. Medicare won't cover it. Medicaid won't cover it. And furthermore, they prevent the doctors from surcharging the patient to recover general excise tax. So what's, what's the doc got to do? They have to eat it. Like if I were to charge you $100 in legal bills, okay, because I'm a lawyer, I would add 4.712% because I live in Honolulu. You would pay me, assuming you were satisfied with my services, you would pay me 104.71. I would pay tax on 4.5% of 104.71, which is, which is the total of what you paid to me, which happens to be 471. Okay, so I would clear $100. That's, that's how the system works right now for most people, including legal providers, grocery stores, drug stores, you know, building supply places, you know, laundries, whatever. Okay. Most business establishments pass on the 4% tax and then pay the resulting amount to the state. Okay. So it really all, it all happens at the consumer level. I build a consumer, I wind up paying tax on my revenue from that consumer, and that's the way that level of the transaction works. What's the next level? So if, if I had insurance coverage for some of the expenses, or, or, you know, if there was insurance coverage paying it, then I would go to the insurer and say, okay, look, I charged Jay 104.71, please pay me. And they would happily cut me a check for 104.71. And then everybody's happy. Now, in the healthcare industry, it's not quite the same, because if I was a doctor and I charge you 104.71, Medicare would come back to me and say, well, look, we only allow $100 for this procedure. So we're going to pay you 100 bucks. And I say, well, what about the 471? And Medicare would tell me, look, you can't surcharge the patient. That's against Medicare rules. So, so I charge you 100, I get paid $100. I have to pay 4.5% of the $100 to the state, um, leaving me with 95.50 instead of the $100 that I thought I was going to charge. That's how it works in healthcare. There's something wrong with that, because then what you're doing is you're nicking the doctor for 4.71. And he has no way to recoup that from his patients as every other retail seller in the state can, right? Right. Right. Well, what about the second level? I was asking about, you know, like, so if I'm selling widgets and I charge my customers 4.71, that is one and 4.71, the fellow who sold me the widgets is wholesale. And he pays what, half a percent. That's right. So, so, so how does that work now? Sure. Let's say you're a drug store. And you sell, and I'm going to give you an example. I mean, you sell me, you sell me some brooms and I buy $100 worth of brooms. Okay. The person that you bought the brooms from is going to pay half percent, not 4%, because you are reselling what you are getting to somebody else. And you tell your supplier, hey, I'm reselling your merchandise so you can charge me or you can pay tax on only half percent, as opposed to the four or four and a half that's applicable to retail sales. Okay. Generally, the supplier won't know what the heck you're going to do with the brooms, but you fill in the gap by giving them a piece of paper that says I'm reselling the brooms so you can get the resellable rate. Please rest assured. And then when it comes time for your supplier to pass on tax, if it chooses to, most suppliers won't pass on more than half a percent. So how does that work in the medical field? Okay. In the medical field, it's very complicated. And let me show you how that works. Let's go to the other chart, the tax chart, please. Okay. So what we have is a couple of different situations. And let me kind of go through them in detail. Let's go to the bottom chart first. That's kind of what we were just talking about. Drug suppliers sell to a retail pharmacy and because they're selling it, the retail pharmacy is selling those drugs onto the patient, the drug supplier is entitled to a half percent rate. Now, for some drugs, namely prescription drugs and prosthetic devices, the legislature has said, well, you know, retail pharmacies, you're exempt. So the amount of tax that the retail pharmacy would pay on this situation is zero. Okay. And the drug supplier still gets the half percent because the retail pharmacy is a licensed reseller with a GET license and they are reselling the drugs in a retail transaction. That's how the system works now. Yeah. And the legislature in its infinite wisdom made the retail transaction exempt. Yes. This was back in 1986. Now, there's a wrinkle to this because hospitals are treated a little bit differently. And let me show you why. Let's go to the first part of the same graph. We have a drug supplier selling to a tax-exempt hospital that sells to a patient. Now, most hospitals, I think all of the hospitals in Hawaii are tax-exempt organizations. So 501c3 tax-exempt organizations. Okay. And there is law from a couple of territorial Supreme Court decisions decided obviously in the 1940s, which said, okay, if that's the kind of transaction that's going on, yes, we are going to say you the hospital are exempt from the 4% tax on your drug sales because you make those drug sales to provide medical care and medical care is an exempt purpose under the GET law. But we are also going to consider you an unlicensed seller. So when you buy your drugs from your drug supplier, they're not entitled to the wholesale rate. So the 4% rate hops back up to the supplier to hospital level. Now, in most cases, you don't see that as a problem because drug suppliers typically have special pricing for hospitals known as own-use pricing. And then the prices are considerably lower than, say, what would they would they would sell to alongs or Walgreens? Well, under existing law, is the drug supplier paying the 4% or the half percent? They're supposed to pay 4% under existing law. Are they paying it? Well, I don't know. Okay. All right. Some are and some aren't. Supposed to pay 4% because the ultimate transaction is tax-free. No, because they are selling to an unlicensed seller. Okay. One of the requirements for the wholesale rate is you have to sell to a licensed seller. And the Supreme Court in its wisdom said that if you are selling to a tax-exempt organization that resells within the scope of its exemption, then it's not considered a licensed reseller. And therefore, the drug supplier, in this case, would not be eligible for the wholesale rate. Okay. Because look at the bottom transaction, the retail pharmacy does not pay 4% excise tax and the drug supplier still gets the half percent rate. Okay. Got it. Okay. So I didn't say it was going to be easy. Okay. This is a complicated area. But again, you've got at least a couple of decisions of the territorial Supreme Court that we made in the 1940s that give us this result. Does it make sense? Maybe not, especially in light of today's conditions. So, you know... What effect does it have on today's conditions? Well, the doctors are certainly complaining about it. They wind up eating the 4%. They wind up eating the 4% because we know wherever it's applied, because Medicare and Medicaid say we ain't paying for no tax. We just give you a certain amount of dollar, certain dollar amount for the procedure based on what the diagnostic code is. And this is all you get, period. Okay. And they're sorry. Yep. So is there an indication that doctors are leaving town because of that? I know there are other factors that would make them leave town, but is this... Did they oppose this? Did they complain about it? Yes, they do. What's the process? They've been complaining about it over the last 15 years. Okay. And yet this system still happens. And there is... As we were talking a little bit before the show, there is a bill in the legislature that would make things worse. There's a bill called Senate Bill 2020, which is... And there's a house companion. Let me see if I can pull up that number. House Bill 1407. Both of them, I believe, are still alive. And they would say, okay, in either of these scenarios, okay, you need a 4% rate to qualify the previous leg for wholesale. So if this bill passes in the scenarios that we talked about earlier, the drug supplier would pay 4% in both scenarios, both when they sell to a taxes at the hospital and when they sell to a retail pharmacy. And it would have, I think, broader implications than that because, you know, let's say you have somebody who imports supplies and then manufactures them into parts. Those parts go into a, you know, sub-assembly of another device. Those parts go into a sub-assembly of another device and they go into a bigger device. Okay. So you have, you know, four or five levels of manufacturer to get a certain device. And if it's all done in Hawaii, it goes, you know, through the tax system, you know, four or five times. Okay. Under current law, everything except the final leg is at half percent. If the bill passes, every other leg is going to be 4%. So you might see 4% popping up two or three times. Who put this in? We don't know. Somebody who wants to have a tax increase. Yeah. We suspect that's the department. You know, the tax department's official bill is supposed to go through the governor's package, but I think there are a couple that didn't. You know, we do know that the tax director has some friends in the legislature and, you know, they may have been persuaded to introduce, you know, a couple of tax bills for their old buddy. Okay. We don't know if that's true or not. That's just a rumor I've heard. But, you know, with the degree of sophistication of tax bills like this one, it seems to be, you know, kind of above the pay grade of most legislators. So who's supporting it? Who's pushing to, you know, I guess it's still alive. Who's pushing to have it pass? And who's opposing it? The department's pushing it. They say they're in strong support. We've provided comments as usual. The hospitals are opposing it tooth and nail, saying that it would increase, you know, the cost of health care by millions. And so, and so we've have, you know, we have this kind of fight brewing, but, you know, again, because the administration or because the department is pushing this, it looks like the bill's still moving. Do we need a tax increase? And do we need a tax increase on health care? You're a fiscal person. You look at public policy in broad terms. Do we? Do we need that? We need another tax increase like a hole in the head, especially in times like this when we got a budget surplus. We have all kinds of federal aid money coming into, you know, into our state. Grassard Institute has estimated that we have a $3 billion budget surplus. $3 billion. That's, that's more than chump change. Oh, and we just gave $600 million to the Hawaiian homelands. Well, that's that's not an end deal yet. Oh, okay. Okay. Thank you for that. Yeah. Nothing's, nothing's over until the, until the final gavel. But let me say that it just seems this year, it seems to be burning a hole in our pockets now. It's looked like they're looking for ways to spend it this year. Oh yeah. A lot of the legislators are up for reelection. Okay. They want to make an impact. And they want to make an impact this year. So, you know, how can they do that by, you know, by spending it on things that are close to, you know, close to their hearts or their constituents' hearts? You know, one of the things that's come up since the last time we spoke, maybe we touched on it then, is this whole thing about credibility of the legislature. And of course, it's driven off the revelations over corruption and bribery. But where do we stand on that now? I mean, if you don't have the level of confidence, trust and confidence that maybe one, at one time we did have in the legislature, how do you see these things? And maybe you look at every bill differently. Do you look at every bill differently now? Well, we don't. I mean, we, you know, typically look at these from attacks and public policy perspectives, but the rumors are going around that, you know, because Senator English and Representative Cullen were charged by information rather than by indictment. The rumor is, well, there's more coming. And I think, you know, most legislators either, you know, even if they don't have anything to really be worried about, they'd be more careful. And the, and the legislators who do have, you know, something to be worried about would be very careful. Hmm. I have a question for you. Sure. What's the question? If the tax hits every level of subassembly in Hawaii, wouldn't this incentivize what few manufacturers we have left to offshore their production through the mainland or elsewhere? Oh yeah, absolutely. Doesn't this hurt virtually integrated businesses? Yeah, vertically integrated businesses would suffer the most. Manufacturers would suffer a lot because they have to go through several different production stages. Well, actually, if it actually would help vertically integrated businesses because if a manufacturing operation does several stages in-house, okay, then they would avoid the different 4% layers that are incident to, you know, having, you know, A sell the B, B sell the C, C sell the D and so forth. If A does, you know, these C's and D's function itself with its own employees, then you can avoid those multiple layers of taxes. Incentivize a company that was involved in a vertical chain of production to acquire organizations that it was ordinarily dealing with as separate organizations. Make it all one big organization and that way you don't have to pay tax on what you're doing in-house. Is that possible? That's not easy to do, is it? Well, it depends on the kind of manufacturer you are and where your supplies are. If, for example, you're a coffee grower and you need Hawaii's climate, then, you know, you can only outsource so much because you got to grow the coffee here. Well, it strikes me. Let me pose it to you. You know, that beneficial possibility, that is, of not having to pay tax on intramural production and transfer in a given single company, that's a benefit for that company and it encourages acquisition, I suppose. Yeah, it encourages bigger companies. Yeah, which may or may not be easy to do because you need money to do that. Right. But the other possibility, which seems to me pretty detrimental, is you're raising the level of tax between all the component companies, however many there are, and where you were getting half percent on maybe a number of companies, now you're multiplying that by eight, at least eight, on all the various steps in the assembly. That's a lot of extra tax imposed on manufacturing and, for that matter, the entire economy. Yeah, and that's what we're trying to say to lawmakers that this is going to be one of the effects of that bill if it passes. So, you know, we're very concerned about it. And that would outweigh the benefits, if you call them benefits, of the fact that you know, you can avoid the tax by acquiring, merging with other companies in the assembly process, right? Or by outsourcing it. That's a small benefit against a huge detriment. Yeah, or by outsourcing it. For a lot of people, it's easier to outsource. But outsource outside the state, since sending our economic activity away. Yeah, so this goes to something I'm sure that you and the Tax Foundation think about all the time. That is, and you and I have talked about this many times, and that is tax is an enormously powerful member of the toolkit in our inventory at moderating the economy, at encouraging the economy, at shaping the economy and various sectors in the economy. And one would think, recognizing that, that's economics 101 or high school economics. One would think there would be a comprehensive tax plan and policy to shape and improve the economy of Hawaii. Where can I find that plan, Tom? Well, there isn't one. I mean, the Tax Review Commission, which has just rendered its report earlier this year, was supposed to do something like that. I mean, its job is to its job is to render opinions on the tax system as a whole. But they didn't do that. They just gave us some suggestions for raising taxes like, hey, let's adopt the carbon tax. Hey, let's look at a tourist green fee, stuff like that. Maybe it addresses revenue adequacy if they're thinking, well, the state government's not getting enough money, so they have to whack us some more. But I don't think that's the job. Obviously, there are different opinions on that, and the existing members of the Tax Review Commission figured their job was otherwise. The other part of this, which is central in our discussion today is healthcare. So if I make the conclusion, and I think from the media over the past 20 years, we can make the conclusion that we have a doctor train in Hawaii, we have a healthcare problem in Hawaii, then presumably we would have a plan, a plan to minimize the departure of doctors to maximize the medical services available to the citizens of the state to protect and preserve what we have and to approve it. So I guess I'll ask you the same question. Where can I look up that plan? There isn't one. That's, I mean, supposedly, that's why we elect lawmakers to come up with that kind of thinking and then put it into action. So maybe it's an argument for getting different lawmakers. Yeah, it certainly sounds like that. The other thing is, let's look at Westlature for a minute. If I ask you where these thoughts should properly be initiated, that is, planning for the economy, reports, inquiries, recommendations, where should that be coming from within state government? Is this something that D-Bed, the Department of Business and Economic Development and Tourism should be generating? And if so, to what committees in the state legislature should that go? And what committees in the legislature should be addressing the problems and the plan and the ultimate massaging of the economy? Sure. The D-Bed does have assets to address that. They have a bunch of economists. They are supposed to be concerned with economic development. My observation is they write reports reporting the status of the economy. That's not the report I'm talking about though. The report I'm talking about is going further than just reporting on the status of the economy. It's what a better economy would look like and how you get there. Well, that's political leadership and that should be coming from the top. It should be coming from the governor's office and then from there perhaps to the economic development committees of the House and Senate and then to the money committees and then hopefully they come up with good laws. So the bill you're talking about, the very troublesome bill about the gross exercise tax, did that come from the economic development committees of either the House or the Senate? Did it come from D-Bed? Did it come from the governor? Well, let's see. The Senate bill was introduced by Senator Keohokalole. It went to the Ways and Means Committee directly, which is their money committee. The House bill went to, I believe, the Economic Development Committee. It was introduced by Ryan Yamane, who I believe heads the Human Services Committee. It was referred to the Consumer Protection Committee, but that referral got cancelled. So now it's going to finance, which is Sylvia Loup's committee. It was a bill that we're talking about, a part of a plan or just a standalone. It's a problem. Let me go to the question of healthcare now. So what are the committees, who are the agencies that would address the preservation of our healthcare industry and healthcare services for the public? Where did that come from? I believe the Department of Health has some responsibility, Department of Human Services, because they administer Medicaid. There are health committees in both the House and Senate, and then the money committees would get involved as well. Okay. So did these bills go through those committees? This particular one didn't. So they don't have the benefit of whatever expertise exists on those committees? That's correct. So what does this all teach us? I mean, just to sort of summarize a little bit, these bills are really out of the blue. They look like they're just intended to raise money. They don't necessarily look at the impact they will have on state health services or on the state economy. That's how most bills come in. They're one-shot affairs. They're introduced by an individual legislator or sometimes more than one. They're introduced to address specific constituent concern. The idea is that the bills go in. They may start off as one-shots, but they may be combined with other things. They may be amended as the discussion on the topic goes on and through the various committees to which it's been assigned. Is that good? I don't know if it's good or bad, but it's typical. It's typical good. I mean, we're examining this because there are questions that the media has raised over trust and confidence in the legislature. We saw the Supreme Court knock down and gotten replaced a couple of months ago, and the media coverage of that said, well, okay, that's one problem. Gutton replaced was one problem, but it will need further litigation. It will need further correction by statute and otherwise before we can feel that the kind of abuse that was represented in Gutton replaced can be corrected. I mean, such as, for example, the way the conference committees work at the end where bills come and go without any explanation. So where are we in this? These bills are emblematic, it seems to me, of a lack of comprehensive analysis and concern for the future of the state, and they represent the wishes and will of a few constituents, but nobody's actually watching the larger picture, the store, so to speak. Am I right about that? What are your feelings about that? Well, I mean, I think that there are lots of people trying to watch the store. The money committees, for example, they have to deal with the budget and hundreds and hundreds of bills, so they're in a position to coordinate what's going to go through and what's going to get stopped and tossed to the cutting room floor. And that's the kind of government system we have. And really, it does have the potential to work. We just have to have the elements cleaned up once in a while. And hopefully this corruption scandal will lead to a little bit more cleaning up of what we got in there. Well, we have a gubernatorial election coming up, not too far. Well, we have an election for everybody. Yeah, okay, fair enough. Fair enough. Let's make you a candidate. I mean, a hypothetical candidate. What platform point would you take? What would you say to the people you want to vote for you about what bills, what initiatives could be brought into play to make this work better and make the public more confident of the system? Well, I think it's important for the lawmakers to understand that they have to be responsive to the concerns of the broader public, that we've got a big health crisis and that we have doctors already heading for the exits. I mean, like regular people too, but doctors heading for the exits at a time when we need them. I mean, who can be in the middle of a pandemic without doctors, right? So we need to, I think, look even at that sector of the economy as not, oh, these are rich fat cats that can get dumped on. But hey, if we need them, we better start treating them with respect and not dumping on them at every opportunity. So we, yeah, I mean, government needs some money to live on. So we have to have some taxes, but we don't want to see more than necessary, and we want to see good controls on what's there. There are a lot of fiscal gimmicks that have been developed over the years, and a lot of them are still in use, like special funds, to reduce transparency to get rid of the public in the decision-making process. The conference committee rule with no public input is also another tough thing, and maybe that ought to be re-looked at. So, you know, so as to increase transparency at that stage as well. You know, it strikes me there are a lot of lobbyists and special constituents that try to have the maximum effect on a given bill. But when you take, for example, the tax foundation of Hawaii or an organization like Common Cause, which is a non-profit, which appears on these bills, and they, more than a, you know, a business organization that is a constituent seeking a particular agenda, they, that is the non-profits, they represent the public, or at least their view of what the public should have. Are they getting an appropriate hearing? Is the tax foundation Common Cause and all the others, are they getting an appropriate hearing in the ledge, or is it the same kind of hearing that a business organization with a specific business agenda gets more or less or the same? Well, I think, you know, they're listening to non-profits more now. When the decision on Gut and Replace came out, you know, there were prior decisions on it too, when the tax foundation versus state decision came out. You know, we might not have realized it at the time because we lost the case, but it was, that decision made it much easier for non-profits like ours to get into court and sue people for over things that would be objectionable to our constituents. Okay, there was a bill that was, you know, championed by the Speaker's office and put in the legislature the very next session seeking to reverse the the result of that case, you know, I and other non-profits, you know, testified that that would basically squish the the non-profit sector and and legislators listened. I mean, it was kind of the one of the one of the rare instances when the tax foundation and other very, you know, right-leaning organizations, I mean, left-leaning organizations were on the same page. And a number of legislators kind of remarked on that. I mean, you guys are taking the same position. I mean, that's very rare. And I said, well, that's because it's what it is, representative. Well, you know, one thing is you talk about all this litigation of this, so it establishes a kind of interaction between the courts and the legislature on policy and respecting these non-profit cause organizations. It seems to me, though, that because what you're also saying implicitly is that if you have to go to court to be heard, if you have to go to court to get your views understood and respected, that's a flaw. It's obviously better not to have to go to court. It's better that you should, you know, receive the kind of respect that a non-profit bent on representing the public should get. And then you wouldn't have to go to court much at all, would you? Yeah. But the reality is that there's, you know, dozens and dozens of non-profits representing all kinds of causes. And if you're a legislator, who do you listen to, right? I mean, you got to listen to somebody who is giving you credible advice, who is, you know, telling it like it is, who's non-partisan and telling you the facts and the truth, as opposed to, you know, what somebody might want. Fair enough. Tom Yamachika, President of the Tax Foundation of Hawaii, very interesting discussion, not without complexity, but nevertheless, very important because tax and tax legislation always has an effect. And sometimes we see it right away and sometimes we find out the hard way. Thank you so much, Tom. Thanks for having me on the show, Jay. We'll see you in a couple of weeks. Aloha. 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 thinktecawaii.com. Mahalo.