 Well, let's do talking tax with Tom then at one o'clock on a given Wednesday. Hi, Tom. Jay, thanks for having me on the show. That's Tom Yamachika. He's the president of Tax Foundation of Hawaii. We're here to talk about tax. Why this is a good moment to talk about tax? Because David Ige has executed his vetoes. He had a list of 20, and he executed 18 of them. He's vetoed 18 bills. And we're going to talk about not only the process, but exactly what happened. And we're going to talk about, in terms of tax, the implications of what happened on his vetoes of the tax bills. So the first thing we should understand is, where are we in the continuum? The legislature passes bills. It tells the governor what bills is passed. He has a certain number of days, weeks to make a list of the bills he has inclined or of thinking about vetoing. And then the only way he can veto a bill is if it is on that list. If it is not on that list, he cannot veto it. That's correct. And that's designed to give the legislature notice of what he's planning to veto so they can figure out whether they're going to call an override session or not override meaning if the governor vetoes a bill and both houses vote in two-thirds in favor of the bill, then the bill becomes law anyway. And that's called a veto override. Yeah. But the de facto is that the decision to have a session to override the special session costs millions to do the special session. And that's a decision that's made by the leadership of the House and the Senate. They decide whether they are going to call a special session. Yeah, although they do have meetings internally within the chamber and I guess get people's take on what they're inclined to override and what they're not. And if they don't have the votes, I mean, at least they can compound. So if they don't have the votes to do the two-thirds thing, then why call the special session? Why call the override? I suppose you have an interesting situation where they did have the votes that they decided not to call the override, not to call the special session. That would be interesting. I think that would result in the front line, a headline. Well, that and probably change in leadership. Maybe so. Yeah. So they've already indicated that they're not going to have a special session. That's right. No veto of the 18 vetoes that he issued is worth their while to have a special session override. And I guess they fielded it and found that there wasn't sufficient votes to override a veto at any of those 18 vetoes. So it's not going to be a special right. So basically our legislative session for 2019 is not Powell. We know what's going to become law and we know what's not going to become law. Of the four of the bills on the 20, four of them involved tax or public finance. Those are the ones we were following. Of the four, three of them were actually vetoed. Just kind of a microcosm of the out of 2018 got actually vetoed and two were spared the act. Okay. What was the three that were actually vetoed? Okay. So we talked sometime about the real estate investment trust, Bill. Sometimes known as REITs. The problem there, just to give your people a refresher, is that there are federally privileged entities called REITs. They have lots of shareholders and they invest in real estate. And the federal taxation scheme basically says, okay, we're not going to tax the corporation, but we're going to tax the shareholders instead. As applied to states like ours, it leads to some problems because the REITs do business here. They don't get subject to income tax. The shareholders are not here. So we can't tax them either. So we kind of lose out on the income tax. However, the REITs do pay other kinds of taxes like the GT and real property. I'm just wondering if I am a resident of the state of Washington, for example, where my recollection is there is no income tax in the state of Washington. So under existing law, as now confirmed by David E. Gaye, vetoing the REIT bill, the REIT and for that matter, it's non-resident owners, including this guy we're talking about in the state of Washington. They don't pay any Hawaii tax. That's correct. Income tax. Now he gets a distribution and amounts to a dividend check in the state of Washington. That's income tax. That's subject to income tax, generally speaking. But since there is no income tax in Washington, he doesn't pay income tax there either. That's correct. That's really interesting. Okay. So the arguments that were flying back and forth. I mean, I heard ads. I heard ads. I don't know if you heard ads on the radio and television already about why we should and shouldn't do this. Actually, most of the ads I heard were by capital concentrations that did not want to see the bill pass and that we wanted to see it veto. Right. And they, along with the governor's message, raised the possibility that, oh, if this bill is enacted, investment in Hawaii will be disincentivized. There will be investors heading for the exits, capital will dry up. Whoa, whoa, whoa. Housing, I heard the argument made about housing. We need housing with desperate need for housing, including especially, of course, affordable housing. And REIT money pays for, is the investment capital for a lot of housing in the state of Hawaii. So we're going to have a problem in raising funds if we pass this bill, if we had passed this bill. Right. Raising funds for this critical need for housing and affordable housing. Housing for the homeless. That's touching a nerve, isn't it? Yeah. I think one common thread through most of those arguments was, they're all speculative. I mean, I didn't hear a whole lot of, I'm a REIT, I'm planning to invest in Hawaii, if this bill passes, I will not come to Hawaii, or I will take my oil investments and I will pack up and leave. I didn't hear any of that. Did you? No. No, you're right, it was speculative. So a lot of it was speculative, which kind of bothered me. Because even when the Amazon click-through nexus bill was being considered by the lingual administration some years ago, Amazon did come out and say, look, if you pass this bill, we are going to cancel all of our distribution agreements with Hawaii people, and we will go home. And that's what led Governor Lengel to veto the bill at that time. Yeah. Well, it's really interesting. By the same token, by the way, I never was straight on exactly how much money it would have raised for the state had the bill not been vetoed. I heard that a few million dollars, I heard up to 60 million, but how many do you know? There were varying estimates. A lot depends on the assumptions that you make, but the estimates ran between four to five million in the first year to 30 to 60 million, again, depending on who's money and who's statistic you believe. I think everybody was being careful. I mean, both the constituents, the advocates for and against, were being careful. I mean, you don't want to say how much money you think it'll realize for the state because you could be completely wrong and embarrassed later. Likewise, you don't want to say that you're not going to invest anymore in Hawaii because you may invest anyway, even if the REIT bill, it doesn't cost the REIT anything. Think about that. It costs the individual REIT owners on the mainland. That's who is actually going to pay the cost of a bill like this. That's right. In the end of the day, it's all a pass-through anyway, like a limited partnership. Yeah, it all gets passed on in the end. Any taxes are imposed at the entity level. They have to be absorbed somewhere. Yeah. The other thing that strikes me is let's take a state other than Washington. Let's take New York, where the income tax is really steep. If the bill had passed, the individual would have received the individual owner, would have received less money from the REIT because the REIT would have had to pay taxes and that would reduce his share of the net. It doesn't mean he has to pay twice. He has to pay the New York income tax on whatever he gets, but what he gets is less because Hawaii imposes a tax in that circumstance. That's right. So it's not like it would be taxed on. It's unfair to him or anything. It would be taxed on a lesser amount. The only time it would be unfair or at least have an effect would be like in the case of the state of Washington, where he would not be paying Washington income tax. Or if the shareholders attacks exempt organization like a pension fund or a sovereign provident fund or something like that, they don't pay tax at this level on dividends anyway, either federal or state. That's true. They would suffer. You can't argue with that. They would suffer. On the other hand, Hawaii needs to have revenue like that. I'm from a tax policy point of view. If the governor had not vetoed it, it would have been okay for tax policy, right? Well, let's kind of go with that point just for a second now. This bill and the next one I'm going to talk about, which we call the Airbnb bill, they were primarily advanced because the legislature thought, hey, we need money for programs and services. Now, whatever those two bills were going to produce, they ain't getting it now. So the governor was asked, well, how are you going to compensate for this? And he said, when he'd made a press conference, at the time he announced the intent to veto this, he said, well, we're going to have to apply restrictions on state government, which he has the authority to do. A certain amount of budget goes to an agency, and he can tell the agency, you spend 10% less. Yeah, that's always hard. You go to an agency and say, slice your budget 10%. And the agency says, what 10%? What programs you want us to drop? And the state says, you figure it out. You just dropped 10%. That's all you do. This is very hard. And sometimes when this happens, the agency makes a mistake and drops the wrong programs. But the budget does get reduced when that happens. I'm not sure if that's a good way to grow or to evolve or to shrink state government. It needs more nuance to say what programs survive and what programs don't. Yeah, I mean, for a number of years, that's what the EGA administration had been doing. The administration too. Yeah, but I think more in the EGA administration, because the restrictions were, I think, 10%, as opposed to lingles 5%. The agencies had to cut back on everything they did quite a bit. And there are a lot of costs that are hard to avoid, like people. You have warm bodies, you can't really fire them, because otherwise the unions would get upset. Right? I forbid. So cutting the amount you pay for salaries, benefits and so forth is difficult, so you have to cut somewhere else. It's true, you're right. So you roll back maintenance, you roll back, you know, purchasing equipment, new projects, new construction, all that. Yeah. So you're really holding back in sort of a progressive development of the state, and you're left with a kind of boiled down workforce that is the most expensive part of the program, because not only do they get paid and sometimes well, but they get all these retirement benefits, which are remarkable and better than many other states. Right. Now, I mean, to be fair, the individual agencies don't, the retirement part is not in their budget, it's in budget and finance, but they have to deal with the personnel portion. Yeah. Well, you know, it's nice that they say that, and it's nice that, you know, Lingo said 5% and David D. Gay says 10, but at the end of the day, it puts stress on the taxpayer, because to the extent that we don't have money, then we're always going to be looking at raising taxes in order to cover the shortfall. Yeah. Or providing, you know, less in terms of product services, you know, when you need help from the state, is somebody going to be around? Right. Maybe not. Right. And what makes this, you know, excruciating is that we are facing climate change and other, and other unliquidated liabilities of, you know, and 20, 30, 40 billion dollars, we don't have the money, and we won't have the money. And, you know, that's really problematic. Climate change is going to cost billions. What are we going to do in duress? What are we going to do after that big storm that's coming anytime? We will not have the money. And then there'll be, you know, the economy be busted over the decline in tourism. We will be in bad shape that way. Well, I think a lot of people, you know, are too worried to see even that far out. I mean, they're worried about, can they make the rent payment next week? And a lot of people can't. You know, Houché gives me a headache. Whenever I have a headache like that, I need to take a break, Tom. Can we take a break together? We're going to take a headache break. We'll be right back in one minute. Tom Yamachika and me talking about that. Aloha. My name is Mark Shklav. I am the host of Think Tech Hawaii's Law Across the Sea. The Law Across the Sea is on Think Tech Hawaii every other Monday at 11 a.m. Please join me where my guests talk about law topics and ideas and music and Hawaiiana all across the sea from Hawaii and back again. Aloha. Aloha. I'm Sharon Thomas Yarbrough, a host here at Think Tech Hawaii, a digital media company serving the people of Hawaii. We provide a video platform for citizen journalists to raise public awareness in Hawaii. We are a Hawaii nonprofit that depends on the generosity of its supporters to keep on going. We'd be grateful if you go to thinktechhawaii.com and make a donation to support us now. Thanks so much. That was like a good, et cetera, number nine, very good. With that, Tom Yamachika and me doing tax here and talking about David E. Gay's vetoes. You mentioned there were four of them. We covered the REITs. You mentioned BNB, the BNB bill. We can talk about that right now. Then we're going to talk about movie tax credits. You can talk about that. And then the VAPE bill will speed through all of that. So Airbnb, I think it's complicated. You think it's not so complicated. Yeah. I mean, what the bill is trying to do is we have people who, for whatever reason, rent out either part of their houses or their entire home or their entire apartment or whatever it is, two transients so they can earn some money to pay the mortgage or whatever else they need money for. And the only thing that the Airbnb bill was supposed to do was to say, okay, platforms, you can register to collect and remit tax. What that means is the owners have to pay GET. They have to pay the transient accommodations tax. Like a hotel. Like the hotel. A lot of them don't. And to prevent the leakage, the platform said, okay, let us register and collect the tax for you. Why did they do that? Was that being nice or what? That's one theory. Another theory is they wanted to, they have another agenda. Not sure what that was, but they wanted to protect their homeowners. Now, the one thing that the bill did not address was that a lot of these BNBs are illegal at the county level, because there are county zoning laws that say you can't do this kind of business here in this residential neighborhood. Serious penalties. Well, they got a lot more serious. Maui and Honolulu now have penalties up to $10,000 a day, okay, which is kind of not what happened, not what the state of affairs was before, but that's what it is now. Fiscatory comes to mind. Definitely. Now, so the state in this particular bill wasn't going to share information with the county. They don't have to. What makes them have to share information with the county? Okay. And my... Sounds like a wink and a blink thing. You go after yours, I go after mine. And if the twain don't meet, it doesn't matter. Yeah, because actually the states have the state and the counties have competing interests. Okay. The state's interest is if business was done, we have to tax it. Okay. Like Al Capone. We don't care if the business was legal or not. Business was done, we get to tax it. Counties are saying, oh, but this is illegal and we've got to enforce it. You know, never mind that they weren't enforcing it at any time prior. Okay. But they want to enforce it now. So... I mean, I can see the homeowner walking into the $10,000 a day hearing and saying, I paid the tax, actually Airbnb paid the tax. You know, I'm a good boy. I did the right thing. And the zoning is unreasonable. And I need the money for my mortgage, otherwise I'm going to be foreclosed. Well, that's where you have the conflict, because you have two different governments. They say two different things. They're not consistent. And they don't have to be. They don't have to be, but wouldn't it be a better world if they were? It would, yeah. Okay. Anyway, so that's the part where my head begins to spin. Not to the point where I take another break. My head spins when you have two jurisdictions. This is like the highways. You have state jurisdiction on some highways and county jurisdictions and all that. And nobody knows which highway is what and all that. And they don't necessarily coordinate their efforts. That's right. So, okay. So what does it mean? He vetoed the bill. He vetoed the bill. Now there's no platform going to collect it, that each homeowner is on his own, right? Pay the tax or not pay the tax. Right. So it doesn't change the underlying law. If you do a transit vacation, you're liable for the tax. You've got to pay it. Okay. If you haven't been, you better make peace with the state because you're liable for these taxes. It's a Sophie's choice. You notice it's something like the census question that's pending at the federal level. I'm the homeowner, right? Do I pay the tax? Because if I pay the tax, maybe one of these days they're going to compare notes and then I'm going to get nailed on the zoning. So if I don't pay the tax, nobody would be a better of it. And I think you're going to have a lot of scoffers coming out of this deal if we don't, if we don't already have them. We already have them, I think. Yeah. Yeah. So this is going to encourage people not to pay, not to pay the gross sex tax. Maybe. But again, the governor's objection to this bill was, hey, you know, if I sign this, it's going to legitimize these trans-invocation minerals in illegal places. Well, that may be de facto true. And maybe that is why Airbnb stepped up, you know, to say that it would stand as the tax collector. Because, you know, my argument before as well, the homeowner is doing the right thing. Airbnb is collecting. The state is getting its GET. Why punish the homeowner in those circumstances? Well, you punish the homeowner because he or she is renting in a place where they're not supposed to. Right. But Airbnb will be seeking changes in the zoning law. They'll never get it. Okay. What's the county issue? It's a different jurisdiction. Yeah. It's a different legislative body. Interesting. So is this a good thing? Do you have any thoughts? The, I don't know about the policies involved, but the one thing I do know is that the reason why this bill was being pushed in the first place was that it was a revenue razor, that you do this kind of withholding scheme, you know, like it is for every day employees who come to work. The employer withholds and pays taxes, right? Because if you trust the employees to do it themselves, they probably won't. Okay. So you have the withholding mechanism in place, compliance is a lot better, and you get more money in the door. And this money in the door is not going to be happening now that the bill is vetoed. Yeah. And what's interesting is if you look at the money on both sides of the equation we've been discussing, the gross excise tax as collected by Airbnb, that's a substantial amount of money. And there's a fair guarantee that they would, you know, collect it and pay it over to the state. It's big bucks. Finding people $10,000 a day for zoning violations. The counties don't have the resources to go after them. They're not going to do it. It's going to become a real churn on every single fine that they levy. People are going to appeal that. It's going to take forever. And it's not a predictable cash flow at all. So what would you rather have if you were the government, I mean the combined government, what would you rather have? Well, if, and I think this is the point that was made in some recent editorials, if you're going to have these zoning ordinances, right, you have to have the resources to enforce them. If you're not going to enforce them, why do it? So we have a lot of ordinances that deal with zoning and permitting and that kind of stuff. We have an infrastructure that is woefully inadequate to enforce them and deal with them. Humongous lines for permits come to mind, for example, inordinate delays and getting anything approved and built. That is a major problem. We don't have the infrastructure, we don't have the resources and there's really nothing out there that suggests we will in the future either. Yeah, instead we're planning on spending all this money on other stuff, you know, like rail and the Blaisdell Center and whatever else have you. And I kind of shudder to think what's going to be in store for taxpayers at least here in Honolulu. Yeah, well it's like cutting the budget of the tax office. If you cut the budget of the tax office, you're going to get lower collections. You get lower collections, you're kind of... You're going to cut the budget even more. Yeah, you have less money to, you know, it's a spiral down. Okay, let's go to the next bill. Okay, one bill out of the four that did become law was the movie credit bill. Now, what do I mean by the movie credit bill? We grant credits to productions that come here, film, employee people here, that kind of thing. There's a multi-step process to qualify. And where we had it was, we had a statewide cap, which is like all the productions anywhere in the state, the maximum credit you can pay out is $35 million. Now, that might have been okay a few years ago, but we now have like two major TV series here, namely 5.0 and Magnum PI, right? And that frankly eats up most of the 35 million. So you want a feature film like Pirates of the Caribbean or Jumanji to come here. There's no space left, at least in the credit landscape. Yeah, well, let me add a thought and that is there's no space left for the Hawaii filmmaker either. This is all Hollywood style. This is the big boys coming and, you know, making national or global films, but it really does not serve as an incentive for local filmmakers. For local filmmakers, the amounts usually are a lot smaller. So it's easy to kind of like, you know... Are they getting anything? I think they are. You can shoehorn them in easier than a major production. I think the local film industry is not up to what it could be if they were really incentivized. But I think, you know, the other reality you have to face is that a major production comes down here. They spend major amounts of money in our economy. Yeah, sure. It's just a coupon clip. You know, we're investing. It's an investment. Yes. And they hire a lot of people, especially the unions, right? And they throw money all over the place. Sometimes they throw more money around. They should. You know, they spend a lot of money on these big budget films. They do. And we get a lot of it here in Hawaii. So the film office, the film incentives for that. They're not necessarily to build great films. They're not necessarily to build a film industry. They're a manner of jobs. Right. And so what this bill does, and this is the one that Governor allowed to become law, is it basically raises the 35 million cap to 50. 50. Well, it's a substantial increase. Yeah. I mean, it's not what Hollywood wanted. Hollywood wanted the cap to be removed entirely, but that's not what it is. Yeah. You still have a limited pot. Yes. Yeah. And we can't spend any time on this, but they don't have an Act 221. They don't have a tax credit. And that's really sad. They used to be the two of them were joined at the hip, right? Do you remember? The original 221 was a combination of film and tech investment. Now it's film, but no tech investment. They have some tech investment incentives, but they're in different places. How do you say peanuts in front? Never mind. Okay. And the last one, let's deal with the last one. The last one is a bill that started off imposing substantial tobacco taxes on e-cigarettes, but it kind of got morphed at the last minute into a bill that says, okay, educators seeing e-cigarettes in the classroom or related to paraphernalia can confiscate them or are directed to confiscate. No tax confiscation. Yeah, it's just confiscation. And what does that mean? You rip it out of his hands? Are you entitled to use force? I'm not sure about the force part. I'm sure that no teacher would use force. It's too risky. What it does say is that the student has to cough up this e-cig and it's not theirs anymore. The school takes possession of it and the student doesn't get to see it anymore. That's too bad. It would have been better if he allowed that to become law now. Well, I mean, there were kind of a number of sides to it. The objection was that the law was vague and that it didn't really define what an e-cigarette was. So I think the teachers were concerned that if they act, they'd be challenged and have to kind of go through the court system. They did. And I'm sure that the vaping company is opposed to it, too. And at the end of the day, it's who stands up, who takes a position, who advocates, and has a lot to do. It's not like the governor sits alone in his office without input from the constituent. He hears from a lot of people in the process of deciding what to veto and so forth. And this is all of the bills we talked about. I'm sure he was surrounded with voices. Yeah, pressure on both sides. I mean, I kind of think of him as the balloon in the middle and everybody's pushing on it. Yeah, we have pressure here, too, with Think Tech. As we pass our 30-minute mark, I get pressure in my ear from our engineer who pressures me to close the show down. So, Tom, I'm afraid we're out of time. But thank you so much for coming down yet again. We really appreciate it. Talking tax with Tom. Thank you, Jay. Thank you for having me on the show.