 Good morning. This is 10 o'clock on Thursday morning, March 10th, 2022, and you have tuned into Talking Tax. This show is an attempt to follow what's going on in tax and public finance. I'm Tom Yamachika, president of the Tax Foundation of Hawaii. Jay Fidel, who normally hosts the show, is off today. And with me today, I have a very special guest. He has made a career out of covering the capital and now does it for Seville Beat, the senior reporter there, Kevin Dayton. Kevin. Good morning. Good morning. Thanks for having me. Yeah, thanks for being on the show. So today we're going to talk about half time at the legislature. Today, as you probably know, is the crossover day. So bills have to move from one's house to the other one. And if they don't buy today, they're dead. So we are going to talk a little bit about some of the tax bills that have been introduced and are either still alive or, thankfully, have dropped to the cutting room floor. And we've got a whole bunch of them. You wouldn't think that in a special year like this, when everybody's up for election, that they'd be talking about tax increases so easily, but they are. What do you think about that, Kevin? Well, they certainly are. It's kind of interesting. I was looking back at a little bit of history and in the past, if you think back to 2020, there were a whole bunch of tax bills that were on the table. Now the state budget was in a crisis and it looked like the budget was basically melting down in the early stages of the pandemic. And so if you look back to March of 2020, which was also an election year, they were kicking around. Let's say I got a short list here. They were kicking around applying the corporate income tax to real estate investment trusts. There was a discussion of even a discussion of increasing the state excise tax, which is a pretty dire thing to do. Most of that stuff, I think virtually all of it did not pass because of the fiscal crisis that was going on and the effect that was having on the business community. But they had been known to consider tax increases in election years. But I agree with you that it does tend to make them more cautious. And for our money, basically we're tracking two, what we consider to be major tax bills. I know that you folks are much more intensive in the way you track tax bills, but two big ones stand out to us this year as things to watch, although the prospects for both of those bills are a little shaky right now. Okay, so which ones are those? Okay, one of them would be one that the House just voted on earlier this week, which was, let's see, that was the capital gains tax, that the House bill 1507. And I noticed you have that on your list of bills that you folks are tracking as well. And that was approved in a 46 to five vote. Department of Taxation tells us that if they were to apply that capital gains increase to basically apply it as written that it would increase the state tax date take by something on the order of maybe $100 million a year. So we consider that to be a pretty substantial tax increase. And then the other one would be before we get away from that one, let's just kind of go into that one for a little more detail. That one is basically two things tied together. One, a half of it would take the state earned income tax credit, which unlike other states is non-refundable. It would make the credit refundable and permanent. Now it's refundable and temporary. And it's going to pay for that by basically making capital gains taxable like any other income that a normal individual earns. I mean, right now, although the top tax rate is 11%, capital gains go up to and do not exceed seven and a quarter. So it's been a little bit less. Historically, the reason for that has been because capital gains are kind of made over more than one and probably several years. And there is, or at least at the federal level, it was perceived that taxing multiple years gains in the one year that's realized would create a hardship. So rather than trying to average out over the years over which it's been earned, they basically applied a little rate to it. Now most states don't do that. Most states, from what I understand, do tax capital gains at the ordinary income rates. But then they're applying rates like 5%, 6%. And they don't get into the stratosphere like we do. We're at 11%. I think we're the second or third highest in the country. California is currently the leader of the pack. This is a race we don't want to win. But we should maybe spend a minute talking about the political pitch in favor of this as well. The argument that is either implied or explicit that's being made is, well, this is a capital gains tax and most people don't realize capital gains. If you're talking about an ordinary working stiff, that's a person who probably is not going to realize a capital gain. And therefore, it's seen as a sort of an equalizing. I think some of the testimony on that particular bill was this is a quote unquote tax loophole for the wealthy. And we ought to do something to close that up as a way of making the tax system more equitable. So just so that you may or may not agree with that, but that is the argument that's being made. Yeah. Yeah, certainly the supporters of the bill are arguing that, oh yeah, the tax investments are something that are just made by the wealthy. And ordinary working stiffs bring in wages that are taxed on this amount of income. Why do we give a tax break to the wealthy? And I think the short answer is most working stiffs don't reach the 9, 10, 11% rates at all. So the capital gains are going to be taxed at or close to what normal people are making if you've got normal people there. And if you've got people who are in the 9, 10, 11% rate and yet then it makes a difference. But for those people, you have to understand that they're the ones that are paying 80% of the tax, any. Well, to clarify that, what you're saying is since most people are paying something below 11% on their income, right, because they're not up to the level of earnings where that 11% bracket would kick in, then the existing capital gains tax is maybe closer to what they're actually paying on their income. Yeah, that's right. I hear what you're saying. Maybe we should talk for a minute about the pairing, the decision to pair the EITC, earned income tax credit with the capital gains tax increase, because I think that's an interesting decision that the legislature made to do that. Well, it's not the only one. I mean, the EITC to make it refundable and permanent, that's something that the Progressive Wing was pushing over several years now. And they were trying different things to pay for it. There's another bill that so far is in the scrap heap that would have done it by raising the top income tax rates to 13%. Like as was proposed last year, or that one, actually it did pass, but it got vetoed and the veto stuck. Yeah, I thought it was just interesting, the pairing decision was kind of interesting because apparently the House leadership is not real crazy about it. This idea of putting the earned income tax credit, which is something that it's pretty clear that both the House and Senate are pretty enthusiastic about that this year. That's something they want to do, either as a concession to the Progressive Wing of the party, or just as a good tax policy. They want to, it's pretty clear that the leadership in both the House and Senate want to make the earned income tax credit permanent and want to make it refundable. That's something they feel like they can do for working people in the community. And then to pair that with the capital gains tax increase, or the capital gains tax proposal makes it harder to pass. And when I was speaking with House Finance Committee chair, Sylvia Luke, I want to say about a week ago, she was not very enthusiastic about the idea of pairing those two together. I think she wants to be sure that the EITC passes and doesn't get gummed up in an argument over whether or not to increase that capital gains tax. So that bill might not be the one that covers the EITC issue. So when we wrote up these two tax bills in the civil beat on Monday, and in our discussion of it, we were guessing that that's probably not going to pass. Well, either that or it's still relatively early in the process, if they want to advance the EITC part, and they can do that and cut out the capital gains increase if they want, just another section of the bill that they can they can tax. Well, there's a million ways to do anything down here, right? So certainly that is one possibility that they could pursue that. But you didn't mention that also the House has also approved a bill since we're talking about EITC, we might as well talk about it now, that would that links up the earned income tax credit with the minimum wage increase. Those are two what would be called sort of progressive issues that are, you know, those are sort of crowd pleasers for a lot of people. And to bundle them together like that might make more sense. And I suspect because that's the House's way of addressing that's the bill that on behalf of the House addresses what's going to happen with minimum wage. I suspect that's going to be the vehicle and I'm sorry I didn't I wasn't didn't think we were going to talk about this so I didn't write down the number I don't have it in front of me maybe you do. It's House bill 2510. Okay, right. And that just passed yesterday I guess yeah that was moved. I know there's there's some big controversy about that because the progressive wing of the party thinks that bill doesn't go far enough they want the Senate version and you know of the minimum wage bill. And they're they were advocating to the House that they vote no one on 2510. But I guess that's a conversation that's going to come later. Right, but if the progressive wing were to prevail and were to convince enough people that they should not support that bill, they would be theoretically surrendering their the the EITC as well which is the clever that's the clever part of packaging those two things together the earned income tax credit combined with the the minimum wage increase suggests that you know if you want one you got to take the other kind of thing and I wonder whether that's the way it's going to play out. Right, so what's that other big bill you were following? Carbon tax I didn't see it on your list but I'll bet it's on there somewhere I probably just overlooked it but that one the carbon tax is let's see what we got here. It's a triple referral in the Senate so it passed the House about a week ago and it is a triple referral in the Senate and again Representative Luke was remarking to me that oh we passed that bill for discussion purposes which is usually not a good sign when they when they start making statements like that that this is for discussion purposes it suggests that that also is on kind of shaky ground. There's a lot of movement on the you know the fuel tax space occasion not only by you know various carbon tax proposals but also the Department of Transportation had something called the road usage charge that it was starting to roll out they actually had a bill that would change the $50 registration fee for electric vehicles to a road usage charge but I think that one died a grisly death although you know it's never over until it's over. Understood I think that one will actually be a tough sell because when you when I talk to people there's this sense that if they want to change the system it's somehow going to cost me more. There's a sort of a general mistrust of switching from you know a taxing system that you understand and know and it's very predictable to one that's based on the miles that you drive. Yeah so it's a concern and I think that's going to be a tough sell. The carbon tax even more so I would think. Yeah and I think it's really a terrible time to be thinking about you know things that would hit people at the pump you know given the current geopolitical situation that's already going to make you know prices sky high at least in the near term. Yeah. Now let's we're at the halfway point of our show so we're going to be taking a short break. We're going to be going into some other interesting topics at the legislature when we get back. On April 1st at 10 a.m. Hawaii time think tech will be presenting a 90 minute webinar panel program called Burning Global Issues. This will be an examination of six continents by thought and community leaders living in or expert in those continents discussing burning issues affecting each of them how they relate to the prospects for functioning democracy and what we can learn from all of that. The moderator for the program is Pamela Spratlin a 30 year foreign service veteran who has served as US ambassador and consular official in a number of overseas posts. The panel is comprised of Carl Baker senior advisor of pacific forum on China and Asia. Rupamati Khandekar director of global relations forum on India. Elsa Jark Hadean a consultant with project expedite justice on the Middle East. Ilbert Nua Ghira an economist in Kampala Uganda on East Africa. Carl Ackerman of the social studies faculty at Punahoe school on Eastern Europe and Juan Telo a business attorney in Bogota Colombia on Latin America. The program is sponsored by project expedite justice. We hope you will attend and that this program will help you better understand these important global issues. Please go to our website. ThinkTekHawaii.com and register. Mahalo. We're back in talking text regarding the half halfway point at our legislative session. I'm Tom Yamachika. I'm here with Kevin Dayton of Civil Beat and we're talking about the the bills that are still kicking around at this session. The legislature so it's a very interesting thing isn't it Kevin when people talk about you know when is a good time to increase taxes I say I say almost never. One of the things that you've been hearing I you just you just told me during the break was that this one of our key legislators were saying well we have a whole lot of money this year so why do we need to raise taxes it's it's and that's true. I mean we have more than a billion dollars in surplus. Governor Ege proposed to sock the whole billion dollars away in the rainy day fund. That remains to be seen whether that's going to go anywhere. It doesn't look like it. Yeah. And the governor also had made a pitch for a hundred dollar credit for everybody and it looks like that's not going to go anywhere either because both of those bills died. Correct. So the conversation that I had that I thought was very interesting was either the Senate Ways and Means Chairman Donovan Delacruz made the point that you know it's particularly hard this year to be raising taxes when you're sitting on this a normal a normal I'm sorry enormous I meant to say surplus. So you have the governor's proposal to put that one billion dollars into the rainy day fund and after he made that proposal we had the council on revenues come in with a new projection that suggested that the state's going to collect something on the order of about 890 million dollars more than Ege expected when he made his proposal. So I don't have a good feel for exactly how large the surplus is but it's a monster. And so when you have that much money sitting around as the senator pointed out it is very difficult to make a case for a tax increase but then as you think about that the opposite argument was being made two years ago as the bottom's falling out of the economy we now see that nobody nobody can stand a tax increase at a time like that your small businesses are suffering your taxpayers are suffering that's the wrong time to increase. So you don't increase taxes when the economy is down and you don't increase taxes when the economy is up and both of them seem like very common sense notions and yet if you don't keep up with things like inflation and you don't maintain your infrastructure your roads your schools and so on you very quickly have very big problems and so you have to find ways to raise enough revenue to to run government. So it's an interesting paradox it just it's sort of the political end of things but both of those arguments make a lot of sense. Yeah and there are of course a number of people who are trying to use taxes as a social policy tool they're saying well you know we were talking just before the break about a carbon tax that is that's a way to be more you know force the public to be more environment friendly by discouraging the use of fossil fuels you know it's like you know the taxes that are now on alcohol or tobacco you know you don't want people to use them but if they're going to use them anyway let's make some money off that's kind of that's kind of the mindset behind those taxes so why not why not fuel tax as well. Absolutely but as you pointed out this is a disastrous time to be ringing something like that up I mean when you have the war in Ukraine playing out with the full expectation that that's going to have a dramatic impact that already has on gas prices so the consumers are going to pay heavily for that there's another problem with that bill that was pointed out to me this is I'm talking about the carbon tax bill now it was pointed out to me by one of the advocates of that bill who said that there were some errors that were made apparently in the original drafting of the measure it was intended by at least some of the people who were supporting the bill that it would be revenue neutral but in other words what was supposed to happen is there would be a tax imposed at the pump for example it would actually be collected at the barrel level at the importation level but the tax would be imposed and then the money for that extra tax would be refunded to the consumers most of it less administrative costs would be refunded to the consumers through a tax credit but the way the bill was exactly what the the council not the council room but the tax review commission which which had just read at its report had been recommending that that the yeah let's impose a carbon tax for the social policy aspects but rebate 80 percent of it to consumers and I said that's that's never going to happen it's never going to happen because they're going to grab the money or it's never going to happen because it's not going to grab the money grab the money okay well anyway the argument and that's you know the the carbon tax proposals that or the the one that they have now a 2278 that's what it's got in it it has yeah there's a refundable income tax credit in it but it but I believe it cuts off at a certain income level um or if not this version the previous one did it was most augment the low income tax credits yeah what I'm told for what it's worth what I'm told is that there was an error in drafting the bill and what ended up happening was you had the credit was too small as as drafted the credit was too small and when the tax department actually analyzes the effect of the bill as written the state has a wonderful huge windfall basically you know hundreds of millions of dollars a year in additional revenue that the state would collect but that at least one of the supporters is arguing that that was not the original intent the original intent was that virtually all of the money would be refunded to the taxpayers and I know you may not find that credible but that's that that was what they say the intent was well I'm sure that's what the tax review commission's intent was uh but when you get to the capital things take on a life of their own they certainly do they certainly do there is um if you want to move on there's another issue that I wanted to talk about which relates to property taxes it's not on the table at the capital this year you want to go there let's do it okay so there's been an argument made for a number of years you know there's a great deal of concern about the cost of housing in Hawaii and the extraordinary volume of purchases that are being made by out of state and and international investors um either for second homes or for flat out investment properties and the argument that's been made is that the state the way the state and county taxes together are structured encourages that by basically we keep our property taxes low because we fund our school system which is a major expense out of of excise taxes and other state taxes while the counties and the and the city keep their property taxes low um lower than the most other comparable places or other other sorts of similar desirable places such as ours um that then has the effect the argument goes of encouraging outside buyers to come in buy out property here whether it's for investment or for second homes and their carrying costs are um lower than they otherwise would be or some people would say otherwise should be so the idea is and there I've seen a couple of different mechanisms proposed to do this nothing nothing that's moving this year but it's an interesting idea if there was a way to sort of prod the counties and the city to increase their rates and then perhaps lower um the tax rates that are applied by the state whether it's for the the GE tax which is extremely regressive it might also have the effect of making the the tax system overall more progressive and it's an interesting idea I'm guessing maybe you don't think well let me let me hear what you have to say about that any thoughts well yeah there were some proposals along those lines one was what we call a vacant homes tax that was proposed I think by senator chang last year but but but the big problem with with something like that is it's a tax on the usage of property and the state has no jurisdiction to impose any kind of tax on the usage of property because our constitution says that real property tax is exclusively the county's culliana and and you know I think he and his supporters were kind of you know chewing and thrashing upon that principle and trying to get around it you know by drafting some variants of that measure but that's what they were trying to do so either to to raise the property tax themselves past constitutional amendment which which failed this year as well and we're encouraging the counties to to pass some kind of vacant homes tax now but I don't think there's anything that's really made it out of the box so far but it's kind of a very interesting dynamic to see that play out yeah the the feedback that I was getting from a legislator there's a legislator Kyle Yamashita who's who's been very interested in this idea and his take was that there frankly is not enough trust in the legislature to pursue this issue that you what you would need you would need a community outcry to say hey we need to do something about the property tax rates at the at the city level I or city and county level I should say I have a hard time imagining how that could possibly happen because I you know people don't rise up to demand higher taxes on their property um for anything but but it is an interesting idea because if we are I want do you agree that the tax structure the way it is now is actually encouraging outside buyers to come into this market no you don't think so I mean it is a high tax state and you know if you look at property tax in a vacuum that maybe you can come to that conclusion but if but if you're you know even partially informed I think you would realize that there's all kinds of detriments to investing in Hawaii because you know yeah they won't tax you there but they'll tax you here here here here is here okay well I mean I see your point if you're talking about setting up a business I wonder whether purchasing property purchasing a home that's become sort of a surefire thing in terms of building equity and and making a profit and I wonder whether taxing it property taxes um could be used to discourage outside investment because as you know we've got you know people are crying for affordable housing and at some point the state is going to have to do something with that um and the efforts to build more affordable housing don't seem to have done the trick just yet yep I mean there that is is among a raft of problems that we're considering um you know dilapidated infrastructure at our schools and airports um you know we have we have all maintenance backlogs we have all kinds of stuff to worry about in fund um any any last thoughts before we wrap up this show Kevin uh no I just think there's there's not going to be any great tax proposal that'll be moving this year I just don't think the timing is right for the ones that are left on the table that it's shaky timing it's difficult timing you know increasing a fuel tax or or you know even capital gains um while they might be popular in some sectors I think it they're they're going to be a little concerned about in an election year sure yeah and especially in this this super election year where everybody is up not just not just uh half the senate uh but but everybody so it's it's a very interesting situation to be in and we're in the halftime of our legislative session half half of it remains so we'll be on pins and needles until uh I guess the beginning of the beginning of May which is when when things wind up I'd like to thank Kevin Dayton from Civil Week for taking the time to be here today thanks for having me there viewers and this has been I think tax I think tech Hawaii's talking tax and we'll see you in two weeks aloha