 Okay, we're back. We're live with talking tax with Tom on a given Monday morning. And Tom is the president of the Tax Foundation of Hawaii. And Tom, welcome back to your show. Nice to see you. Nice show. Thank you so much for having me on your show. Okay. Let's talk about tax this morning. Let's talk about something that has interested me in the context of Hawaii for a long time. And that's tax incentives. And I suppose I spring on that issue from the sad story of Act 221, which was intended to build a tech industry in Hawaii. And it was adopted by the Kaitano legislature back in, I think, let's see, 1989, I'm sorry, 1999, or perhaps the year 2000. And Linda Lingle beat up on that statute for 10 years and then finally forced it to sunset early. And with, you know, of course, confidence is the firmest pillar of justice. And she wrote in public confidence in the statute on a regular basis. And it never had a chance, you know, to do to do what was intended to do. So, and that's, I guess the counterpoint is, you know, from the legislature side of it, they, they saw the tax return, they saw the amount of money that was going out the door. And they, they turned colors a few times. So the question then became, well, what exactly are we allowing? And when they kind of took a look at what actually was going through, they said, well, geez, none of this was intended. Yeah, they were they I remember that. And that was an important issue. And one we should talk about today. I mean, here's the economy of the state. Here's all those kids leaving. Here's all those people who can't afford housing is their jobs don't pay enough. Here's a mono economy, only one thing going on tourism. And so this was an important attempt. And there were people in the ledge who thought this was the most important bill ever, ever passed this state of Hawaii, because it, it realized the dream of John Burns, the dream of George Ariyoshi, and all the governors for that matter, right on through Kaitano. And so the idea was to build a tech industry just like San Diego built a biotech industry back back in the 60s to make to make Hawaii a high tech place. And I have to say that when it failed, which was in 2010, because Lingold was campaigning to have it sunset early, supposed to sunset a couple years after that. When it failed, the tech industry failed. And I remember talking to all these young kids who would come from the mainland to participate in this great experiment in Hawaii, the building of a tech industry, and they were leaving. They were going. They had it. It was not just that, you know, there was no dollar and cents incentive that would bring capital into these startups. It was more than that. It was a statement by the state government, especially the governor, that they didn't care about tech. They didn't care about innovation. They didn't care about building an industry. They didn't care about broadening the economy. And these young kids said, well, you know, there's no future for me here. I'm leaving. I talked to a number of them. They left. So tax incentive is more than the dollars and cents. Tax incentive is a statement by government to say we want to do this and we're willing to put our money where our mouth is. But I agree with you, from the very beginning, even before, you know, company one had been established, even before, you know, there was any real opportunity for traction. The ledge and Lingold were making these, and Sean Howe, this Honolulu advertiser, was criticizing the statute because it wasn't it was costing too much and it wasn't returning anything right now. They wanted to see a return right now. And indeed, you know, the calculation was, gee, at one point it hit as much as 100 and 150 million altogether. By the way, that's a lot less than other tax credits that have been adopted. But people were excited about that. And I guess the argument from the public was something, those who opposed it because of all the newspaper articles and opinion pieces, they were saying, wait a minute, why are you giving a tax credit to these young kids doing tech? Why don't you give it to me? You're taking it out of my pocket and giving it to them. Wrong. I don't, I don't agree with that. I oppose that. And so there was this great big groundswells. We don't need no stinking tax credits. And for that matter, we don't need to incentivize development of a tech industry. And so that was the end of it. One of the problems at the time, of course, was that the technical aspects of the tax credit weren't really well-defined. There were, you know, like seven or eight different categories of what we called qualified tech businesses, some of which didn't sound like tech at all. One of the big stories in the beginning, for example, was the movie Blue Crush, which was, because movie development was identified as tech-related, I don't know how. But it was included in the same rubric and it was eligible for the same credits. And that's kind of what happened. The producers of the movie got a smart lawyer to write in and the department had to rule that the movie was eligible. Well, I totally agree there were abuses. And Blue Crush was clearly notoriously one of them. It was also the drop-down corporations, where a wealthy local corporation could create a subsidiary and have the benefit of this tax credit, where, you know, I think it was more intended for startups, not a drop-down subsidiary. But, you know, as her advisors told her, Lingo, you know, you can fix that with regulations. There's a section, I'm sure you're familiar with it, Tom, in the federal regulations, as if this is intended as a tax avoidance scheme, then it can't be used for that purpose. And likewise, regulations are all over the internal revenue code to limit, you know, opportunities that people who are trying to do tax avoidance or take advantage of loopholes, you know, will be stopped. I mean, you stop loopholes with changing the statute or building regulations that effectively deprive people who shouldn't have the benefit of a particular exemption or a tax credit. That was not done. Instead, Lingo was out there, Lingo was out there trying to punish investors. I remember, I remember the campaign by Lingo. They were regulating by audit. Yeah, right. And they had to turn their pockets out. They had to show you their tax returns. I mean, make public disclosure, I think. They had to bend over and reveal things that ordinary taxpayers, ordinary investors, didn't have to reveal. And it was obviously intended to discourage. It was not intended to actually help the development, the refinement of the statute. It was intended to discourage investors. And guess what? You can scare away investors pretty well. Hawaii has a great record of scaring away investors, including now. What I enjoy most, and I'll stop after this, is the article in the paper written by Sean Howe. It was a banner headline, and it said, Act 221 investors found to be wealthy. Get that, Tom. Found to be wealthy. This was a kind of, you know, journalism that we had in those days. It was the kind of position that Lynda Lingo was taking to punish investors. And after a while, there were no investors. So you can't be rich. The idea of a wealthy investor, that is really something. Of course, most investors in the world are wealthy. So that was ridiculous to make that headline and write that article. However, let's talk about the policy. Would you agree with me that however the mechanics of the statute worked, and they tried hard, maybe with some success and some failure too, they tried hard to incentivize the tech industry. Because everybody, at least in the line of governors anyway, and lots of the legislature enough to pass the bill, felt that it was a good thing for Hawaii. That's why they passed it. But don't you agree that that that was a worthy, worthy goal, worthy target for the state economy? And it was worth a tax credit. And if the tax credit, you know, was not doing the job intended either too much too little, then you tune it up. That's what happened. That's exactly what happened in San Diego. Right. So when you want as a society to encourage certain kinds of behavior, you can do a couple of things. One, you can data. Two, you can penalize it. Three, you can incentivize doing the right thing. And this is one thing that the tax credit is used for. You know, sometimes I think tax credits are used for too many things that they shouldn't be used for. But this was one of the cases where it was used. Now, the problem is that when you have a tax credit, what you really want to do is you want to have some provisions that are very clear in what you're incentivizing. And, you know, the more things you try to do with it, you know, the more unrelated items you try to put in your laundry basket, the less clear it's going to be, and the more people who are skilled in such things can try to drive a truck through what you've built up, to get things that you weren't intending to be incentivized in under this tax credit. So one thing that you want to see happen is especially for, you know, to encourage a particular industry is you want the credit to taper off over time. And you want to stop it after X number of years, supposedly after the industry has had a chance to get established and get going. Because you can't have an industry running on tax credits forever. I think that's all true. And I would, I don't know exactly, but I would guess that's what happened in San Diego. And that was what was supposed to happen under Act 221 and other tax credits. But I think, you know, Hawaii does not have a good track record with this in terms of making it simple, expressing, you know, the purpose, expressing the need and making everyone understand it and avoiding loopholes that people could drive trucks through. And that's that's not, you know, a failure of concept. It's a fit. It's a failure of getting down into the details and writing a good bill. So how do you run it? Execution. Yeah. And of course, in executing it, it was a piece on 60 minutes last night about marijuana in Northern California, the Emerald Triangle, they called it. And there were there were there were and of course it's legal, right? But the state and the counties involved in that area have found ways to de-incentivize the growing of marijuana. And they have all kinds of little ways, you know, to stop the growers, especially the small growers. So it's a it's a it's a 1000 cuts is what it is. You can take a perfectly valid intention, a perfectly valid statute, and then you can cut at it, which is what happened here. For example, investors having to turn their pockets out. So you really need to have a focused program. You need to have the legislature and the governor, the leadership, if you will, remember why the thing was adopted in the first place and not try to pull the rug out from under it. Yeah, you're absolutely right. I mean, one of the one of the big problems that happened during Act two to one was there are, you know, there were changes made to it. For I think the wrong reasons. The, you know, the credit program was going was, you know, losing tons of money. And, you know, proponents came to the legislature and said, Well, it was, it was scheduled the sunset on X date. But let's have a few more years. Let's have maybe 10 more years. And, and they did get a couple of extensions through, not, not because really they, they had an industry that was viable and going, but because what they had was, let's say inaccurate and, and it wasn't really shitting the people that it was supposed to hit. And people were trying to fix it to make it better. Yeah, that was a certain amount of complaint going on in the community about a statute that only addressed a small subsection. But that was a subject and it should have been addressed. That was a subsection of the people who had built it. You know, in, say, 19 2000 or so, the kids were coming back from Silicon Valley. I could name some. They were there. They made some money. They had cut their teeth. They learned about technology. And they were ready to come back to Hawaii and build the industry. It was addressed to them. They were the, they were the intellectual property people. They were the vital, energetic, you know, generation who was going to do this. But when the bill got beat up that way, they stopped. They went into real estate. I'm serious. They went into real estate, gave up tech, gave up entrepreneurial activity. What a crushing blow this was to the future of the state. If you look back at, you know, our time here, our professional time here, if you want to see, you know, some of the big mistakes the state has made, that was one of them, crushing the opportunity. The other thing is it had, yes, it had a certain period of time before in sunset. And sunset, as you said, is appropriate for an incentive. After a time, you should not need it anymore. But they didn't know at the beginning how long it would take. In San Diego, it took decades. In this case, they only had a few years on it. And it was a guess. The whole idea at the outset was we don't know how long it's going to take for this to have traction. So we have to be flexible about the period of time. They were not flexible, they were always trying to cut it back and knock it off. So you know, the result is, you know, a lack of flexibility on this is fatal. And that's one of the reasons Bill died. Right. Anyway, so but let's talk about tax tax incentives in general. I mean, we've had we had a tax incentive electric cars. There are 10,000 or fewer electric cars here in the state of Hawaii in a population of something, you know, 1.5 million, which has a total number of cars of over a million. So the percentage of electric cars against the incentive of all the cars is 1%. I get that right. 1%. Right. Now, if we want to be a tax credit for electric cars primarily federal, we give stuff like you know, giving them special license plates that pull out on free parking and, you know, entrance into the car lanes and stuff. But we don't give them monetary credit for electric cars. We did. We did. We gave them we gave them something over and above the federal credit. I forget the exact. It wasn't that much as I recall. It was it was several thousand dollars for a car and and and it was had a sunset on it and the sunset was pretty tight. And it came and went and it ended and that was that and it's only the federal credit. Now you can say the federal credit should be adequate, but it hasn't been somebody has to be watching this. We only have 1% of electric cars in the state. I mean, if I were king, if you were king, and we had decided that we wanted to have a fleet of electric cars that we wanted to really be green and not and not spend $6 billion or $7 billion on importing, you know, gas into the state to drive all these cars, we would do something. We would de disincentivize gas cars, fossil fuel cars, and we would incentivize electric and hydrogen cars. We haven't done that. So it should be or you would ban the fossil fuel cars. That's that's that's another thing or where you could enact mandates, which is, you know, we had talked about City Council Bill 25 to impose building requirements in all new buildings. And they would have required I think 25% of the of the stalls parking stalls in any new either residential or commercial building to be easy ready. I mean, that's that got got people going home. But that's one way to achieve that policy objective as well. I mean, what you what you need to do is kind of strike a balance between you know, being, you know, the carrot of the stick, so to speak. Oh, I totally agree. In other words, you know, if you were I were king, we wanted to do something about this, we wanted to change the numbers we want to be the state with the highest percentage of electric cars in the United States, we would find carrots and sticks both. And in a few years time, we would achieve our goal, we wouldn't need either carrots or sticks, because everybody would come along, they would have to know the problem is political will. I was the problem in 221. And it's the problem in electric cars. You know, for the life of me, I don't understand why on the one hand, we talk about electric cars, we tell everybody we have all these electric cars, but we don't. And on the other hand, we don't do anything about it. There's aside from, you know, allowing free parking at the airport, which is not entirely free, or free parking at meters, which is not entirely free. You know, we don't, we don't tell me if I'm wrong, we don't do anything. We don't do anything to incentivize this. And then we were surprised that we're behind the curve on it. This is not the only situation in which a tax incentive or some kind of other incentive or carrot or stick, you know, would change public conduct. But in Hawaii, everybody loves their cars. They love the sound of that engine. They love that big $70,000 truck or that huge SUV. They love to do it with fossil fuel. They're going to oppose the spending of big money for an incentive. They're going to oppose carrot and stick against fossil fuel cars, because they're invested in fossil fuel cars. Right. So there are, I guess, currently some, some things going on that may change the mix. The Department of Transportation has been kind of after this for some time because, you know, their highway fund is fed by fuel tax. So if you don't use fossil fuel, you don't contribute to the, to the maintenance or upkeep of the roads. And they say, Oh, this is a big problem. So we so they are they are now kind of going along the path of adopting a what we call RUC or road usage charge, which is going to be based on mileage, as opposed to based on the amount of gas you use. Yeah, is it happening? It's it's, it's, it's running down the tracks. Don't use that don't use that metaphor. Okay. Just try to keep that I open up something, you know, but you know, for example, I'll take another one homelessness. Okay, we really haven't done much on homelessness. Wayne Carisu, but he you know, has done a little village. But he's a he's a wealthy man. And, you know, he can afford to do it, he can afford to arrange things that you and I cannot arrange. And it's not too many like him. And so, you know, where exactly is the homeless village happening the next one? And can we have homeless villages for all the homeless? There are 1520 25,000 people that could use a homeless village. I mean, a good one, one that provides all kinds of benefits. And how do you do that? Well, you know, they get some charities and and some people with kind hearts give to those charities, and the churches who get money from, you know, their parishioners, they give money for the homeless. But is there, I don't know the answer, maybe you do, is there a governmental effort in which governmental money is going into helping the homeless? And if not directly into the homeless? What about tax credits? For example, if I wanted to build a homeless village, how about getting the land free or cheap? How about a holiday from income tax or a holiday from real property tax or gross exercise tax for my efforts at helping the homeless? I don't think any of that really exists. So there's no real incentive or disincentive that's happening to actually make this happen. When are we going to learn about changing public conduct using tax and other incentives and disincentives? There's what I know is that there's a governor's coordinator on homeless. I know the guy, he's, he's, you know, Scott Marsh, he works out of the governor's office. And he's supposed to be, you know, building an interagency coalition between state and federal and county governments to address this problem. What has actually happened or come out of it? I'm not really sure. I think the operative word you use, he's out of the governor's office. Yeah, he has a little wee office there on the fifth floor of the Capitol. He doesn't have staff or if that staff, it's minimal. He doesn't have a budget. So is that, is that really the kind of effort that it will take to correct and to, you know, ameliorate the homeless problem? I don't think so. That's not enough. That's not a statement of, we really care about this. You know, what about giving him $100 million? Go for it, Scott. Do something. Figure out a plan. Make it happen. They're not doing that. Nobody's doing that. Nobody's doing that. That I agree with. So this is a huge big problem in the state. And we, you know, it's one of those, one of those sacred cow type problems where yes, we give it lip service, but we actually don't do anything. Yes, we, we like to see innovation and entrepreneurship and tech companies, but we don't do much to help them. You know, it's almost a religious concept. If God wanted there, if God wanted the homeless to be, could not be homeless, he would give them homes. God is not involved in this equation. Right? God is not involved in this equation. Just manage it that caring for one's fellow man and then, and then, you know, for how long, you know, I mean, is this going to be a for everything or you know, the opposite side of that equation is, okay, well, you give people some money. If they have, even if they're not doing anything, they have no production and no, no, no life. Okay, so now it's better to do nothing and get this money as opposed to doing, you know, working McDonald's or Burger King or wherever it is and getting some minimal amount of money. So what do you do? And these fiscal questions are huge. Why? It's something that you and I talked about before a number of times. That is, the state can't pay its regular bills. So what, you know, the you got to have a plan, like San Diego, you got to say we want to we want to have a really terrific economy. We want the economy economy to hum. We want to have income here comes into the state, we want to be able to tax that. We want to have the money to, you know, pay for the right things. Unfortunately, we don't have a robust economy. A lot of the money in the tourism industry goes offshore. And the wages in the tourism industry are not, are not great. And so what what happens is, which has three or more heavily your year. Yeah, yeah, right. Well, so you know, the result is, we don't have an economy that yields a lot of tax. And by virtue of the economic activity. And so we can pay our bills. We're way behind, you know, I mean, various estimates of unliquidated liabilities of 40, 50, 60 billion dollars sounds like Puerto Rico, you know. And so you've got to do a jumpstart on things. You've got to build the economy. And I frankly do not understand why we don't do that. Do you understand why we don't do that? No, I don't understand why we don't do that. The COI executive council recently came up with a with a big paper on that. And then they said, you know, and you know, and I was I was I was part of this effort. They said, Hey, look, we really need to look at what we need to do to get the state back on track. I E, you know, we got we got crumbling bridges, we have maintenance backlogs, we have, you know, all this kind of stuff that has been neglected, and this is starting to fall into this repair. So what is it going to take to get us back to the status quo? And I think that the number that they came up with was like 80 billion dollars. You know, this is a kind of number that requires planning. There are people, I think in the legislature and elsewhere who deny that a problem exists. There's a problem. And they don't they don't understand about how tax either more tax or tax incentives can actually affect the economy and public, you know, perceptions, public conduct and public confidence in the economy. Anyway, I think we're out of time time. But it's been great talking to you. And I really enjoy the remote. And I hope we can talk to you again in a couple of weeks. Okay, great. Thanks so much for having me on the show. I'm Yamachika, President of Tax Foundation of Hawaii always enjoy Aloha time.