 Welcome to ThinkTech. I'm Jay Fidel. This is Talking Tax with Tom Yamachika. We'll be right back in a moment to start our discussion. We're back. We're live with Tom Yamachika, who joins us from the Tax Foundation of Hawaii, to talk about tax this year. We have a lot of bills just entered, just introduced. These are the signature bills in the governor's package, including a bill to give our citizens broad income tax relief, another bill to enact GET exemptions, and various other things. So this is going to be an exciting year, an exciting session, with the governor's bills anyway who knows what other bills will be introduced. So Tom, tell us about what's going on. As you have probably seen, the governor recently did his state of the state address that was picked up, had a lot of press coverage, and with the state of the state address, the governor unveils his own package of bills, and they get put into the legislative hopper. Now, the notable thing about this year's bill package is that typically each of the bills in the governor's package is identified by a license plate number, which has a three-letter code for the agency that's primarily responsible for pushing it through, and a two-digit number. So this year, the Department of Tax put in tax-01, which is the bill to conform our income tax and estate tax laws to the Federal Internal Revenue Code. We do that every year, right? We do that every year. It's required by statute, and for the last few decades, this bill has been called tax-01. The thing that's different this year is this year, tax-01 is it for the Department of Taxation. There is no tax-02 or tax-03. Instead, what's happening is that tax did in fact draft a few more bills, but they are being kind of the signature pieces of the governor's package. So they're called governor's office bills. So the primary one that is being covered in the news is Gov-01, GOV-01, and that is sometimes known as the Green Affordability Plan or GAP. Is that green for environment or green for governor? Greed for the governor. The Green Affordability Plan. You can kind of say what you want about the name, but the contents are actually fairly striking, because in the bill, there are adjustments to basically each of the credits that are important to low and middle income households. And by that, I mean the food excise tax credit, the low income household renters credit, the credit for dependent care expenses, and I think there's one more that I'm missing. And on top of that, there are also proposed changes in the personal exemption amount, which everybody who files a return can take, and a significant boost in the standard reduction amount. This is all in GOV-01? That's right. If you wanted to look it up yourself, GOV-01 is introduced this year as Senate Bill 1347 and House Bill 1049. Usually, it goes into both sides. It's introduced by the President of the Senate and the Speaker of the House and it's signed by request, which means that the bill is being requested by somebody other than the Senate President now, Speaker. Let me get something straight here. So have these bills been known as GOV Bill this and that before, or is this something new? In previous years, the Governor's Office would introduce its own measures. I mean, there have been GOV-01, GOV-02, and so forth in the past. But this year, it seems to be different in that they're actually tax bills. And because they're being designated GOV-01, GOV-02, and so forth, the Governor's Office itself is going to be the agency primarily spearheading those bills through the legislature. So what does this tell us? This tells us that the administration as a whole is taking much more of an interest in these so-called tax reform bills than perhaps in other years or other administrations. It sounds like it's putting this GOV-01 bill is putting a whole bunch of stuff in there in addition to the standard required bill conforming Hawaii taxes with federal changes. And that's new, isn't it? Yeah. No, the tax reform is not common. But in this case, it's being lumped up with the standard bill conforming. Those are two different bills. Tax-01 is a different bill. It's Senate Bill 1398 and House Bill 1087. Those two are going to kind of go off on their own. Again, it's up to the legislature what they do with them, whether they pass them, whether they don't, whether they hold it, whether they take pieces of the bill and shove it into something else. That remains to be seen. Well, didn't we discuss last time around the change-up that we saw from the time that the governor was campaigning and he talked about exemptions from gross exercise tax. And then he changed his approach to that with a $300 across the board refund to everybody. Is that $300 still in play? We now have both of these items coming up from the legislature. Actually, no. The $300 rebate that was previously talked about isn't in the package at all. So it seems like the governor's pivoted a little bit and is trying a strategy that hasn't been at least publicly talked about before. And they're using primarily the existing credits and the existing laws to deliver broad-based tax relief. What they have said, as reported in the other media, is that they are are really trying to target the Alice households, Alice being an acronym for asset limited, income constrained, but employed. Let me identify some of the things that I think are in play. One is a new tax credit for teachers' expenses, changes in the amounts for the income tax brackets, I guess raising the amounts in the brackets so that the tax would apply only to higher income. A personal exemption amount changed, standard deduction amount changed, and then a gross exercise tax exemption for certain groceries, feminine hygiene products, incontinence products. That's in Gov02, the general exercise tax stuff. All in play, all in play, and over the counter drugs. This is quite remarkable because we haven't had a lot of exemptions over the year. Right. Usually when you and I are talking about bills that are introduced in the legislative session, they're mostly about bills to raise taxes one way or another, or make life more difficult for taxpayers. This one is quite the opposite. This session really looks at giving, like I said, broad-based tax relief. Well, is this the right time for it? It sounds like it's politically nice. Everybody will like these changes, the changes I just identified. They are a reform, I guess you could say. It certainly will please taxpayers. But do we have the funds where we can take the hit for the additional taxes? Well, the reduction in tax revenues, this will result in. Are we flush? Do we have the money to do this? Are we paying our other bills? Why now? Well, right now, the State of Hawaii is sitting on top of a surplus over a billion dollars. There have been various groups calling on lawmakers and the governor and everybody else to do something about it to help, because taxpayers have been in pain for a very long time and they're showing it by buying one-way plane tickets. With here is the starting point. And the last part of my question is, are we paying our bills? Are we paying our funded and unfunded, liquidated and unliquidated liabilities? And we'll get to this in a minute, but it's going to cost plenty of money to deal with homelessness. It's going to cost a ton of money to deal with climate impact. And a query, can we afford to give it away? We gave away what, $600 million to OHA last year. Yeah, they're scoring GOV01 at $300 million, a little bit more than $300 million in revenue loss. It's basically the same amount of money as was given away in the rebate last year, because the rebate last year, $300 per exemption or so forth, translated to, I think, a high $200 million. But my question is, are we paying our bills? It's nice to give away money. Everybody loves a government that gives away money and reduces taxes. This is a delight. But are we paying our bills? That's debatable. We have certainly some huge bills for post-employment benefits for retired state employees. And depending on which actuarial numbers you believe, we either haven't funded those adequately or we're kind of on track to paying those. But that's a big enough number that you can't settle in one year. I mean, it's got to be a multi-year commitment. Just like when you buy a house and take a mortgage, you pay the debt over 30 years or so. And because, especially here, buying a house, there's no way that a normal person can pay that off in just one year. What does the council on revenues say? How are we doing? I think the last COR report showed us on track to some increased numbers. I don't recall exactly what they were, but we're in good shape. Okay. I mean, I love hearing you say that, but at the same time, we don't know what next year we'll bring or even this year for that matter. I mean, we could have an extreme weather experience that would change everything you've said. Well, of course. And in that case, we can take it up next year and kind of suspend things or scale things back. But I think it's really important to be talking about not simply a one-year rebate, but something that's more permanent. I mean, one problem with their income tax law consistently has been that we don't index anything for inflation. So people can get raises to simply keep up with the cost of inflation and find that they're in higher tax brackets. And this has been going on for years and years and years. I think we're basically using tax brackets, at least on the low end, that have been established in the 1960s. That's almost as old as me. I won't comment on that. No, I turn it on myself. In any event, okay, but these exemptions from the gross exercise, these changes in the income tax, they are ostensibly permanent. They're not a one-year deal. There's no sunset on these benefits, these reform items that have been included in at least part of the governor's package, right? That's right. Now, as it goes to the legislative process, that may change. But at least right now, these are permanent changes. And like I've been, I think, writing for some time, permanent changes are what we need. Temporary changes are maybe nice in the short term, but it's just so often that that tax bill start off with temporary increases and turn into permanent ones. It's time we have some permanent decreases to counter some of those. Okay, well, we'll put our worries about the future aside and enjoy the moment. But let's talk about the visitor green fee. That's a double entendre. The visitor green fee program in Gov.03. What is that? The idea there, and this has been floating around for some time during the governor's campaign, would be to charge tourists $50 ahead for a one-year license to visit state-owned natural resources like ARCs and nature preserves, things like that. We and the tax foundation have spoken on that kind of program before, and there are some constitutional issues with the U.S. Constitution. Why don't you identify those that we need to get around? We have something, for example, called the Privileges and Immunities Clause, and what that says is that if you're a citizen of the United States, then basically you're entitled to the same privileges as any other citizen in any other state. And there have been cases that the Supreme Court of the U.S. has decided, some of them back in the 19th century that talked about, hey, being a citizen of the U.S. and having these privileges and immunities means you can go anywhere in the U.S. without restriction. If Nevadans can go to Reno, then you as a Hawaii citizen, when visiting Nevada, can go to Reno also. And really no state has the right or the power to stop you from doing that. What about the Commerce Clause? Well, the Commerce Clause is a little bit different. I mean, they say basically when you're doing business, you can't discriminate against people from a state that's not yours, okay? And that may be in play too, but the idea is that you as a state need to treat the people before you equally, whether they're coming from your own state or someplace else. This sounds like a serious problem for the governor's visitor green fees distinguished between locals and visitors. Well, the thing is, what you can do is like for certain specific places, and I think there's a case that's been decided on Hanawa Bay here in Honolulu that says it's perfectly possible to charge a user fee for people who go into the park. And it's also permissible to exempt your residents because they're paying taxes whose money is being used to keep up the park. And from the user fees that you collect, you use that stuff to maintain the park, that's not a problem. The problem is when you kind of mush all the parks together and use the money for broad-based purposes, then it starts looking less like a user fee and more like a tax and a tax on access to lands within your state is just not permissible. Well, how's the bill set up? Is the money going to the general fund or is the bill required to go for the maintenance of the individual park or a group of parks? Well, as the bill is set up right now, it is going to the, I believe, a special fund controlled by the Department of Land and Natural Resources, which seems to be on the problematic side. For what reason? Because it's too broad-based. Hmm. Oh, actually, it goes to the department rather than specific parks from which the green fee was assessed. Right. Okay, that's very interesting. Maybe that'll have to be hashed out in court or if the legislature sees this coming, they might want to change it and improve it. What about GOV04, which is really interesting, the climate impact special fund five cents a barrel from the, I guess it's an additional barrel tax or is it the existing barrel tax? Yeah, we currently have a barrel tax on imported fossil fuel products. What GOV04 proposes to do is to establish yet another special fund called the climate impact special fund and feed it with a nickel per barrel from the barrel tax. So above and beyond the existing barrel tax? No, no, it's from the existing barrel tax. So there's no additional tax assessed? Does anybody make an analysis of how much that would actually recover for the state? I'm sure somebody has. The numbers haven't been shared with me yet, but it's a much, much smaller dollar impact than what we're talking about with like GOV01 or GOV02. You know, I recall the barrel tax has been a subject of a lot of change, well, conversation and changes over the years and originally it was intended to deal with environmental issues and energy issues, as I recall, and then everybody, every state agency wanted a piece of it before you know it, it's been pretty well fragmented. Oh yeah, it started off as basically a nickel a barrel and it was to come up with a fund to protect against crises like the Dxon Valdez. And then before you know, it went from five cents to a dollar five. Yeah, but now it'd still be a dollar five or would be a dollar ten? No, it would still be a dollar five. Okay, I wish you were telling me that this bill clarifies and rationalizes how this tax is supposed to work and who gets what and why because it just seems to be a hodgepodge. Yeah, I mean from our organization's perspective, we're not big fans of the barrel tax in the first place and we're not big fans of special funds, so we have a lot not to be happy about with this particular bill. So where's this climate impact fund supposed to go? Who manages it and what is its a sensible purpose? Climate change is a big issue and it could be very expensive. Mike, let me predict it will be very expensive. Yeah, I think DLNR is supposed to deal with that one as well. The bill number there is Senate Bill 1350 and House Bill 1052. I wouldn't be too optimistic. This is going to work. And I guess it's, this is the first time anybody has actually attempted to create a climate impact special fund, whatever you think about special funds. In other words, there isn't a special fund of this nature right now. This is brand new, right? Well, we have thousands of special funds already. I'm sure we have a few that are close. Okay, nobody knows exactly how close or where the overlap is or how this one relates to the other ones. It's very nice. Yeah. I mean, that's one reason why we're not such big fans of special funds because there's so darn many of them. You can't keep track of anything. And it becomes that much more difficult to keep track of, you know, you are in my tax dollars that are kind of like swirling around somewhere in the ether. And it really blurs the accountability lines. Well, yeah, it blurs what happens to the money. It dissolves into we know not exactly what DLNR may or may not do a fund that you and I would think of. It may not spend the money or even identify the purpose of the fund in terms of spending the money the way you and I would. And you know, for example, I mean, so many things happen in the world and people do not necessarily associate those problems, those disasters, if you will, those weather events with climate change. They just report that there is a weather event. There is a disaster. There is a forest fire, but they don't necessarily connect it directly or even indirectly with climate climate change. So, I mean, it's really an interesting question. Suppose you had a lot of money in this fund. Who decides whether it should go for this purpose or that purpose when it's really not clear, even to the environmentalist, whether the, you know, the problem is a result of climate change. Well, I mean, you would just have to trust our government bureaucrats to make that decision. Okay, that makes me want to move on to Gov 06. And that's a GT exemption for construction of affordable housing units. Indeed, the governor was very excited about housing, affordable housing when he was lieutenant governor, but this is a natural progression. But what does the bill do? Well, one of the signature pieces of this bill is to establish a rental deposit loan program. I mean, like people who want to rent have to typically come up with three months rent in advance, right? When the first two for a security deposit, and then you actually need to pay for the first month's rent in advance. So, you know, for most people, you know, making them monthly rental payments tough enough, you know, the three is, you know, something that they need to borrow for. So, one of the things that this bill would do is to create a rental loan, rental loan program so that people can do just that. Is that a good solution to achieve affordable housing? Well, it's something, certainly something different than what's already been done. I have no idea how people are getting those other two months rent under current circumstances. And it's quite possible that they're, you know, the housing expert said, well, this is a big issue. We need to do something about that. I guess this is something which hasn't been done and we'll have to watch and see. I mean, if it is enacted, we'll have to watch and see whether it actually addresses the problem or it's just a big giveaway. In any event, I guess my final question to you, Tom, is, how does it look for these bills? How does it look for tax reform in the state of Hawaii right now? You know, what is the community going to say? What is it saying? Are the people who are interested in these bills going to accept them, ride with them? Are they going to look for big changes? Are they going to oppose them? What is the environment, if you will, in the legislature about tax reform? Well, as you might expect, the current environment in the legislature is that a legislative leaders are not wholeheartedly embracing tax reform. So there's a lot of explaining to do why now. Some of the points you raised earlier. Don't we have other bills? What we need this revenue next year or the following year or the following year? I think there's going to be some pressure to scale back some of the ambitious goals that are written into this bill. And we'll see what ultimately happens with this. What are the primary committees who are going to be processing these bills? We would think that certainly the money committees will be having a heavy hand in this. That's Senate Ways and Mains and House Finance. And then maybe the housing committees, maybe Consumer Protection, we don't know. I haven't seen the referrals on these bills, but that's easy enough to look up on the capital website. Well, I come away with, I appreciate your comments on this, but I come away with the notion that these are some of these things are untried. And of course, the staffers can say, well, we think it's going to work this way or that way. We think the bottom line in dollars will be this with that. But we really don't know until we see how it plays out. And the other thing is that you have really a lot of changes in the tax structure and what we've discussed in this half hour. And I think that you get a certain amount of resistance to change. I'm not saying change is bad, change is inevitable. I'm only saying that in Hawaii there is customarily resistance to change. Your thoughts about all of that? No, I think that's absolutely true. There's resistance to change everywhere, especially here, I think. And taking these bold action steps is going to require a lot of convincing. I think the governor's staff is really bracing for that. They're really putting together a coordinated campaign to get their message out and see if they can take some bold steps along the tax front, which nobody's done in a number of years. So I wish them luck. Yeah. Well, at least they're bold. They may not get through, but they will initiate a conversation about tax. And maybe that's a good thing, because even if they fail for one reason or get derailed for one reason or another, it seems to me the conversation is a good conversation to have. And the public ought to be more interested in the way the tax, all taxes in Hawaii are structured in a way that the tax receipts are spent. So it must be a joy, at least as far as that's concerned, for the tax foundation to see this conversation broaden. Oh, yes. I mean, we hate being the bringers of gloom and doom news every year as we report on what the legislature is doing. It's good to have at least some prospects of good news to report. Well, thank you, Tom. Tom Yamachika, Tax Foundation of Hawaii here on Talking Tax on ThinkTec. Thank you so much. Thank you, Jay. And thank you for having me on the show. Aloha. Mahalo.