 Hi, everybody. I'm Mark Coleman, your host, your co-host today for this week's episode of Talking Tax. My co-host, the real man of the hour, the half hour, is Tom Yamachika, who is President of the Tax Foundation of Hawaii. I'm with the Grasshopper Institute of Hawaii. So Tom, we are going to talk today about your article that you wrote this week. It actually, there have been some changes since you wrote it. It was about House Bill 1537, which wants to change the Constitution, the White Constitution, to allow the state to attach a surcharge on to investment residential properties. Yeah, this is kind of like Groundhog Day. You remember back in 2018, we had the same thing going on. Yeah. We had the HSTA, the teachers, and supporters of education say, hey, we really need to have another funding source for teachers. So let's do this constitutional amendment to allow the state to tack on a surcharge on unreal property tax. Right. Go ahead. Yeah. So we have that debate again, and we're going to kind of see how the debates changed over the years and how it's playing out now. Well, it seems like that giving a little more impetus this year is that the proponents are latching on to the popular idea that outsiders have a lot to do with rising home prices in Hawaii. And it seems that they're using that as a justification this time. And that's why they've changed the language a little bit compared to the last time in 2018. You probably ought to explain why that bill got thrown out and what's different about the new one. Okay. So back in 2018, you may remember that it resulted in a fight that went to the Hawaii Supreme Court. The Hawaii Supreme Court tossed out the ballot question. It was still printed on the ballots, but it didn't count anymore because the court ruled that the ballot measure was invalid because it was too vague. So let's kind of start by showing everybody what the 2018 measure actually said on the ballot. So if we can have that first slide, please. Okay. So this is the ballot question that was on the 2018 ballot, and it's deceptively simple. Shall the legislature be authorized to establish as provided by law a surcharge on investment real property to be used to support public education? Now one of the things that we said about this at the time is that says nothing about tax. So how could voters possibly understand what this sucker is if it's a tax that we don't even tell them it's a tax? So the Supreme Court actually held that the solution was more complicated than that, but they did rule that the ballot question as posed was too vague, likely to mislead and therefore not worthy to be on the ballot. And also inadequate in that it didn't explain the context of this proposed change that it would in effect be a serious precedent allowing the state to impose taxes on real property, which currently is the exclusive territory of the counties, right? That's absolutely right. And we gave the counties the exclusive right to tax real property in the 1978 Constitutional Convention and the election that followed. So and it was kind of a 10-year transition back then. So in the like 10 years from, you know, 80, you know, 70 to 80 was too. Yeah, I mean, it was a little after that when the election was held. The 70 was the concon, but I think the election was held a little bit later. But 10 years after that was the transition period. And now it's very clear that the counties have the exclusive right to tax real property. So do you think this wording, do you think the wording is any better now? I mean, it seems like, oh, well, by the way, you mentioned that that was on the ballot in 2018. And even though it didn't count, the taxpayers voted it down, right? Yeah, it's held miserably. Yes. This round, targeting, you know, outsiders, wealthy residential investors, people who are assumed to be living in their homes only half a year or whatever, and can afford to take this take this hit of the surcharge, whatever the amount it might end up being. And that would all I mean, let's let's let's take a look at what this version says. Let's take a look at the as introduced version of the question. That's this one here. It's not that different from the previous one we showed you. No. It still doesn't mention tax. It says surcharge and residential investment property. The two elements that it adds are that it that it's the property has to be valued at $3 million or more, and that it excludes a homeowner's primary residence, which may add to the word residential actually, too. I'm not sure what the first one said it said, as a surcharge on investment, real property. So now they've added the word residential investment, real property. Yeah. So really, it's like you say, they're trying and they're they did create the exclusion of primary residences and actually in the law's definition of investment real property. It also excludes affordable housing projects that are subject to a regulatory agreement with either the state or the or the counties, which is interesting. Yeah. I mean, why is that not, why is that not investment real property? I mean, the yes. And kind of what sometimes includes like you say in your article, you know, the term actually does include all the equipment on the property. It's pretty comprehensive what that includes. But in your opinion, does this wording? Well, and also this wording still doesn't address the historical context. It still doesn't present. Do you think that's an unreasonable demand of the Supreme Court that this language should have included the history, the context, what it means historically for the state tax system? Well, not at all. And matter of fact, the Supreme Court did include a footnote saying what they thought of the proper question it would be. And when the bill was heard before the judiciary committee, the supporters of the bills were very passionate. And they said, look, we changed the bill in significant ways. It should pass now. And I said, well, wait a minute, you haven't addressed anything that the Supreme Court said was a problem. So how could it pass if you haven't even, you know, dealt with the problems that the Supreme Court told you were there? So at the end of the Judiciary Committee hearing, you know, the House Judiciary Chair, Dave Tarnas, said that he would fix the bill. And here is what he came up with. Let's take a look at what the House Draft II says. Okay, it's a lot of more words now. But this is basically the wording that the Holy Supreme Court wanted. So what do you think about that, Mark? Well, I was wondering if adding this wording makes, you know, it's an improvement. But I'm wondering if such a substantial concept shouldn't just have its own institutional convention. I mean, this is a, this is a major, major change in how we run things in the state. And even if this language were allowable by the Supreme Court, it just seems to me that perhaps this requires a lot more discussion than than than a small amendment that what that what is perceived to be like a small amendment or passing it off as something rather small here, one one bill in the 2024 legislature, you think this deserves more discussion, along with perhaps the whole tax system of Hawaii, where the only state that has, after all, that allows the state that where public education is funded by the state. And that's what and that takes the counties off the hook. So we're the only state in the country that does that. And that's why the state pays for public education that month. But we're also the only state with the GET. I don't think anybody else has a GET. Do they? A couple states come close. Yeah, come close. Partial GETs? And what those are? Well, yeah, yeah, for example, in New Mexico, as it grows for seats tax. So it just seemed to me that maybe this is, this requires a larger discussion about about the precedent here. And there's other, there's other rationales aside from the excuse for having this at all, the purpose allegedly is to fund DOE. And I'm not sure that's such a good reason either. So no, why not? I mean, the teachers and the teachers union specifically is saying that teachers are woefully underpaid. So they need more money and they need more money now. So how are you going to do that? I mean, I have my own ideas. Yeah, I do too. They already have, you know, 20 to 25% of the state budget. And though they're, and yet, and they want more money every year always. But enrollment is declining for the past five years. And we can clearly see that they're not very good at spending the money they already get, which kind of goes back to our conversation last week about the school impact fees. Yeah, I mean, they can't spend the money that they have. And so so there's lots of beneficiaries there. And plus they get a lot of money from for their capital improvement program. That's a whole another ball of wax, you know, for them, they get all that money too. So I don't think they're really hurting. I think there's room for paying the teachers more if that's really needed within the budget that they have personally. And of course, too, I would also favor more more relies on private education in the system generally, but, you know, I don't want to get too far field here. I'm just saying that I don't think that this is a really good reason to be adding to be to be setting this precedent of overturning our tax theory in the in the state regarding who gets to, you know, tax real property. Yeah, one kind of hesitate on the other hand, this kind of this conversation kind of is like saying, well, you know, the language isn't right. It's not going to pass. And so we're giving them a chance to like back up and make language that will work, you know, and I don't really want this work. I want this to work even if even if it gets to the ballot and survives Supreme Court challenge. I don't really want it to succeed. I just don't think this is a I'm against raising taxes. And that's what this would do. Yeah, one of the one of the things that you got to think about is, well, OK, even if this this were to go on the ballot and and this were to pass. Would the money actually go to public education? Yeah, that's another thing. Yeah, I mean, the, you know, that you can you can rig the the Constitution of the law implementing it so that you know, the money from the new tax does go to public education. But what about all the other money that's appropriated to it by the legislature out of the general fund? There's nothing that says that the legislature can't say, oh, geez, well, you're getting all this money from the, you know, from from the school property tax. So we don't have to give you so much money anymore. Mm hmm. But of the out of the general fund, right? I mean, we can we got other priorities. I think they are worried about that a bit that the components, you know, they would want to make sure that this is an offset by allocating general funds away from the DOA because. Yeah, but there's but there's no, you know, mechanism in either either in the Constitution or otherwise to ensure that such an offset doesn't take place. You can't write it in law. That's right. Because the budget is just another law. And actually, they're just passing this off to the next legislature, aren't they, the mechanics will be up to the next legislature or the ones thereafter. Yeah, so so there's a lot of there's a lot of pookas, you know, that are left in this analysis. Well, what do you. So so do you think that the you know, that some of the political scientists are saying, well, it depends how people perceive this, if this does go to the ballot, if they perceive it as something really needed to help the teachers find they'll do that. But if they perceive it as more something for to raise taxes, just another tax hike in a state where we already have the highest taxes in the country, then that could be a problem and that it might lose. So what do you think would be the prevailing sentiment if this were to go to the ballot? Well, I mean, I'm I'm a lot less uncomfortable with the House Draft II version going to the ballot because at least it tells people that we've got a tax hike in the works and that we have, you know, changes to the, you know, the historical system that's been prevailing with the counties imposing a real property tax. You mean that you mean that paragraph that you said harness produced is going to be the new one? That's that's the prevailing version right now. I thought the prevailing version doesn't use the word tax and doesn't say anything about the history. Where am I? Am I a week behind? Yeah, you're a week behind. That was that was the version of the bill as originally introduced. Well, the original version. Oh, OK, OK. Well, the house draft House Draft II is the latest version. OK, that's that's the one that's now being considered by the legislature and it does talk about tax. And, you know, there is no Senate companion to this. So this is this is kind of what we're working with right now. So this is the improvement over the original language of this year's bill, which was supposed to be an improvement over the language of 2018's bill. That's right. Now, I think the proponents and the PR people are saying, Jesus Christ, this ballot question contains the word tax in it more than once. How the heck is it going to pass? So so I think they're going to have connexions and they're going to try to, you know, dumb the the ballot language down so that it doesn't mention tax like it did last, you know, the last time around. Oh, that's what I think the PR people are trying to do. I see. I see. Yeah, I was a little worried about that. I was thinking that if they didn't do that, that could be a deal breaker for the Supreme Court. But now that they've covered that, now they're back to the reality of saying, we want a tax hike. It's more clear. Yeah. And that's what the Supreme Court wanted them to say. Right. So so so so House Draft to at least says that and it says that we've got a tax hike. You know, not in so many words, but there's a lot of words there. But but but it does contain the word tax. I think I think the you know, the PR people, like I said, are hating it with a with a big passion. But what they need to do at this point is to basically convince the Senate that, you know, a further watering down of the language is in order. And I'm not sure where this where the sucker is going to go from here. Now, I mean, maybe it'll be heard by the Senate Education Committee and then going to Ways and Means, who know what they're going to do with it. I have no idea. Is there any chance that this will be deferred? Do you think? Well, given the fact that the teachers are pushing it very, very hard and the teachers union is very powerful, as as you probably know, if it's probably going to get through the legislature in some form. And if it does, it does not go to the governor. OK, the governor does not have the opportunity to veto this. Oh, right. Because it's not a law. It goes to the ballot. So if it passes, the legislature is going to go on the ballot. And then I think the county is going to go into conniptions again, because in terms of practical fact, this con ham is messing with their primary revenue source. Right. And in your article, in your article mentioned that there's the problem of their their financial, you know, ability to float bonds and such. Yeah, their bond underwriters are not going to want the state messing with the primary revenue source, not at all. So so so so the colonies are going to be, you know, fighting this con ham tooth and like they did like they did last time. And they're already doing it, right? They've already all filed testimony against this, right? Yes, yes. They're definitely opposing this. And so this is truly a foot in the door, if it were to pass. And as we know, there's no such thing as a temporary tax. And there's and once you get your foot in the door on any other kind of attack, let's say they put a sunset on it, you know, allegedly. Oh, this will just be like a temporary tax. If you get your foot in the door, that's pretty much it, isn't it? From there, it just expands. It's not going to be limited in the future to just this one surcharge, probably, right? Yeah, I mean, once once you, you know, create that hole in the shield, the hole is not going to, you know, it's not going to shrink. It's going to expand and and cover more things. Well, a great tax system is in perhaps the need of a of a more careful and thoughtful revamp or in a review. This, like I said, I think this is like coming out of the blue. We had it in 2018, deja vu, but it's still very focused. And it seems kind of irresponsible to try to just do it for this one thing. Yeah, I mean, that's one union, right? Well, what what then, you know, prevents HGEA from coming in, for example. And saying, hey, HSEA got this, this, this special funding source, we want one too. And then the UPW comes in and then, you know, UHPA and then, you know, whoever else, you know, represents government workers. You know, the the parade just starts. There must be some other groups that would be interested in affordable housing, you know, whatever it is, government programs to build homes or whatever. Yeah, you can the reasons for tax increases are endless. As we know, every year there's even in an election year this year. It's it's an election year and they're talking about raising taxes all across the board. There's all kinds of tax hikes being proposed, which is it's never ending. And it's kind of perplexing, actually, considering the burden that we're already bearing. Yeah, I mean, don't these guys know that we're losing people at the rate of like 11,000 a year? Yes. And there was what, just a study the other day that's that estimated the tax loss because of everybody leaving. Did did you see that? I did see that. I don't remember the numbers off the top of my head. But when I did see that, yeah, what do you remember about it? You know, so that lead with with taxes and higher housing costs driving people away, that leaves fewer of us to pay the remaining tax burden, which hasn't gone down. So and and yet there's more, you know, there's a start. There's already keep increasing taxes. So basically, this if this all goes through and you're suggesting it might has a good chance. That's what the political scientists seem to think. Call on more and so on up at the age. It'll really become a PR battle then on it during the election. That'll be kind of a major focus of the election. Yeah. In 2018, the the businesses organized and and they put up a very spirited battle on the airwaves and on TV. As did the proponents. So if this if this measure passes, I think you can expect the same thing to happen. Well, that's too bad, actually. That that would have to be an issue at all. I think since it will, you know, I think a lot. I think a lot of the politicians might might not be enjoying that conversation at all. Probably not. And and I think, you know, one thing that's kind of been left out of the equation so far is, well, DOE, why can't you produce financial information? Why can't you, you know, cut your costs? Why do you need, you know, so many people at the, you know, at the super grade levels? The you got your superintendent of education. You got your assistant superintendents. You got your complex area superintendents. You got your and then you got your school principles. I mean, how many layers do you need? Well, my personal experience is that most people who work for the government, a lot of them, probably most actually do work pretty hard. But it's not how hard you work. As my former boss at Pacific Business News used to say, it's so much work to get done. And what are you achieving? They might be putting in full hour days and working really hard. But what are they really doing for the good, you know, for the greater good? Is Hawaii's educational standards really anything to brag about? I don't think so. You have schools that are some schools that are better than others, which is, you know, a good thing. But in general, on average, I don't think Hawaii even ranks very well in terms of educational performance. So is the DOE even doing a good job, regardless of how hard everybody's working? That's kind of why I'm bringing up the idea that we might need more home schooling or more charter schools or just more people in private schools. This heavy reliance on the DOE, plus how much considering they're taking from the, you know, from the from the general fund, they say their percentage is going down. But then again, the amount of money taking billions. Yeah, I know. And it's 168,000. Is it for kids? Forget the number. But anyway, it's perplexing. Well, it's a it's a it's a great topic that we're talking about here, Tom. I think it'll be a major thing that everyone will be talking about in the weeks ahead, especially if it makes it to the ballot. I personally hope that it doesn't. I think there's a lot of good reasons to be against another tax increase just on the face of it, no matter what the good reasons are or who the scapegoats might be that we think we can tax, you know, without any behavioral changes that could negatively affect our economy. Infecting investment and such. But your last take on all of that. Well, I mean, let the voters see what they need to. But, you know, don't don't try to pull the wool over their eyes. We've tried that before and that's that's not going to work. Very good point. Very good point. Well, on that happy note, Tom, thank you very much for your wisdom today and your knowledge. Everybody else, thank you very much for joining us today. It's been a lot of fun to talk about another complicated and vexing issue here on Talking Tax on Think Tech Hawaii. If you like this program, click the subscribe button on your screen there and we'll see you next week. Thank you very much, y'all. Aloha.