 Okay, it's Thursday. I'm Jay Fidel. This is ThinkTech. In fact, this is talking tax with Tom And it should be no surprise that Tom joins us. Tom Yamachika, the president of the Hawaii Tax Foundation to learn about the fiscal policy and I guess the balance sheet and the budget for the state of Hawaii Which we all need to think about right now in the COVID time. Good morning, Tom. Nice to see your smile in face Hi, Jay. Thank you for having me on the show so here we are taking our bi-weekly snapshot And as we left this exciting story, we had a $2.3 billion shortfall in the budget We had spent remarkably 150 million For pay raises for the HGA employees, even though some of them are not working. They're at home not working And then we had read in the paper that we spent 20 million dollars for a footpath over Alamoana Which did not seem appropriate in these difficult times and what we're sharing the expense with the Howard Hughes Corporation on that But query do we really need it? Anyway, it just seems like things are askew. We are we are in we are moving Slowly or perhaps not so slowly over a cliff in terms of fiscal policy and the legislature I think it's closing this week. Is it I'm not sure they have achieved anything to deal with the problem Well, the legislature adjourned last week last Friday, right? Yeah, okay They're done and well, what did they do actually to deal with these problems? Well, it's as you say, I mean the the problems were kind of like sent up to the governor And now the governor can decide what what if anything to do about them the the pay raises for example I think the legislature Felt and this is from me talking with the you know few insiders that they really couldn't do anything about it so they sent it upstairs and The governor has more options like a vetoing the bill be Signing it or letting it become law but implementing budget restrictions which which he's done in the past he could also impose furloughs like the infamous furlough Fridays of a few years ago or Do other things to force the government to to be smaller and he's he's he's explicitly threatened to do some of these things With you know that the the union heads going off the deep end in response But you know what what what actually will be done? Yeah, well interesting when it came out. I think it was in civil beat and they had You know a I guess an appropriate list of who among the legislature voted for that voted against it and so forth I guess they knew there was this that's going to be pushed back on it And you know what a lot of people have said to me they don't like this bill at all They really ticked off at the people who voted for it because it didn't seem appropriate in a time of crisis What's your feedback on well, I mean I think You're absolutely right. I mean there are Some businesses that that aren't open and can't be open The proprietors of those business aren't making any income at all. There are people who have been laid off lots of people who've been laid off They're not getting any income period unless they can find other employment and then even with They're being on the street or On the in the unemployment lines. They're waiting for an employment checks and they're not coming because of the backlogs and other things that are Kind of reminiscent of what state government does Yeah, well, and the interesting I'm thinking back to a earlier discussion you and I had is that there are a lot of state employees at home being paid in full not doing anything and There was an effort To repurpose them and have them work for I guess the Department of Labor to process those Unemployment claims and checks, but they didn't want to do it. You know, they're being paid anyway And I guess that stayed that way that never got resolved. So we never got the extra work force Yeah, nothing that we've heard about anyway. Yeah Yeah, that's really tragic. I mean there was that With the unemployment processing the Department of Labor did set up a Site at the convention center for quote-unquote volunteers and some some, you know, folks actually did volunteer quote-unquote That you come into work and go there the volunteers included people from other departments as well as legislative staffers That's encouraging. I mean after all everybody tells us we're in this together. We have to work together We have to collaborate in every way possible to deal with the crisis and yet there are parts of state government that are not Really collaborating. I also saw in the paper recently this thing about the 20 million dollar state expense for a foot bath over Alamo one of this I recall The total cost of that is 30 million the Howard Hughes corporation is paying 10 million and the state is paying 20 million and It struck me as we managed to get along for a long time without a that a bridge over a footbridge over Alamo on Do we really need to spend that kind of money now? Who's watching the store? I thought we had people who were very careful about this kind of expenditure in the legislature the money committees How did this one get through? well The the budget builds a huge document it's hundreds of pages long and It's very easy for something to get you know to slip past I Also kind of brought attention to the Aloha Stadium The the current plan is for it to be developed by a public-private partnership The state shares going to be a lot of the order of 350 million dollars. So what about, you know, 10 or more times the Alamo on a footpath and So what are they going to build they're going to be a good entertainment district You know, it strikes me as we need to be entertained Yeah, well It's just the wrong time for that It strikes me that you know, there's this complacency and complacency You know, we have a major pandemic on our hands in the world You don't have to read the paper but five minutes a day and you can see or watch any new show on television And you can see how major this is and how threatening this is and yet You know, we focus on old issues old projects projects where you know, the advocates of the projects Don't consider COVID at all. They don't consider the pandemic at all. You'd think we changed our priorities But here we're sailing into a footpath a footbridge and a stadium expense of hundreds of millions when we're well, I think one of the problems is There's a huge huge time lag between You know when you can tee up a construction project and when it actually gets done at the federal level like for highways and so forth It's like it could be 20 years here it's, you know, five years depending on on how big the project is but You know Things like that cannot turn on a dime No, but you know, if you're in in a time of COVID, you know, the word is all hands-on deck Let's focus and it just doesn't seem to me that we're focusing That's definitely not happening So, okay, what's the status? Oh, we I wanted to ask you something in the paper late yesterday about about hearings In in the legislature, even though I guess the session is over now Questioning how well the administration David E. Gay was doing on his COVID His work, you know to deal with COVID and From the article it was not a friendly hearing at all. They were very critical of how the administration was doing Do you know about this? Were you there? No, but I do know that some of the legislative committees We're still meeting the the special COVID-19 committees. I think both the house and set it both have them They were still conducting hearings I'm not sure what is being accomplished you know now but I guess People need to debate and kind of figure out what to do if they haven't already done it. I mean, you know that the We would have hoped that that the That's bait so far would have helped, you know shape a plan for How we deal with the pandemic But where's the plan? It seems to if things seems to change day by day and You know, it's Just just recently for example the The reopening date for tourism that pushed back one month. I mean not not that it Wasn't needed probably was But it does underscore the fluid nature of these things. So You know, I Think you know the the bigger question is, you know, what's up America? Why you know What why is this this pandemic so raging when the other when other countries have gotten the control? What makes us so horrible Yeah In all fairness, I mean a lot of this has to do with Trump It's not just that he's not leading but he's actively confusing everybody Including especially the states who are watching him and listening to him and cannot get a beat on where to go So they don't make the same decision and they don't hold on their decisions Everything is coming out of Washington is Confusing disruptive and so forth. So I mean that you know, I give them credit I give the state some sympathy for that on the other hand, you know, we really haven't settled down on things We said we would do for example You know that the testing on the mainland before the passengers get on a plane I don't understand why that's not in place. That should be pretty basic. It should have been pretty basic a lot a long time ago So if there is a plan assuming there is a plan to do that. It's not being implemented. I Don't know. I don't know who's responsible, but whatever task force David E. Gay has in place You know should be under under the gun about that. Don't you think? You know that well that part of it was was put over 30 days as well So even if somebody gets a test a negative test and wants to jump on a plane, they'll still be quarantined once they're here Yeah, first well, it could happen right now There's no reason why it doesn't happen We're still operating on that quarantine 14 day quarantine thing By the way, there was a lawsuit by the ACLU in the federal court set aside that thing as in violation of the commerce clause Do you know the status of that? I Think there were there were two suits one of them went away and and I think the other one Was being argued. I think I think it's slated this week on you know motion for preliminary injunction or something like that Yeah, well that could change things suddenly if an injunction was issued one way or the other Okay, anyway, so let's talk about the unemployment insurance and how well it's doing because people are running out of their benefits And of course that $600 supplement from the federal government will run out too. Can you talk about that? well, what I can what I can talk about is how these unemployment benefits are funded we have a Supposedly self-correcting Unemployment insurance system The when the way it works is the tax rate is determined at the end of the year based on the employer's experience reading namely Whether it's had to pay a lot of money for claims and is you know kind of more prone to that kind of thing and By the overall health of the fund so Given that the overall health of the fund is one of the key factors. I think we are we're going to be looking at an automatic bump in all of the UI rates Come the end of the year and the beginning of next because it automatically kicks in based on the health of the fund the That part of the benefits that come from external sources like the 600 bucks from the feds or the 100 bucks from the state with Fed money, they don't count but but but the there is still a key component of the benefits that do come from the unemployment fund and That's what is measured at the end of the year And we have been paying out lots and lots of money So are you saying that the employer contribution will go up? Yes Wrong time for it to go up Well, I don't think people were really concentrating on it I mean there are it's it's an automatic thing and Automatically kicks in unless somebody steps in to stop it, which you know legislatures have in the past But I don't think they were focused on that this year Yeah, and they're again, they're out of session now Yeah, and the one the one tax bill that the that was passed during the session was One that relates to how we conform with the federal eternal revenue. So what it says is That for state purposes and state income tax, we are going to follow some of the key provisions Such as we're not going to treat PPP forgiveness as in We are going to allow the additional $300 above the line deduction for charitable contributions because the charities need money to We Are going to allow plan loans That are in increased limits like the like how the Fed does but there are some provisions that we're not going to adopt and For example The tax cuts and jobs act Changed how businesses can use a net operating losses like if you if you lose money one year And then you make money in the second can can you then use the past year's losses to offset current year's income? And the answer always used to be yes Under the tax cuts and jobs that you can only use 80% of the Current year's the current year's income to be offset by a prior your losses So even even if you have tons and tons and tons of prior your losses, you still have to pay 20% of the Of your current year's income no matter what What sort of reason for that are they need money? Thank you And so on the federal level they said okay, well businesses are hurting so So they will allow Businesses to absorb 100% of prior year losses into current income for 2020 and 2021 Okay Just as kind of a temporary measure they also allowed That operating losses to be carried back into previous years when you did have income and pay tax so the tax would come back to you State Decoupled from both of those provisions Saying okay, we're not going to allow carry back losses and we're not going to allow more than 80% to offset 80% of taxable income to be offset by net operating losses So this so we're going to be we're going to keep following the cat the tax custom jobs act now the the the issue really was Well, what kind of public discussion came, you know led to this and the answer is not Here's why the the bill that conforms our income tax law to the to the federal one is usually Put into play at the beginning of the year It incorporates the federal law changes to the end of last year so to to the end of For the December 31st, 2019 So that was kind of sailing sailing along through went through past the Senate and then COVID hit okay, so Lots of things then happened including in March the CARES Act passed and There was a big question regarding What if any changes in the CARES Act we would conform to? noting for example that we normally passed that bill at the end of Or as a beginning of next session because because you know 2020 changes usually are considered in 2021, but but we decided to pass some of them anyway But the way it came up was The bill that came over into house finance and typically this bill has a single referral on both sides It was basically the plain vanilla till 2019 end of 2019 changes You know some people including you know including our organizations and will you ought to pick up some of the some of the CARES Act stuff and It was the Department of Taxation that put together the bill says okay Well, let's confirm this but not that and the house finance case said okay, so they picked that up And the Senate said okay We won't disagree with the bill So often went to the governor's office that and that's where we are Was there public debate not really I mean the Capitol was still closed And I think we should we could have and should have I had some discussion about you know Which of the provisions we're going to pick up in wine Usually this this comes up in testimony and hearings At which people can you know Address the committee and give public input, but you know capitals closed this doesn't happen Well, usually this This bill to conform the state changes to the federal changes is It's a slam dunk. Isn't it? It's pro forma. You just take the federal changes and make them into state changes, right? No, there's actually a very interesting calculus that goes on the the tax department or whoever I Believe it is a tax department. They figure out whether some of the changes are going to cost the state money and And based on the price tag they can Recommend and do recommend a decoupling from certain provisions like most states When they did this kind of bill decoupled from bonus depreciation when it first came out. We did too and That that has kind of been continued into into the present day, I think we've really never coupled with the bonus depreciation enhancements and There's there's a full expensing provision called section 179 for a very long time we Basically minimally coupled that we only allowed a twenty thousand dollars just so to be expensed Not like the five hundred thousand or Other limits that we're in the federal I guess my question is ordinarily are the hearings on this conforming bill? Yes, there's a generally a hearing in the house and a hearing in the Senate. They're both protected by the money committees and People in the tax community come and testify They do yes, but not this year this year was basically written submissions and the capital is closed Okay, and I would imagine that this the state tax office recommendations were accepted as as recommended Yes, they were The finance committee report says that that's another it's another casualty of the COVID a Fiscal cabinet, you know casualty of the COVID so where you know, what about other critical things? What about you know paying bills like for example to the employee's retirement system? That's billions And another big one is oh, huh? Hundreds of millions go to Oh, are they are these bills getting paid now? Presumably so yes, I mean that hasn't changed The one thing that did change And I think we talked about it a little bit before Was that part of the TAT went to the counties before? But because of the governor's emergency suspension pen That stopped Entirely so so the counties are not getting any one red cent for the TAT not that the TAT is a Source of tremendous wealth anyway this year because it's not but nobody's here. Yeah Nobody's here So, you know in the past we've had the council on revenues and they sit and meet I guess What before the session sometime in the fall maybe? And they decide I think they meet every three months. Yeah, every every three months. Okay So the question I have for you is is a council on revenues Updating is expectations for state revenue So that the legislature at least theoretically would know how well or not so well we're doing My my understanding is that they're still meeting every three months The legislature is required by constitution to follow the revenue estimates that the COR puts out To you know determine whether we have a balanced budget or not and they're required to have a balanced budget Well, are we gonna have a balanced budget this year? Well, we the legislature had to pass it so they passed it They passed it no No, they they they they passed it by getting Source funds from other sources like the you know, the federal cares act money the rainy day fund Borrowings, etc. So theoretically it is balanced It is balanced, but well, you know, are the income sources sustainable? No It's not going to happen next year. So we'll have to basically figure out what to do next year next year. Yeah, well You know, I hope they weren't assuming that Congress is going to provide additional charges of money this year Because it looks like Congress has locked up on that. Yep What about the loans you mentioned a moment ago that we we were going to try to Balance the budget with loans. Of course, that's that's not really income so much as a loan But right you get back from the federal government. How's that work? It comes from the federal government There's something called the municipal liquidity facility The the units have been talking about that a lot as a way to fund the you know, the current pay raises the But as the governor said your money's got to be paid back in three years So it's it's not a long-term solution. Yeah, I well again, you know There are a lot of issues like like footpaths and bridges and whatnot stadium Rebuilding and stadiums the stadiums. Yep And so what you know what I what I'd like to do with you in the in the remaining Couple of minutes is that try to figure out where this is all going because I think I think we we have a certain complacency or lack of Focus on the on the true priorities, which are really threatening What's going to happen? Yeah, I mean that they're really there really hasn't been a focus on determining what the true priorities are I don't think there really has been Any focus discussion on that if you know if it has been taking place. It's been taking place in back rooms We in the public haven't seen that and you know, I hope I hope we Get to see that's you know some of that in the In the coming weeks Well, let's assume there have been those discussions in the back rooms, whatever for the lack of a You know a steady session What what can we hope for there? We can hope for I guess a reasonable expectation of getting enough revenue to balance the budget And we can you know have enough money to pay unemployment claims or even extend them and Keep people Solvent and in their efforts to get food and Medicines and whatever they need to pay the rent and all that that's that's that would be my Mystic view of it Yeah, I think what's got to happen is there there needs to be some discussion about you know, we're in government to cut We can't we can't maintain the current level of government. It's just it's not sustainable and We got to be thinking of what do we need and you know, what would we like to have but can't afford What what things would be an issue then time You know, you look through the budgets and programs of a lot of a lot of departments, especially the big ones DOE comes to mind Do they really need all of these programs or they really need all these administrators doing do we really need? All of these all of these things If we don't, you know, come on, let's get rid of it and maybe bring it back when I can then you're when you have money Yeah, well, there's billions all there Yeah, we have we have people who can't you know who can't find food and shelter. I mean, let's get to let's take care Yeah Well at the same time DOE is asking for extra money to make things safer in the event of a reopening of the schools I'm not sure that settled yet or that it's funded yet But that would also that would involve not a reduction of the money that goes to DOE But an increase in the money that goes to DOE Again, you know, we have to make priority calls. Is this something we really really need or is it something that would be nice to have? Maybe something would have it's gonna be nice to have You know, still it until we have some more money Okay, so on the one side we were looking at the possibility that there had been back room meetings and even though the legislature was You know had a Swiss cheese kind of session and even though that it's out of session now There are as you said, there are committees meetings such as the committee to look into David E. Gates plan on cove it So the optimistic view is that they must be doing something And that and they are aware of the issues that we've been mentioning here And somehow they'll be able to pull it all together in time to avoid going over the cliff But the other possibility is the pessimistic possibility and if we were pessimistic to say that well Whatever room back room meetings that were whatever Post-session or extra session meetings that were there were no no solutions. There was discussion, but no solutions There were hearings, but no solutions in that event, you know, we're left to Whatever the situation is which is a started out as a 2.3 billion dollar shortfall And it doesn't sound like we've actually made any progress on that And you know despite the loans and the extra money, which we may or may not get from Washington we may wind up in the hole and This year that matters a lot because there are people who depend on the state to eat So my question to you is what happens on the pessimistic side? Let's assume that there have not been productive meetings by the legislature. Let's assume that you know, you see what you get At the gubernatorial level, what's gonna happen to us? Well We're gonna run out of money and then everything stops What's what's everything government Give me an example of a stoppage that would actually affect me or us You're building a house you want a building permit? Government stopped You'll be waiting for that permit for years More than you already are That would that would be across the board and and when you start thinking about it and sitting down and Answering that question fear for yourself You would come up with things like that but plus a lot of other things Where you depend on government for a lot of things and this is especially so in business in business enterprise So it's a government can't can't function Then the economy is sure to follow. So you think yeah, maybe we can talk more about that in a couple of weeks On our next show, let's do that. Let's talk about how fiscal policy affects the economy Because I think you know that that linkage Coupling if you want to use the word coupling is clear That's Tommy. I'm a chica. He's the president at tax foundation of Hawaii every couple of weeks We explore these things which you should know about you should listen to with Tom's comments And you should read up on it in the newspaper and you should make yourself Familiar with how this works because ultimately it's going to affect you. Thank you so much, Tom. I appreciate the discussion and the wisdom