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Tom Yamachika, Grassroot Scholar and president of the Taxpayer Foundation of Hawaii, was the special guest Feb. 1, 2021, on Keli’i Akina’s “Hawaii Together” program on the ThinkTech Hawaii network.

The topic was “How tax hikes will hurt the economic recovery,” and the conversation, posted below, generated many valuable insights. Among them:

>> “The amount of tax revenue depends on the economy. So, if people make less money, there’s going to be less tax.”

>> “If you want to address shortfalls to the tune of a billion or a billion-four, you’ve got to do something drastic. If you’re going to do that with the individual income tax, you’re going to have legislators saying two things: One, ‘Yeah, we’re just taxing the rich.’ And No. 2, ‘You’re rich. Congratulations.'”

>> “My favorite example of a temporary tax is the tax that was imposed to build our convention center; this was in 1986. It was a 5% tax, then called the transient accommodations tax. It was supposed to be over and done with and repealed once the convention center got built. Guess what? We still have it. It’s 10.25% now, not 5%. It just keeps on going.”

>> “I think what bothers me most is that there really is no overall plan. There is no overall game plan. There are various and sundry tax bills out there, a lot of which contradict themselves. Like there are tax increases proposed, but at the same time, they’re proposing to continue credits, create more exemptions, enact more incentives. I just wonder if they’re talking to each other. Maybe the Legislature is the time and the place for this cohesive strategy to be built, but it certainly doesn’t seem like there is any right now.”

See the entire conversation below. A complete transcript is also below.

2-1-21 Tom Yamachika with Keli’i Akina on “Hawaii Together”

Keli’i Akina: Aloha, and welcome to “Hawaii Together” on the ThinkTech Hawaii broadcast network. I’m Keli’i Akina, your host and president of the Grassroot Institute of Hawaii. 

We’ve got a wonderful guest with us today, Tom Yamachika. But first, let me talk a little bit about what’s going on at the state Legislature. It’s become an annual tradition just counting on the New Year or setting off fireworks on the Fourth of July. Every year in late January, we observe the running of new tax proposals, and this year it’s no different. So far, the Grassroot Institute of Hawaii has identified dozens of new tax bills under consideration in the 2021 legislative session.

I think you’re going to be amused; well, maybe you’ll be crying [laughs] when I mention some of them. 

There’s a car tax being considered on the purchase of any non-zero emission vehicles; proposals to raise the base of the general excise tax from 4% to 4.5%; a three-year surcharge on the liquor tax — literally, that’s a tax on top of a tax; a proposed constitutional amendment to remove the exclusive authority of the counties to tax real property; so guess what? The state can also tax you on your real property. Or new taxes on the struggling tourism industry, including a “sustainable tourism” tax and a surcharge on the transient accommodations tax — and again, that’s a tax on top of a tax. 

Proposals to increase the top marginal income tax rate here in Hawaii to 18% or 16%, all the way up from 11%. They’re also considering a carbon tax and a hike in the barrel tax that would increase the tax on gasoline to 56 cents a gallon from 3 cents a gallon right now. And there are many many more. 

It’s not clear whether these taxes are being proposed in a misguided attempt to bring in more state revenues, but there’s widespread agreement that we don’t need these taxes. In fact, our own governor had mentioned recently that we don’t need more taxes.

But, that’s what’s going on at the Legislature and that’s why I’ve got with me today someone who understands taxes tremendously. He’s an attorney and president of the Tax Foundation of Hawaii. We’re going to talk about how tax hikes will harm the economic recovery. He’s a good friend and a partner with us in our work at the Grassroot Institute. Please welcome to the program, Tom Yamachika. 

Tom, so good to have you on the show again. Aloha.

Tom Yamachika: Aloha, Keli’i and thank you for having me on the show. Yes, you’re absolutely right that there are a lot of tax proposals being bandied about at the Legislature. We have our own list of bills that we are following. The list is about 300 bills long out of the 2,500 or so that have been introduced.

Akina: You do a lot of good work at the Tax Foundation. Just at the outset, let our viewers know what the Tax Foundation of Hawaii is all about.

Yamachika: Well, we call ourselves a taxpayer watchdog organization. We take a look at taxes and public finance. We especially take a look at the Legislature. We want to make sure that both the legislators and their constituents and anybody else who wants to know has good information on these tax proposals, how they work, how they dovetail with each other, because a lot of times the legislators are not going along with these tax bills because they want to but because they’re following somebody else. So I want to at least make sure that they have enough information to understand exactly what they’re doing and what they’re voting on so their vote actually means something.

Akina: Well, that’s very important work and I know that a lot of lawmakers and citizens rely upon what your organization does. 

One of the things that you’ve been talking about is how lawmakers’ plans to increase taxes actually will end up hurting the economy and actually hurting struggling residents at this time, especially trying to recover from the COVID lockdowns and so forth. 

Tom, last year, Gov. Ige suggested that there might be a need for new tax increases this year. But aside from a tax on sugary drinks, which he proposed — we could talk about that if you care to — he really hasn’t proposed any new taxes in his legislative package. Now he says tax increases should be a last resort. I was really glad when I heard that, but sometimes we have to interpret what lawmakers and politicians tell us. Why do you think ostensively he’s changed his mind?

Yamachika: Well, I think it’s because it plays better with the public. The fact of the matter is that he submitted a budget to the Legislature. The budget had the section on “revenue enhancements” of a billion dollars, with a B. It was unclear at that time what was in that billion. It still is unclear, despite the governor’s package having been unveiled. So we don’t know really what their plan is — if they want to increase the taxes, what kind of taxes, how much? We don’t really know.

We do think that in order to get to the numbers that they are talking about — if you want to get to a billion dollars — you have to basically move one of the two big taxes that we’ve got. One of them is the GET and the other one is individual income tax. So you go to work, you get a paycheck, you get some tax withheld from your paycheck, that’s the individual income tax. Those two are the big elephants in the room. Everything else brings in an amount comparable to what one of those two taxes will bring.

Akina: So you’re fairly suspicious. When there’s a category called “other revenues,” you know what they’re really talking about. Why, Tom, is it a bad idea to raise taxes at this time in particular?

Yamachika: Well, one thing that we’ve been saying all along is that taxes act as a brake on the economy. When people are working and producing goods and selling services, they have to make more to work harder or sell more services, if tax is imposed on those goods or services. So it depresses the amount that is produced and otherwise acts as a brake on the economy. 

Now, one thing you have to realize is that the amount of tax revenue depends on the economy. So, if people make less money, there’s going to be less tax — not only because the tax system depends on that in their calculations, but because even if you assess tax on a person that has no money, that person ain’t going to be able to pay it.

Akina: So taxes slow down the economy, a slower economy means people make less money, which means the people and the businesses pay less taxes, which means the government doesn’t get as much as it wants in the first place. So what’s the logic of raising taxes in the first place? Regardless of these warnings, legislators have introduced so many numerous tax hike bills. I read a list of them at the start of the program: an income tax hike, a real estate tax hike, carbon tax hike, GET surcharge and so forth. What is the rush behind these proposed tax hikes, especially when the logic tells us that that’s actually going to slow down the economy and reduce state revenues anyway?

Yamachika: Well, the question then becomes what’s the alternative? You have expenses, right? And you got to pay them somehow. The revenue isn’t coming in, so what do you do? You have to either decrease the expenses or increase the revenue. Decreasing the expenses entails such things as layoffs, furloughs, getting the public employee unions irritated because their members get damaged. Increasing revenue basically hurts the rest of us, perhaps including the state workers, but not as much because they’ve got [unintelligible 00:09:33] increases. What do you do? 

Obviously, state government’s caught between a rock and a hard place. There is pain that’s going to go around, and the question is who’s going to feel the pain more?

Akina: When people talk about reducing government spending, it’s almost always couched in terms of cutting services or cutting employees. Is that the only way to cut government spending? Do you think that there’s enough fat and enough inefficiency that can be reformed? For example, the government runs many businesses that could actually be handed off to the private sector and run at a better cost as well as more efficiently. Do you think there’s room to do this?

Yamachika: Well, there’s I think room in a number of different places. One is, we know, and we’ve seen the state auditor document, the fact that monies are being squirreled away. The auditor–

Akina: You’re talking about special funds, is that right?

Yamachika: Yes, special funds among other things, yes. Primarily the special funds, there is … The state auditor has identified a lot of money that’s in these special funds. It’s not being used because they’ve tested the funds against how much outflow is imposed on them every year and a lot of them have been showing excess balances, and that’s what the auditor reported on. 

Now, the constituent departments, of course, don’t want these funds to go because they have other plans for them. But, you know, get real folks. We’re all hurting and nobody is helped by having money just plain sit around when we all need to make better use of it. That’s No. 1.

No. 2 is that you have some departments that are very, very large and you look at most management studies that have taken place all over the country, you find, you see that the larger a government or private entity, even businesses, get, the easier it is to find considerable amounts of waste or inefficiency in how they spend the money that they have. 

We’ve got some huge departments. Wwe don’t have a lot of transparency into what they spend or how they spend it. A case in point, for example, is the Department of Education. There is another nonprofit that has made it their life’s work to try to get the expense records and other kinds of accounting records out of the Department of Education. They’ve spent, I think, a year and a half so far, in a Uniform Information Practices Act lawsuit. They finally got some information out of them, but then the information was from the year 2017. So much work, results of questionable relevancy, but it’s a start. 

You add that among other large departments, like the Department of Health, Department of Human Services and you’re likely to find a lot of stuff that is available for repurposing.

Akina: When it comes to the growth of our government, we’re really dealing with a behemoth. Isn’t it true that the rate of growth of the government sector in Hawaii is faster than the rate of growth of the private sector in terms of the economy?

Yamachika: Well, I think your group has done extensive research on that and I don’t have any reason to question that.

Akina: Many people are defending the tax proposals that are surfacing at the Legislature now and one of the defenses is that these taxes, they say, are aimed at the rich and therefore would not harm most residents; for example, increasing the upper marginal tax rate and so forth. What are your thoughts about that? What kind of thinking is that to say that if we’re really only taxing the rich, we’re really not going to be hurting the general population?

Yamachika: Well, I think the first thing is, if you really want to only tax the rich, you’re not going to get enough money. We’re in a $1.4 billion a year budget hole, for multiple years. You can scratch the surface at it if you just go after a very small slice of the population, and that may make you something, but it will scratch the surface. 

If you want to address shortfalls to the tune of a billion or a billion-four, you’ve got to do something drastic. If you’re going to do that with the individual income tax, you’re going to have legislators saying two things: One, “Yeah, we’re just taxing the rich.” And No. 2, “You’re rich. Congratulations.”

Akina: [Laughs] The good news is we’re only taxing the rich and the bad news is now you’re rich.

Yamachika: Yes.

Akina: We’ll come back after a quick break and pick up on that point. My guest today is Tom Yamachika, president of the Tax Foundation of Hawaii. You’re watching “Hawaii Together” on the ThinkTech Hawaii broadcast network. Don’t go away.

[Intermission]

Akina: We’re back with my guest today, Tom Yamachika, president of the Tax Foundation of Hawaii. We’re talking about why raising taxes in the way that many legislators are proposing right now is not the best idea for Hawaii. 

Tom, we ended the first segment talking about the defense of raising taxes that is given, which says we’re only taxing the rich. But as you pointed out, even a strategy that only tax the rich wouldn’t be sufficient for raising the money we need. And isn’t it true that if we tax the rich, we have a very high possibility that we will be reducing tax revenues, ultimately, because the rich actually provide quite a bit of our tax revenues?

Yamachika: Not only that, but a lot of them vote with their feet.

Akina: Ahh, yes, we have the exodus of productive workers leaving Hawaii.

Yamachika: Well, not only productive workers but also the rich. People who are in a position to employ people, entrepreneurs with ideas, people with ambition.

Akina: Well, this sounds like California almost. I mean, we’ve been watching over the last few years a massive exodus of major corporations and wealthy individuals leaving California and heading to places like Texas because of the tax situation. Do you think that’s on the specter here in Hawaii?

Yamachika: Yes. It’s not only California. Connecticut is another one where big corporations have left. New Jersey, I think, is another one. “Taxachusetts,” which is what it’s occasionally affectionately called. The phenomenon is not unique and it’s not unprecedented. People do it. And you’ve seen our population shrink in recent years. That’s well documented. What more is it going to take for people to realize that you can’t tax people to oblivion and expect them to just take it?

Akina: Well, one of the strategies that’s being used to pass some of the tax hikes is calling them temporary. Many proposed taxes this year, like the proposed tax on liquor, are called temporary taxes. What’s your history here, Tom? Does the Legislature have a good record at repealing temporary taxes?

Yamachika: It really doesn’t. My favorite example of a temporary tax is the tax that was imposed to build our convention center; this was in 1986. It was a 5% tax, then called the transient accommodations tax. It was supposed to be over and done with and repealed once the convention center got built. Guess what? We still have it. It’s 10.25% now, not 5%. It just keeps on going.

There were some temporary hikes that were indeed temporary, or some suspensions of GET exemptions that were indeed temporary. Even more numerous, I think, are the instances where the Legislature said, “Well, we’re going to make this temporary increase,” but a year after the increase expired, there were bills to raise it again back to the old rate, with lawmakers, I think, thinking that the public has got used to it, so they’ll pay it.

Akina: Tom, last year in 2020, we went from being the state with the lowest unemployment rate to the state with the highest unemployment rate, in response to the COVID lockdowns and the demise of our tourist industry. As a result, we absolutely depleted our already-underfunded unemployment insurance fund and we triggered a mechanism in law, which says that in the following year, which is 2021, the tax rates on businesses to pay for the unemployment insurance will virtually triple in many cases. Do you think that the lawmakers should lower the tax rate on the unemployment insurance tax for our businesses?

Yamachika: Yes, I do. I think the one that softened the hard edge that is there right now because of the massive depletion … See, what happens is, our unemployment tax is a series of rate schedules, lowest being A, the highest being H. We have been on Schedule C for a number of years. Because of the coronavirus effects, we started off with our unemployment trust fund — which was actually not that bad off; it was $600 million, but that got decimated. We also had to borrow money from the federal government to keep our unemployment payments afloat.

So we’re now owing the federal government $700 million as a result. Under the law, if nothing happens, the law is designed to self-correct and charge more tax when there’s less in the funds, so it’ll go automatically to Schedule H unless we do something about it. And there are several proposals to do something about it, which I think is good, because at least there should be some cushioning of the shock as opposed to going from C to H right away.

Akina: Tom, lawmakers are also considering closing off of some of the tax exemptions that exist. What are your thoughts here?

Yamachika: I think closing off on the exemptions needs to be applied very carefully. We did it in 2011 to ’13 and I’m not sure what beneficial effect it had. It certainly got people upset, especially in the construction industry because one of the biggest exemptions got taken away there. There are proposals to do just that again, and I’m not sure how much thought has been put into figuring out how much … what you shut off.

Typically, when the Legislature passes a tax exemption, it does so for a reason,  because they want to incentivize a particular business that they think has growth potential, because they are concerned about accumulating costs in a certain industry or series of industries. A bill like you described would take away and reverse all those policy choices in one fell swoop. So if you want to do that, you’ve got to be really, really careful.

Akina: In essence, closing these tax exemptions would in many ways be like adding a tax and have that effect you described earlier of putting brakes on the economy and ultimately resulting in lower revenues for the state as well. We seem to see, once again, short-term thinking versus long-term thinking. 

As you’ve looked at the proposed tax increases or hikes for this term, is there any one or are there any few that really bother you, that would really be bad for Hawaii and for business?

Yamachika: I think what bothers me most is that there really is no overall plan. There is no overall game plan. There are various and sundry tax bills out there, a lot of which contradict themselves. Like there are tax increases proposed, but at the same time, they’re proposing to continue credits, create more exemptions, enact more incentives. I just wonder if they’re talking to each other. Maybe the Legislature is the time and the place for this cohesive strategy to be built, but it certainly doesn’t seem like there is any right now.

Ideally, somebody like the governor should come in and say, “Look, guys, we’re in a bad way. I think we need to go along this route, this strategy, to get out of this mess.” If there was leadership shown like that, I think it’d be a lot easier to take, but right now it just seems like a bunch of cats yowling in the wind, and which are going to get picked to eat the fish. It’s just discordant right now.

Akina: In absence of such a strategy that would really take us in the right direction and make our economy more feasible for businesses to flourish, we’re seeing this flurry of tax proposals. Ultimately, what will the harm be to the economy and to the cost of living if many of these tax proposals are passed this term?

Yamachika: You guys are the economists, but we are already starting to see some of the ill effects. We’re starting to see businesses close. We’re starting to see people get on planes and not come back. We’re starting to see businesses that default in rent payments and have no prospect of paying them back. Consequences like that are visible and they’re starting to build up.

Akina: Just a last question before we end the program today. Many have looked to federal loans as the salvation for our economic condition now. What are your thoughts on that?

Yamachika: Federal loans are fine, but you got to pay it back. It helps kick the problem down the road — sometimes that’s what you need — but it shouldn’t be looked at as a long-term solution because it’s not.

Akina: Tom, I appreciate you being with us today. Great insights. If anyone wants to get ahold of Tax Foundation of Hawaii, how do they do that?

Yamachika: Sure. Our website is I think very approachable. It’s T-F-H-A-W-A-I-I.org, tfhawaii.org. Go check it out, we have loads of resources available for free. If you join and become a member, we have even more resources available to you, and we appreciate any support.

Akina: Great. Well, Tom, you’re doing great work, as is the Tax Foundation of Hawaii. I thank you for being on our program today. Aloha to you.

Yamachika: Thank you for having me on the show.

Akina: My guest today, Tom Yamachika. We will be back again next time on “Hawaii Together” on the ThinkTech Hawaii broadcast network. I’m Keli’i Akina with the Grassroot Institute of Hawaii. Aloha.