Keli’i Akina of the Grassroot Institute of Hawaii was among three guests invited by Hawaii Public Radio to talk about tax bills at the Legislature this year, including the notorious SB56, many parts of which have now been attached to HB58, creating a “Frankenbill,” as in Frankenstein.
The other guests were Tom Yamachika, president of the Hawaii Tax Foundation, and Nicole Woo, research and economic policy director for the Children’s Action Network. Catherine Cruz of KHPR moderated.
A complete transcript is below.
3-26-21 Keli’i Akina on Hawaii Public Radio’s “The Conversation”
Catherine Cruz: This is “The Conversation” on Hawaii Public Radio. I’m Catherine Cruz. Our guests today on the show are Tom Yamachika, president of the Tax Foundation of Hawaii. Hi, Tom. How are you this morning?
Tom Yamachika: Great, thank you for having me on the show.
Cruz: Yes, and we have Nicole Woo. She’s the director of research and economic policy at the Hawaii Children’s Action Network and a member of the Hawai‘i Tax Fairness Coalition. Good morning, Nicole.
Nicole Woo: Good morning, Catherine.
Cruz: Keliʻi Akina, president of the public think tank Grassroot Institute of Hawaii. Good morning, Keliʻi.
Keliʻi Akina: Well, good morning, Catherine. Much aloha to you and the other panelists.
Cruz: We are at a point at this session where we know more about the $1.6 billion federal pandemic relief for states. Economists are forecasting a brighter picture, although still a slow recovery. The House has just passed the state budget bill restoring many of the critical social service programs, but some bills calling for tax relief and tax hikes still hang in the balance. While we’ll be talking mainly about the tax hike proposals today, we should mention a tax relief bill that now likely won’t happen because it appears that lawmaker’s hands may be tied by what is spelled out in the federal relief bill.
We did talk to House finance chair, Sylvia Luke yesterday afternoon about this.
Sylvia Luke: The one that is of most concern to me was that there was a bill to extend the EITC, which is Earned Income Tax Credit, which provides tax credit specifically for our low-income working families. That credit would sunset in 2022. We had a bill extending that sunset, but even an extension was seen as a tax relief, so we couldn’t pass that bill this year. We’re hoping that we will get better guidance and more information during the summer, and then we will revisit some of these issues next year.
Currently, we didn’t want to jeopardize the $1.6 billion by passing tax relief bills.
Cruz: I don’t know, Tom, you want to jump in here? What are your thoughts on that? I know we all need this $1.6 billion bailout, and we don’t want to jeopardize it.
Yamachika: Sure. Well, what Sylvia is talking about is a provision in the American Rescue Plan Act or ARPA, section 9901. What that says is that if you as a state are going to take relief funds, then you can’t use them for tax relief, which includes lowering your tax rate, enacting or extending credits, making deductions or exclusions. None of that is allowed either directly or indirectly. The language in the statute is vague, which is really paralyzing legislators all across the country, because they don’t want to jeopardize their piece of the billions of dollars that the federal government has generally made available to the states.
Cruz: Nicole, I’m not sure, did you weigh in on this bill?
Woo: Oh, yes. Hawáii Children’s Action Network cares a lot about the EITC, because it’s a really fantastic antipoverty program that’s designed to help families. Lower-income and working-class families with children, they get the biggest tax credit, so we care a lot about the EITC. About a week and a half ago, when state officials across the country, like Tom said, expressed concern about this part of the ARPA, the U.S. treasury department did say that states can cut taxes without a penalty as long as they use their own funds to offset those cuts.
If we were to pass some bills at the same time, that were the same amounts or more than the amounts in the EITC extensions, then it seems like that would be OK, but Rep. Luke is right. We’re still waiting for a very specific guidance that comes from the U.S. treasury. I’ve heard that it might come out in April. We’ll see. Nobody really knows, but she’s being cautious. She wants to make sure that we don’t lose our federal fund.
Luckily, we do have a little bit of extra time, since the EITC doesn’t expire until the end of 2022.
Cruz: What are your thoughts Keliʻi?
Akina: Well, definitely, getting $1.6 billion from the federal government is certainly something that many legislators would cheer about. But it really doesn’t address the long-term issues that were really at play even before the COVID epidemic hit us. Basically, we had economic policy that was leading us into a downturn economically. The fact is that there are other ways to get the $1.6 billion and even more by adopting good policies in the long-run. For example, the state’s economists had found that if Hawaii cut taxes by 2%, and the economy also grew by 1% faster than expected, we can actually generate $3 billion over the next 25 years.
In addition, we have found that if we reduce certain regulations and grew 2% faster, we would generate $7 billion in revenues over the next 25 years. The point is simply this, I can go on with measures we could take, but it’s not absolutely essential for Hawaii to continue to go into debt and to take federal funding as well. What’s more important is to get the economy up and running through good fiscal policy, and that will actually generate more funds with the outcomes that we really want, which is, really, to help those who are poor or in the middle class to climb the economic ladder.
Cruz: There was Bill 56, or I should say, there is a bill. Tom, you call this The Enola Gay bill. This was, I believe, a bill that would enact a higher tax on the top earners, a tax on the rich. We did talk with Sylvia Luke about this. Here’s what she had to say:
Luke: What was shocking to us was that many doctors spoke up and well, business individuals, and architects and engineers. They wrote in, called our offices, and said, “At a time where we’re trying to expand the economy, and we want access to health care, this would send the wrong message when hospitals and hospitals like Maui Health is trying to recruit specialists and doctors to come to Hawaii, and this is sending a wrong message.” At least on the House side, we’re not entertaining that bill.
Cruz: Tom, you just shared with me before this show that there’s been a new development about Bill 56.
Yamachika: Right. Senate Bill 56 had within it a number of different tax hikes: income tax, conveyance tax, general excise tax all within an omnibus bill. That’s why I called it the Enola Gay Bill, because it really had a really devastating payload on it. When it hit the House, it got a very chilly reception. It was what we call quadruple referred, meaning that the speaker’s office set forth four different committees that had to hear it and pass it before the relevant deadlines, which is almost impossible to do, thereby sending a message that that type of omnibus tax increase is not going to be looked on favorably by the House.
What the Senate adjusted, and this was as of last night, was it released a proposed Senate draft of the House bill that’s now on their side, and this is House Bill 58, which basically stuffs a number of the Enola Gay provisions into it and a little more. It has the conveyance tax, it has the general excise tax suspension to the exemption. It has a provision lowering the threshold for estate tax from $5.45 million to $3.5 million. It doesn’t contain the income tax provisions, but those may be put into other bills.
So the discussion has not been squelched. It’s very much alive, and we need to, unfortunately, wait until the conference committees have done the work before we find out what survived.
Cruz: I know this is an example of what some call a Franken Bill, where you take parts of one and you assemble a new body.
Yamachika: Yes, parts of a dead body and — [laughs] — then try to make the whole package come alive. I call it a Franken Bill.
Cruz: Keli’i, I know you feel strongly about this wealth tax.
Akina: Well, basically, SB56 was going to target those at the highest end of the economic ladder in the belief, and the wrong belief, that by taxing them more, we could actually raise more money and help other people. That’s simply mistaken, but before I point out why, I think it’s important to recognize that, I believe in Hawaii, we’re all committed to some basic outcomes. The question is not about fairness, it’s about outcomes such as an economy that produces a supply of jobs so the poor and middle class can climb the economic ladder. We want that.
We want to supply housing that is affordable to everyone. We want enough doctors to eliminate the shortage. That’s something that Rep. Luke mentioned. We want adequate government funding for essential services and safety nets. Here’s the problem: Raising taxes on the most wealthy is actually counterproductive to doing this.
The top 1% here in Hawaii pay 25% of all taxes, and by raising taxes on them, we’re going to drive them away in terms of their residency as well as their income. Some of these figures that try to calculate how much can be raised by raising taxes on the wealthy simply do not take into account the fact that many of them would leave. We’ve got a project at the Grassroot Institute that helps people who have decided to leave Hawaii explain their reasons [in our series] “Why I left Hawaii.” Many physicians are leaving simply because they simply can’t make the margins financially needed to stay here. With increased taxes, that will be harder.
The bottom line is this: The bills that have been introduced to raise taxes on the wealthy are not actually going to accomplish what they were set out to accomplish. They’re not going to help the poor and the needy. What we really need is a tax system that produces the outcomes in the economy that we need.
Cruz: Nicole, do you agree with what Keli’i has to say about this?
Woo: I think Keli’i brings up a lot of myths that are very popular to talk about, but he hasn’t really cited where he’s getting his evidence from. During the last recession, the Great Recession, I was actually the director of domestic policy, that’s the U.S. policy, at an economic policy think tank in Washington D.C. I spent about 10 years there just looking at nothing except the U.S. economy and how we can make it grow for working families. We learned some lessons from the last recession — not just my think tank, but other ones like the Economic Policy Institute, the Center for American Progress looked at states during the last recession and what they did with their budgets.
The states that cut their programs and cut their spending, they had slower growth, slower recoveries, more unemployment, while the states that had kept their budgets full or even increased their government’s budgets due to the greater need for social programs during the recession, those states had faster economic growth. The reason for that is that, although Keli’i cited some studies about how lowering taxes might increase growth of an economy, that’s when an economy is healthy. Right now, our economy is not healthy. We have the highest unemployment rate in the nation. The economy is driven by consumer spending. Two-thirds of the economy is consumer spending.
We know without our tourists and with so many unemployed people, our private spending, our consumer spending, has died. That’s like if you have a plane with two engines and the private spending has died. You have one other engine, that’s the government. We need the government to keep money flowing through the economy so that people can afford to go to local businesses, so that struggling unemployed families aren’t getting evicted and are able to pay their rent to their landlords, they’re able to pay their mortgages, they’re able to buy food in the grocery stores, and maybe even go out to a restaurant every now and then.
During a hurting economy, which is what we have now, the ideas about taxes are very different. It’s been shown that rich people tend to save their money, and if you tax them more, it doesn’t affect the amount of money that they spend. That money goes into the economy, it goes to regular working people who do end up spending it in the economy. That’s a big difference.
Cruz: Were you surprised–
Woo: With the millionaires’ slice, there’s no correlation between the states that have the most millionaires and the states that have the highest taxes. Millionaires are in California, New York, Los Angeles, Chicago; those are some of the highest-taxed places. Researchers have studied this, and they don’t find that millionaires and rich people move away just because of taxes, because the fact is that they can afford to live where they want. They choose where they want to live based on things like the weather and infrastructure, schools and other things that governments invest in. That’s a bit of a myth, this idea that people leave just because of taxes.
Cruz: Were you surprised to learn about [Bill] 56 becoming [Bill] 58?
Woo: Yes. This was the first I’m hearing about it. It sounds like the Senate really wanted the House to at least give that bill a hearing in the House. Let the public weigh in. And when the House, like Tom described, gives HB-56 an impossible pass, the Senate, I guess, has responded by saying, “You know what, we’re going to give it another hearing here in the Senate. We’re going to keep the discussion going.”
Cruz: Well, if you’re just joining the conversation, we’re talking about tax bills that lawmakers have been mulling over this session. We’d like to know what you think. You can join the discussion by calling 941-3689 or 1-877-941-3689 from the neighbor islands. We will be back with our guests Nicole Woo of the Hawai‘i Tax Fairness Coalition; Keli’i Akina, director of the Grassroot Institute of Hawaii; and Tom Yamachika president of the Tax Foundation of Hawaii, right after the station break.
You are back with “The Conversation.” We’re talking about taxes and the tax bills that are pending at the state Legislature. We do have a call coming in from Maui. Judy, what’s on your mind?
Judy: Well, thanks very much. I’m honored to be able to make a few comments. My comments are particularly, but not exclusively, with regard to seniors and kupuna during this trying economic time. I’ve noted that the federal filing date has been extended a month, which was truly a windfall to many, many people who have been distracted in a thousand ways, if only by how to pay their current bills with that $1,400, whatever. Was thrilled to find that we have a little breathing space here, as I’m sure are a multitude of accountants.
However, we’ve heard nothing like that from the state. In fact, just a couple of days ago in the Maui online publication, which not that many people get, relatively speaking, it noted that Hawaii would not be changing its filing date. In effect, everyone here must file or get an extension on their filing, because to put together our state return, we have to put together all the returns. That’s a real problem, as I see it. Similarly, with regard to unemployment comp, the federal government has said it will not tax as income.
I believe it’s a sum up to $9,000 in unemployment comp benefits. But the state has made no similar mention. Once again, a double whammy there. Unemployment comp is, of course, urgently needed by so many people, including seniors. The census, contact tracing, many, many seniors with the ability to do that got in touch with the federal and the state government, got told initially, “We got your application,” and heard nothing after that.
Now, those seniors are, to a significant extent, in possession of their two shots and an ample time afterward to be arguably immune. We’re hearing nothing, not only about those things, but about other applications.
Cruz: Well, I know, there is a lot of frustration out there about unemployment, and it is tax time. As people start to gather their documents, yes, it is something to consider. Unfortunately, we don’t have anyone from the state tax office here to be able to address that. We’re talking about a number of the tax bills that are pending out there. We did also get another listener comment. We have Kathleen from Kaneohe.
Kathleen: Hi, this is Kathleen. I’m calling from Kaneohe. With the soaring prices of housing and our short supply of housing, and with so many of our local households being sold to out-of-state investors or out-of-state residents, I think it is important that we raise the tax on real estate that’s valued at over $2 million. We can use that money to help our state and support our local families and our local systems like education, childcare, different [needs], like food and care services. I think that it’s important that we make the most of that funding to support our families and the folks that grew up here.
Cruz: Tom, you’ve seen attempts in years past, I think, to try and figure out if we can legally tax foreign investment. Any thoughts on this?
Yamachika: Well, let me address the first caller’s concern, because I think I have an answer to that one. The second caller raises more policy-oriented arguments, and that may take a little bit longer for me. With regard to the filing deadline, one thing that people need to keep in mind is that here in Hawaii, we have an automatic extension, and we’ll be able to make extensions for six months. You don’t have to do anything to be eligible for the automatic extension, because it’s automatic. You don’t have to do anything.
As long as you don’t owe a whole bunch of tax that you should have been paying throughout the year anyway, because the estimated tax requirements have not changed, then you should be totally fine submitting in May with your federal.
With regard to the exclusion of unemployment benefits, yes, the feds did pass, in the American Rescue Plan Act, a provision that says the first $10,200 of unemployment benefits received in 2020 won’t be taxed by them, which is contrary to the usual rule.
The usual rule, and the rule that the Labor Department has been advising taxpayers on, at least according to their testimony before the Legislature, is that they’re saying, “We always tell people it’s taxable. We gave people the option to withhold tax when they get their unemployment comp benefits, and if they don’t take that option, it’s really up to them to make sure that they are good with estimated tax.” That’s what they’ve been telling people. I think that takes care of the first caller. I’ll leave it to the other more policy-minded people to address the second one.
Cruz: Who wants to jump in here? Keli’i or?
Akina: Catherine, I think Tom has answered that well. I’m wondering if I can go back to our earlier portion in which Nicole raised some questions about our data, and I appreciate where she’s coming from. I think we are on the same page when it comes to the outcomes we want to see here in Hawaii, where the poor and the middle-class, we want there to be opportunity. But this information we presented is well-documented.
A good example of the fact that raising taxes will actually reduce the tax revenues the state gets and lowering taxes will actually raise the revenues they get comes from the Tax Review Commission paper called “Who Paid Hawaii’s Taxes,” published March 17, 2021, by Seth Colby of the Department of Taxation. The research is there, and I’d like to just make sure that people have access to it. They can go to our own report called “Road map to prosperity,” and that’s at grassrootinstitute.org.
The bottom line is this: When we raise taxes, we not only cause some residents to leave, but even for those who may not leave, they send their money away. They could easily incorporate in Nevada or elsewhere. I can give you numerous examples of people who’ve done that. The bottom line is we must not kill the goose that lays the golden egg. We must not overtax that segment of the population and the businesses that ultimately produce the jobs that give the economy the boost that it really needs.
Cruz: Nicole, do you want to just say something about the outside investment, foreign investment?
Woo: Yes. Well, for all of those. First of all, Keli’i is basically describing what people know of as trickle-down economics. We make sure that rich people have more money and that their wealth will trickle down to the rest of us. It really hasn’t worked in the past. We had massive tax cuts under Reagan, we had the recession. Bill Clinton raised taxes, we had our first budget surpluses.
He and I are not — I don’t want to go back and forth with him for an hour on this, but I think there’s a basic difference between whether or not giving wealthy people more money helps the rest of us. I personally, as I said, worked at a think tank for 10 years looking at nothing but this kind of stuff. Trickle-down doesn’t work, it never has. But besides [that] point, I want to make a distinction between an economy that’s hurting like ours now, because even those who think that trickle-down works, it’s different when you’re in the middle of a recession, and we have the highest unemployment rates in the nation.
Going back to that plane with two engines, we need to put more gas into the government engine because the private sector, the consumer spending, the tourist engine, is sputtering. It’s just how it works. Spending is the gas to the economy.
On the unemployment tax relief, there were bills in the House and the Senate. I can’t remember which bills they were, but they were intended to relieve people who were getting unemployment insurance benefits from having to pay taxes on it.
There are some states that do provide some relief on some unemployment insurance taxes. It’s not unheard of, and as you’ve mentioned, the federal government is providing some. Those bills have been put aside because of this concern that we started the show with, about whether or not the federal relief allows states to do that.
Cruz: What about this idea of taxing foreign investors? I know other locales have tried that. I think Canada did that, but I don’t know if that’s going to pass legal muster here in the U.S.
Woo: Well, I was listening to the second caller, who was saying that we should tax higher-end income to help invest in the things that regular young families need, like affordable housing and good education. I think most folks know that we’re not allowed to have a property tax in Hawaii due to our state Constitution. One of the visions in the SB-56 bill, the state’s progressive revenues tax bill, is increasing the conveyance tax. It’s the sales tax on real estate when you sell it.
During the time that SB56 went through the Senate, the Senate Ways and Means chair, Sen. Dela Cruz, he actually raised the level at which they would start increasing the tax. In the bill, it increases the conveyance tax on properties over $4 million. Basically, it’s a way to get some extra revenue from people who are doing really well during this recession. We know that high-end real estate in Hawaii is just skyrocketing.
Since we can’t tax property at the state level, this conveyance tax increasing the amount of sales tax on properties over $4 million is one of the ways that the SB56 bill tries to get us that. [It’s] a way to get some more revenue to help the rest of us, people who are hurting from those who are just doing great during the recession.
Cruz: Anything you want to add to that?
Akina: Catherine, [I’d like] to respond to the second question.
Akina: Sure. I didn’t want to cut anyone off. The caller from Kaneohe who asked the question about foreign investment, I’ll just pitch in a couple of thoughts here, if that’s all right. Research really shows that raising taxes on property does not need to lower property values. Here in Hawaii, we already have the highest property values in the nation, and among the highest taxes than other areas.
That’s already a disincentive for foreign investors. What we should do is really foster entrepreneurship, attracting entrepreneurs who are looking for lower taxes to come to Hawaii, by lowering our taxes, and that would really generate more revenue. It’s very easy for investors also to dodge taxes as well.
Woo: Foreign investors don’t have to pay so many of the taxes here, like income tax. We’re talking about foreign investors who buy high-end properties here, and because we have the lowest property taxes in the nation, that incentivizes them to bid up these houses. I’ve seen letters to the editor in the Star-Advertiser where people will say, “I was thinking about buying an investment property in Texas versus Hawaii. Taxes are way higher in Texas, so I decided to buy my investment property in Hawaii.”
There is an effect, because it affects the carrying costs, the annual cost of our high-end real estate. With foreign investors, they’re not subject to income taxes, and so many of the other taxes here in Hawaii, but in terms of —
Yamachika: Let me jump in on that.
Woo: — charging the foreigners more, we’ve heard that there’s a constitutional issue, U.S. Constitution, that treating foreign investors differently from U.S. citizens will cause problems there.
Cruz: Tom, you wanted to interject something?
Yamachika: Yes. Really, if you are a foreign person or somebody from another state and you’re investing in property in Hawaii, you get taxed on capital gains tax just like anybody else. You get taxed on the income that is made from the property just like anybody else. If rental income is made exempt, you got to pay GE tax like everybody else. If the person who is paying you the rent isn’t a long-term tenant but is only there for less than six months, then you have to pay the transient accommodations tax at 10.25% just like everybody else. Foreign investors and out-of-state investors don’t get breaks. Some of them are not aware of their obligation and they just don’t pay.
Woo: I can see buildings in Kakaako, and most of the windows in those multimillion-dollar condos are dark in the evening. I think a lot of our high-end property is being purchased by foreigners who don’t even bother to put people in it. This is, again it could be a whole show.
Cruz: We don’t have time for that. Well, this is “The Conversation” on Hawaii Public Radio. You can join our discussion today by calling 1-877-941-3689. Stay with us; we will be right back after a short break.
One of the taxes under consideration at the Legislature this year was one, I guess, called the “sugar tax.” I believe Daniela Spoto of the Hawai‘i Appleseed, she’s the director of the Anti-Hunger Initiative. She, I think, supported SB-541, which imposes a fee for sugar-sweetened beverages and would establish a special fund for that money to be deposited into. Here’s what Daniela had to say:
Daniela Spoto: They’re some exemptions, but that would include all sodas, things like [Hawaiian] Sun, any sugary drink. It does not include 100% fruit juice like apple juice, and it does not include diet soda. It would generate $65.8 million in revenues per year, is the projection. Obviously, the soda industry does not want to do this, because it has shown to reduce sales, which of course, as public health advocates, we applaud. We also see opposition from retailers; it’s going to be a burden to them.
We don’t actually feel a lot of opposition from the people that actually drink sodas. We’ve done some focus groups and gotten some feedback from communities, from folks that drink soda that say, “It makes sense. If we’re going to tax anything, we should tax things like sodas that are not good for us.” It’s just like with tobacco tax. In 2020, there was a poll done by Ward Research that showed that actually, 81% of Hawaii registered voters support a $0.01-per-ounce fee on sugary drinks when the revenues go towards children’s health programs. That’s an important caveat.
Cruz: We should note that, I believe, the sugar tax bills did not get a hearing this session. That’s right, isn’t that Tom?
Yamachika: That’s right. There was actually an administration bill that proposed a sugary beverages tax. It was introduced by the Department of Health and of course, that means it went in on both sides and neither side heard it. There were no hearings in the House, no hearings in the Senate. Of course, very early on, when the first legislative deadline hit, that bill was no longer in play.
Cruz: Why do you think that is, if the governor was willing to consider it?
Yamachika: That’s a very good question. We don’t know the motives of the legislators who decided not to hear it, or we don’t know whether it’s a decision that came from leadership or from the subject matter chairs or whoever, but that’s how it came down. We’ve had sugar-sweetened beverage tax considered in previous sessions of the Legislature, and they’ve gotten to various degrees but none of them passed the finish line.
Cruz: Keli’i, do you support sugar tax?
Akina: Well, I think it’s trying to solve a problem using the wrong method. If we care about the health of our population, we want to make sure that we have enough doctors, so we don’t want to tax them out of state. We also want to make sure that enough revenues are flowing to the services that actually deal with our health. Here’s the problem when we choose a specific problem and try to tax it: It disincentivizes business and it has a ripple effect at affecting a good number of businesses, not to mention the fact that it impinges upon our personal liberty.
I think that it’s a good thing that we’re not coming into a sugar tax, and other municipalities and states have discovered that already.
Cruz: Nicole, what are your thoughts?
Woo: Well, this is a tax of choice. People get to decide whether or not they buy soda, and we know that there are serious diseases caused by drinking too many sugary beverages, like diabetes and heart disease. If we want to save our health system money, reducing the consumption of sugary beverages does work. In terms of revenues, as Daniela said, just from a few minutes ago, this revenue would be going to a trust fund to specifically address health issues.
When Keli’i says we need to have revenue flowing, that’s exactly what this tax is meant to do. It is in the same category as cigarette taxes, alcohol taxes. Taxes serve two purposes. One is to raise revenue, and another is to affect behavior. If there is something that harms the health of the population, it is in the government’s purview to put some taxes on it. It’s basic economic incentives on the consumers, and as I said, consumers make the choice. They can decide not to buy sodas, then they don’t have to pay the tax.
Cruz: Moving on, we did have a question emailed. Let’s see, John Decal from Waikiki. He wants to know, how can a state with such a progressive electorate produce such a regressive tax policy? Tom?
Yamachika: Well, I think part of the problem may be that there are some different ideas of what progressive means. In the tax world, progressive means that people with more means pay more tax. Here in Hawaii, we rely heavily, probably to the heaviest degree in the nation, on our general excise tax, because it’s imposed on transactions … and it’s just on transactions, it doesn’t consider anything else. It doesn’t consider the means of the person who’s paying the tax, and therefore it’s a regressive tax, it’s the opposite of progressive.
Because we rely on our general excise tax, to the extent that maybe half of our general fund revenue, roughly, comes from the general excise tax. It’s a tax on business, and because the general excise tax is regressive, that’s why we have the regressive nature of our overall tax burden.
Income tax is pretty much the only tax that considers the means of the person paying the tax. That is an important component, but not the biggest one. To put it in perspective, our GE tax brings in maybe $3.5 billion a year; the net income tax on individuals brings in $2.5 billion. Then everything else combined brings in between $2 and $2.5 billion.
Now, one of the things that really does drive the tax system revenue is business, because most of our taxes are based on business, business-privilege tax. That’s what the general excise tax is. We have taxes in special industries like transient accommodations, liquor, fuel, tobacco. Those are excise taxes based on transactions. Almost everything we’ve got in terms of tax revenue is business-driven.
What I have been at least trying to say, from my perspective, is we need to get our business engine going and running so that it can help our economies. That’s how the government will get its tax revenue, at least under this system that it has now.
Cruz: Keli’i, do think we’ve got a regressive tax policy?
Akina: We have both a regressive tax policy with respect to our general excise tax and its impact on the poor, and a progressive tax policy that taxes the rich. The reason is very simple to understand: Our state government is addicted to spending, in that it spends so much that the rate of spending and growth of the state government is double the rate of the growth of the economy, which is a very bad economic indicator. Overall, Hawaii pays the most state taxes in the nation, at $5,400 per capita. That’s more than double the national average of $2,664 per capita.
You mentioned regressive tax; our GE tax is the most regressive in the nation. Our income taxes are up there at the top as well. Unemployment tax is scheduled to rise by 38%. Although it was mentioned earlier that we have low property taxes, the amounts that come in are very high, because we have high property values. Our average property tax bill is on a par with the rest of the nation.
So let’s not have any illusion about it. We are overpaying on taxes, and the reason is that our government is just spending too much, not cutting enough, and not being economical enough about the use of money. [We’re not] fostering the level of economic activity that we need.
Cruz: You mentioned property taxes. I should mention that on the Big Island, the county there, had a proposal to raise the taxes on the wealthiest of the residents. I think that accounted to about 935 people of those who own the properties on the Big Island. Apparently, the bill was amended to say that those property owners could then designate a charity of their choice. I think that that bill then got put on pause.
The counties are definitely looking at ways to come up with money in order to boost their sagging budgets. When I talked to finance chair Sylvia Luke yesterday, she gave the long view and her concern. Here’s what she had to say about the economy:
Luke: The fact that the federal government gave such a huge relief amount this time around actually signals to me that chances of them coming out with another relief will be very slim to none. The fact that this relief package, unlike the CARES funding, which has a really short time frame, this allows us to spend this money, American relief package funds, until 2024. That also signals that they’re not going to give states any relief until 2024.
What’s interesting, Catherine, is that a lot of the states have already reached pre-COVID revenue picture, whereas Hawaii will not hit 2019 revenues until 2024, which is somewhat sad and stressful because we’re lucky that we’re able to balance the budget this year, but we have to be just careful knowing that we will continue to struggle with revenues for the next three years.
Cruz: As we come up to the top of the hour, we’re going to go around the table and maybe just give some, I guess, some final thoughts, with this context that Rep. Luke has left with us about our struggle for the next several years. Who wants to start? Nicole?
Woo: Getting back to John from Waikiki’s question about our regressive systems. Hawaii’s tax system is regressive when you balance out the regressive and the progressive parts that Tom and Keli’i described. I agree with Tom. It’s regressive, mostly because of our general excise tax. Our sales tax is heavier on people with lower incomes because they spend almost all of their money on things that are taxed by the GET. In Hawaii, low-income families, those who are in the bottom 20% of the income scale, they’re paying 15% of their income in state and local taxes. While those at the very top, the top 5%, they’re only paying about 9% of their income in state and local taxes.
We do have a regressive system here in Hawaii, where lower-income families pay more as a share of their income in state and local taxes than those at the top. That’s why these bills like SB-56 have come along, because as Sylvia Luke says, we’re going to have to have the federal funding stretched out, probably. We probably shouldn’t spend it all at once. So we do need to find ways to overhaul in our budget.
Cruz: Tom, do you have any final thoughts?
Yamachika: Sure. One of my big concerns is that we’re considering new and enhanced taxes at a time when the economy has really got a lot of us in the private sector on the ground. It’s really kicking us when we’re down. The state government is worried about furloughs. Well, in the private sector we’re worried about A: layoffs, and B: businesses shutting down permanently.
We’re not in any way worried about perhaps getting people to stay home one day a month, or two days a month. This is way more serious. Right now, I think there’s an existential threat to business in general, and we really shouldn’t be messing with it to the degree that some people have proposed. That’s where I see it.
Cruz: OK. Keli’i, give us your final thoughts.
Akina: Well, when it comes to good tax policy, it’s really not about issues of fairness, it’s about getting the right outcome. It certainly shouldn’t be about favoring one class over another. What we want is an economy that produces adequate jobs, housing, doctors, safety net and revenues for the government. That’s important.
What we have to recognize is that if we tax the most productive economic members of the community, we cause them to have the incentive to either leave or move their money out of Hawaii. It’s very important for the government to recognize it must reduce spending, reduce regulation and reduce taxes in order to stimulate an economy that will provide the outcomes that we all desire.
Cruz: Well, we certainly have lots to think about. There’s the waning days of the Legislature, lots of high stake bills still in play, and we’ll be getting to the committee process of our legislative session. Lots of things to watch, particularly with this particular Enola Gay bill, Tom from 56 to 58, now the Franken Bill which you call, but lots of concern about the transparency as we watch the lawmakers do the people’s work as we close the session.
We would like to thank our guests, Keli’i Akina, president and CEO of Grassroot Institute of Hawaii; Tom Yamachika, president of the Tax Foundation of Hawaii; and Nicole Woo of the Tax Fairness Coalition. And we thank you, the listener, for joining us on today’s show.