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‘It’s hard to say if they’re schizophrenic or not’

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Joe Kent was featured guest on Keli’i Akina’s “Hawaii Together” program on ThinkTech Hawaii network on March 1, 2021, and his first observation about legislators at the 2021 Legislature was, “It’s hard to say if they’re schizophrenic or not.”

Kent, executive vice president of the Grassroot Institute of Hawaii, was invited onto the program to talk about “What to watch out for at the Legislature.” Elaborating on his initial comment, Kent said:

“Basically, some legislators are focused on bringing back the economy. That’s a good thing to focus on right now because the economy has been decimated after last year’s lockdowns. Then, other legislators are focused on, it seems, like hurting the economy and passing more and barriers to our economic growth.”

He continued: “There are a lot of tax hike proposals. We were astounded when we looked at the beginning of the Legislature at just dozens and dozens of tax hike ideas. Lawmakers, I didn’t know they could be so creative. We’ve got tax hikes on liquor, on conveyance taxes, car sharing taxes, tax hike on second homes. You got the TAT hacks surcharge proposals, rental car taxes, and on and on, even capital gains tax, general excise taxes, and even a death tax hike. They just thought of everything.”

Find out what else Kent had to say about the latest legislative session by watching the half-hour interview.

A complete transcript is below.

2-1-21 Joe Kent with Keli‘i Akina on “Hawaii Together”

Keli‘i Akina: Aloha everyone, 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. 

It’s March 1, 2021, and with all Marches, I think back to my high school Shakespeare class. You remember that phrase, “Beware the Ides of March”? That ominous tone had much to say about Julius Caesar and the trouble he’d encounter. I think it has something to say about what we’re going through now, because the Legislature is in session. We do need to beware of the Ides of March, because decisions are going to be made that will affect our pocketbooks, our livelihoods, the economy of the state and the future of Hawaii.

Going on at the Legislature now is the process of looking at bills, vetting them and seeing what ultimately gets through the sieve. The fact is, there’s a certain posture that’s taking place right now, one that is desperately looking for ways of raising revenue. 

That’s for a couple of reasons. First, as we all know, we’ve had the coronavirus pandemic, which has resulted in the shutdown of the economy and has drastically reduced the revenues to the state coffers. But going into the coronavirus pandemic, long before it, we were on tenuous ground economically here in the state of Hawaii with massive levels of debt and falling levels of revenues. Put that all together, your legislators right now are trying to look at ways of raising more money.

What they’re looking at in general is taking from the rich and giving to the poor. But in reality, they’re doing things that will actually harm all people, rich and poor alike. We’re looking at new taxes, probably more than I’ve seen in any year at a Legislature. We’re looking at new regulations as well. 

At the Grassroot Institute, we take a nonpartisan approach. We don’t represent any one particular point-of-view, any side, any particular clients. We’re not lobbyists in that sense. What we are is research specialists who take a look at the root of the thinking taking place. We believe in individual liberty, free markets, limited accountable government.

We’ve got a terrific team at work. Heading up the team that is analyzing the work at the Capitol right now is our executive vice president, Joe Kent. Joe’s been with us for several years. He’s an expert on understanding public policy in Hawaii. I want to welcome him to the program and invite him into a discussion to catch us up on what’s taking place at the Legislature from the perspective of those who believe in greater freedom, and preserving that freedom.

Joe, welcome to the program.

Joe Kent: Thanks for having me.

Akina: It’s always great to have you on board. You’re doing great work with your team. You issue publications regularly, research reports, bulletins, newsletters and news releases. 

Tell me just at the outset, what does it look like down there at the state Legislature in 2021. There’s a flurry of activity in terms of bills, particularly those that are going to increase taxes, if they get approved. As I mentioned earlier, there’s real desperation for the legislators to find ways of raising more revenues.

Kent: It’s hard to say if they’re schizophrenic or not. Basically, some legislators are focused on bringing back the economy. That’s a good thing to focus on right now, because the economy has been decimated after last year’s lockdowns. 

Then other legislators are focused on, it seems like, hurting the economy and passing more and more barriers to our economic growth. There’s some mixed-bag going on at the Legislature.

Akina: We’ve got a lot of legislation in play, particularly to deal with the problem of the shortage of housing here in Hawaii. We’ve got other bills in play dealing with the budget shortfall. We’ve got a whole bunch that are specifying new tax increases. Why don’t you tell me a little bit about what you see in terms of the tax proposals?

Kent: There are a lot of tax-hike proposals. We were astounded when we looked at the beginning of the Legislature at just dozens and dozens of tax hike ideas. Lawmakers — I didn’t know they could be so creative. We’ve got tax hikes on liquor, on conveyance taxes, car-sharing taxes, tax hike on second homes. You got the TAT hacks surcharge proposals, rental-car taxes, and on and on. Even capital-gains tax, general excise taxes, and even a death-tax hike. They just thought of everything.

Akina: Well, as you mentioned a liquor tax surcharge — that means it’s actually a tax on another tax already. We’re finding ways to tax our taxation. 

You mentioned a tax on second homes, and a lot of times that’s touted as something that’s aimed at wealthy investors from outside of Hawaii, but isn’t it the case that a lot of people who have second homes are just average middle-class people trying to help their children out?

Kent: That’s true. A lot of people might have a one-bedroom condo, and then they finally get enough money to buy a house, maybe out somewhere else, and they want to keep their condo and rent it out. That’s a really typical thing. Then maybe when their kid grows up, they will have another place for their kid to live. It’s something that makes sense. It’s something that a lot of people do in Hawaii. I don’t think there’s anything wrong with it, and yet we’re taxing it as if it were a bad thing.

Akina: You and your team, Joe, have taken a look at these taxes, one by one, at these proposals. One of the things you found is that many of them will not accomplish what they set out to accomplish. In some cases, the taxes will actually end up hurting the people they were designed to help. 

As we look at them, there are certain themes that seemed to come together. One theme is the idea of fairness, that there’s a population in Hawaii who make more money than other people, who need to pay “their fair share.” There’s a very interesting tax bill that you just started following recently. It’s emerged rather rapidly. I just saw it this last week, Senate Bill 56. Do you want to tell us a little bit about that?

Kent: Sure. SB 56 is a bill that would basically be a big tax hike on the rich, the wealthy, and it would do so by increasing the income tax rate by about 18% on individuals making over $ 300,000 per year.

Akina: Let me just stop you there before you go on, just as a segue. It’s interesting the way the word “wealthy” is being used. Three hundred thousand dollars may sound like a huge amount to some people, and [be considered] wealth. But to many others who have large bills to pay, large families to house, educate, and so forth, it may not really put someone into the class of what we call “the wealthy.” That’s a very relative term, wouldn’t you say?

Kent: That’s right. Especially with inflation, and in Hawaii, our cost of living is so high that you basically have to make hundreds of thousands of dollars just to live like everyone else here, just to afford to live here. 

Basically, you might be rich and we may be taxing you more, you may find out.

Akina: Like the old adage, there’s good news and there’s bad news. The good news is that the Legislature is only going to tax the wealthy. The bad news is now you’re wealthy.

[laughter]

Kent: Yes, that’s right.

Akina: I didn’t mean to cut you off earlier. Let me let you go back to what you were [saying] about Senate Bill 56 and how it would increase taxes to 18% on those [making] over $300,000. It’s also going to affect the capital-gains tax and other things.

Kent: That’s right. The capital-gains tax, corporate income tax, and the conveyance tax on properties that are worth over $1 million. Again, that’s like a typical house here in Hawaii, so we’re not just increasing taxes on the rich, so-called. This is a tax hike on everyone. 

Actually, if you think about it, a lot of entrepreneurs now, millionaires, are looking to move to places that have low taxes. That’s a trend right now. People are leaving California and New York and going to places like Texas, where there are low taxes. At the same time, we’re increasing taxes. In a way, we’re shooing away people who might contribute to our economy and help create more jobs.

Akina: As your team has looked at, it’s very possible that SB 56 would end up as a disincentive to people who could actually end up paying more taxes. So we could end up getting less tax as a result of it.

Kent: That’s right. Oh, and I forgot, that bill would also repeal more than 30 general excise tax exemptions, such as for construction and interisland shipping. This isn’t just a tax on the rich. Those taxes will be passed on to everyone. There’s really no way to hide it. You can’t just tax one group. It’s so easy to spread it out.

Akina: Aren’t those tax exemptions designed to stimulate the economy in the first place, to make it more feasible for businesses to operate and to be able to build and manufacture, and actually produce jobs for the local economy?

Kent: That’s right. That’s another schizophrenia here. We have sin taxes that are meant to discourage behavior, but then we have these huge taxes on business, and so I assume that would discourage business, too. 

We need to reduce taxation so we can get our economy jumping again.

Akina: It seems as though when you say schizophrenic, the Legislature at times wants to stop people from smoking or drinking sugary drinks or drinking too much alcohol, but it seems it uses the same mechanisms to stop us from growing an economy that builds jobs and provides for the general public.

Kent: That’s exactly right. I just can’t figure out why lawmakers even want to raise taxes right now. It’s kind of tone-deaf, you might say. When our economy has been devastated by the lockdowns and we’re just crawling back at a time when many businesses are just struggling to make it, now we’re going to tax them. In fact, there’s already an automatic tax that’s going up. It’s the unemployment tax. We’ve calculated that that will triple this year unless the Legislature does something.

Akina: That’s largely because we’ve depleted our unemployment tax fund, and that triggers automatically an increase in the rate that businesses pay in order to give that out. That’s something that’s going to be devastating now that many businesses are down and out. 

But in all fairness to our lawmakers, there is some rationale behind their desire to raise taxes. Ostensibly, they’re looking at a budget shortfall, and so they want to raise revenues. But what’s wrong with that, raising taxes in order to solve the problem of falling revenues?

Kent: We’ve tried that in the past. If you look at the past decade, Hawaii has spent record amounts every single year, and that’s been funded by record taxes. That was during a boom period. During one of the biggest boom periods for Hawaii, we still increased taxes to record amounts. So we’ve already increased taxes beyond what a lot of people can afford. That’s why they’re moving away. 

Why are we taxing even more, now that the economy is in a downturn? We should use a different playbook, reverse this trend, reduce spending and reduce taxation.

Akina: You don’t deny that there is a budget shortfall, but talk to me a bit about that. Suggest some of the ways in which we might actually deal with it.

Kent: Sure. There is a budget shortfall. Gov. Ige originally in December said it was going to be about $1.4 billion for each of the next four years, which was an alarming figure, so Gov. Ige cut the budget. He really cut the budget. He even put furloughs on the table and cut back a lot of departments by 10%. 

Then surprise, we came to January, and we noticed the economy was doing slightly better than expected, at just a few percentage points better than expected. That made all the difference. It injected about $400 million into this year’s budget. Suddenly, we had this big gift of revenues that were unexpected.

Then the governor took furloughs off the table and increased the budget somewhat, the spending somewhat. At the moment, the governor says there’s no need for tax increases because everything is balanced. 

Now, that all depends on whether lawmakers agree with him, because lawmakers get to set the budget too. Now the budget is at the Legislature, in their court, and we’re just waiting to see whether they want to increase spending even more.

Akina: At the same time that we’ve had this slight improvement in the economy, resulting in greater revenues than anticipated, we also have money that’s being borrowed from the federal government. Isn’t that right? Now, do you have any concerns about the fact that spending is being pegged up for a higher level in light of the borrowed money and in light of the increased revenues?

Kent: That’s a great point. The governor, in trying to balance his budget, has borrowed $750 million — he took it out as bonds, and he put that in the budget as a source of revenues. 

Actually, if you think about it, it’s borrowed money. It’s actually a liability, so we shouldn’t be counting that as revenues. That’s a liability. If we have a windfall, then that really should be used to pay our debts. Instead, what’s going on is we’re taking it as a windfall and using it to increase spending.

If you look at the budget now, we’re actually increasing positions. There are more payroll positions this year, in this year’s budget, programmed in than in last year. It doesn’t look like a cut. It looks like growth in spending. Really, they should be doing the opposite.

Akina: Well, that’s an interesting concept you talk about: balancing the budget. I’d like to ask you a little bit more about that, and why it isn’t exactly what happens on your kitchen table when you balance your budget at home. We’ll do that when we come back from a quick break.

I’ve got Joe Kent with me, executive vice president of the Grassroot Institute, and we are talking about what’s going on at the Legislature in terms of budget and taxation.

 Don’t go away. There are some interesting things that Joe is going to bring up. I’m Keli‘i Akina, ThinkTech Hawaii, “Hawaii Together.” We’ll be right back after this quick break.

[Intermission]

Thanks for staying with us. I’m Keli‘i Akina, with the Grassroot Institute, talking to executive VP of the Grassroot [Institute], Joe Kent. We’re going to jump right back into our conversation. 

Joe, when we left off before the break, we were talking a bit about the way the state balances the budget. You and your team have pointed out that sometimes it’s not so intuitive.

For example, at home, if you take a look at your checkbook and realize you’ve got $1,000 there, and you’ve got $1,000 in bills, and you pay it all off with that $1,000, you could think, “I balanced my household budget.” But in reality, you may be spending money on your credit card to pay for your car payment, or to pay for some other expenses, and so forth.

So what we’ve put on our credit card matters. What you’ve pointed out is that the state doesn’t operate that way. It talks about balancing the budget in terms of money in and money out in a given year, but doesn’t take a look at massive debt that is lined up for decades to come that hasn’t been paid.

Kent: That’s right. If you look at the budget, it’s being balanced by IOUs. Basically, it’s being balanced by debt. That’s happening through bonds, the $750 million that the state took out. That’s the first time the state is borrowing just to fund the general fund. 

We’re also incurring more debt through not paying our bills. 

There is a big bill that’s due to the health-benefits fund. There’s a debt there and unfunded liability, and we have to pay that debt every year, while Gov. Ige has waived that requirement this year and the Legislature wants to waive it for the next five years. 

That would “save” $2 billion, but it would cost us $8 billion in the long run. It’s like: If you don’t pay your credit card bill, then the bill goes up. That’s the same thing that’s happening. 

We’re balancing the budget, yes, through debt, but it’s going to result in more debt than the state has ever seen.

Akina: That’s not a good thing, especially as we’re trying to climb out of this terrible economic condition. 

Let’s shift gears for a while and talk about something else that is very big down at the Legislature, and that is housing. There’s no question about it, that Hawaii has a housing shortage. There are different reasons for that, yet the Legislature is proposing a certain kind of solution to that. Talk to me a bit about housing bills.

Kent: For sure. Housing, by the way, relates to the budget just because there is a way to get more revenues into the budget, and that’s by helping the economy grow. 

One way to help the economy grow is through housing. 

Some lawmakers have good ideas about how to do that, actually, which is to loosen housing regulations. There’s some bills, we were surprised to see, that actually loosen zoning restrictions or single-family zoning restrictions, and they allow detached dwelling units, and they allow homeowners within a block to increase their housing density. There’s all these creative ideas, actually, to get red tape out of the way. That’s a good thing, because then we could see more housing.

On the other hand, there are a lot of housing proposals that would be really complicated and may actually not create more housing in the long run.

Akina: Well, Joe, there’s one that seems to be very popular at this time called the ALOHA Homes. In some ways, it’s based upon a model that has been at work in Singapore. Tell us a little bit about it. You mentioned that some of these bills are not all what they seem on face value.

Kent: Right. There is the intention of a bill, which is one thing, but then there’s the effect of a bill, and sometimes they’re not the same thing. With the ALOHA Homes, it’s really well intended — it’s intended to create housing. It would do this by creating government housing projects. The units would be paid for through government bonds, but then they would be repaid by the people who buy the units — but the units would be leasehold.

If you want a unit in one of these ALOHA homes, you’ll never own it, you’ll just lease it. That would probably reduce the value of the property, but also the property will be expensive to develop. Remember that governments don’t build things as inexpensively as the private sector. These government projects would have to pay prevailing wages, and that could increase the cost of the building by about 12%, that we calculated. This may actually end up just costing taxpayers more money.

Akina: There’s a lot of history as to government-owned apartment units across the country in cities like New York and Chicago. This is really quite a problematic approach. It’s something we’re looking at very carefully. 

One of the things that observers are noting is that there are alternative ways to be able to increase the amount of affordable housing, or housing that is affordable. In fact, you and the team at Grassroot came up with a report, I think, called “How to Build Affordable Thriving Neighborhoods.” Tell us some of the solutions that are listed in that report. I think there were about 50 different ways to proceed. 

Kent: That’s right. Actually, that report is on our website, but it was produced by the State Policy Network, which is a national think tank, but we like it still. The ideas in that report, say, allow smaller housing, allow smaller lots, allow taller buildings, extra kitchens, accessory apartments and reduce political approvals. There are so many ways to help the development of housing. 

Just remember that in Hawaii, we have some of the strictest housing laws in the nation, and that can increase the time it takes to build a house by over 10 years just to get the approval. Anything we do to reduce the red tape is going to have a positive effect on housing development.

Akina: Legislators are also taking a look at how to build our economy forward, recovering from the COVID pandemic and the downturn in the tourist economy. 

Again, we are hearing the common mantra “diversification,” diversify the economy. What’s being proposed in that sector?

Kent: Well there’s a lot of bills to so-called diversify the economy. For example, there’s one bill, SB 1420, [that] would provide $100 million to make Hawaii a tech state. We’ve been trying to make Hawaii a tech state for decades. It hasn’t really happened yet. 

Another bill would create a state job for diversification, that’s HB 1176, and another bill would provide an income tax exemption for taro, that’s SB 341. 

There are all these ideas to try to pick winners and losers in our economy. 

Keli‘i, what do you think about that idea about trying to pick winners to grow the economy?

Akina: We’ve got a lot of history to look at. The government has attempted to do that since the ’50s and the ’60s, calling on the state to have a more diversified economy. The problem is, the government doesn’t know which business is going to succeed and which will fail. When the government puts money behind one business or one industry, it’s not cognizant of the market forces.

It’s really the free market that determines winners and losers. The best thing the government can do for diversification is to get out of the way, reduce regulations and taxation on business, and diversification will occur naturally as a result of that. 

Well, we’ve come to the end of our time together. I just wanted to ask you real, real quickly: What’s going on with regard to minimum wage, and why minimum wage may not end up accomplishing what it intends to?

Kent: Well, SB 676, that’s the hot bill that’s going to increase the minimum wage, or they hope, to about $12 per hour — which sounds good, but just think how many businesses are trying to get back on their feet again, and how many jobs that might kill. If you’re someone trying to look for a job right now, that bill may actually make it more difficult to find a job. There’s a lot of arguments there, but we think that that one could actually hurt people more than it helps.

Akina: A couple of bright spots worth closing on: HB 103 will prevent the governor from extending lockdowns past 60 days, giving more power back to the Legislature and the people, and SB 134 would prohibit the governor or mayor from suspending open records requests during an emergency. Your thoughts on these bills?

Kent: We’ve learned a lot of lessons over the past year, in 2020, about giving too much power at the top. These bills would help serve as a check against that power. That’s a good thing. There really isn’t a need to waive transparency during an emergency, for example. In fact, we need more transparency during an emergency. These bills would help with that.

Akina: Thank you, Joe. 

Joe, you and your team are putting out regular reports that people can get weekly, and even twice a week, publications from us. How can you sign up for these reports, get your email on the list?

Kent: Just go to grassrootinstitute.org. You can sign up for our emails there and see what we’re writing about.

Akina: Well thank you very much. My guest today has been Joe Kent, executive VP of the Grassroot Institute. We’re delighted to be with you on “Hawaii Together.” Until next time on the ThinkTech Hawaii broadcast network, I’m Keli‘i Akina. Aloha.

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