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Should Hawaii raise taxes on the rich?

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Tom Yamachika, president of the Tax Foundation of Hawaii, was special guest on Keli’i Akina’s latest “Hawaii Together” program, on March 29, 2021, on the ThinkTech Hawaii network, and the topic, as you might guess, was taxes. Specifically, whether should Hawaii increase taxes on the so-called rich.

Part of the context for the conversation was the recent attempt by the state Senate to hike the highest rate of the state personal income tax to the highest in nation, while also increasing numerous other taxes aimed specifically at “the rich,” who in the case of the personal income tax proposal were defined as anyone making $200,000 or more a year.

Watch the 30-minute episode below and enjoy the conversation between Akina, president of the Grassroot Institute of Hawaii, and Yamachika, one of the most-informed individuals in the state about taxes in Hawaii.

A complete transcript of the conversation is below.

3-29-21 Tom Yamachika 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 your host, Keli’i Akina, president of the Grassroot Institute.

Well, today is March 29, 2021, and we’re almost at the end of our legislative session. Taxes is a big issue. It looks like our legislators really want to go after several tax increases, although we don’t think they are necessary. Part of the problem is the way they are being justified. In many cases, we’re being told we’re only going to tax the rich and help the poor, a kind of a Robin Hood methodology.

I have a friend today here who is an expert on the matter, and knows there’s less to that than really meets the eye, or actually more to that than meets the eye. He’s Tom Yamachika, tax attorney and the president of the Tax Foundation of Hawaii. He’s got some great insight into some recent legislation, things you need to know as you watch the Legislature.

Tom, welcome to the program. Glad to have you on board again.

Tom Yamachika: Well, thank you for having me on your show, Keli’i.

Akina: Well, I appreciate all the work that you do at the Tax Foundation of Hawaii. Do you want to tell us a little bit about that, for viewers who are not familiar with your organization?

Yamachika: Sure. The Tax Foundation of Hawaii is a 501(c)(3) nonprofit. What we do is education, especially on state tax law. We try to educate people, especially our legislators, on what the tax bills that they are voting on contain. Rather than just blindly following someone else, at least our legislators have a good chance of being able to make their own independent judgments on whether these tax measures are good for Hawaii or not. That’s what we try to do. We have all kinds of interesting and free information available on our website, which is tfhawaii.org, T-F-H-A-W-A-I-I.org. Please check it out.

Akina: Thank you, Tom. Tax Foundation is a terrific organization. We collaborate with them at the Grassroot Institute of Hawaii, and do as much as we can to communicate the realities of our tax situation to the public. Tom is doing good work.

Well, Tom, I don’t need to tell you that the context for this current legislative session has been a massive drop in revenues that the state is looking at. As a result, the legislators are looking for ways to raise money. Part of the drop came because of the coronavirus and its impact upon our economy. Yet, there seems to be a theme that is a little bit suspicious, and that is, if we can only tax the rich, the wealthy, the businesses, and give it to the poor, we can somehow solve our problems. Have you seen that theme at play in the tax legislation this term?

Tom: All the time. I’ve been present at several hearings on tax-related bills. There are usually some supporters that play up that theme to legislators: “Hey, we just want to tax the rich. That’s all this bill’s doing, so let’s do it.”

Akina: A lot of times, people appeal to the concept of fairness and say it’s only fair when you look at the disparity between the very wealthy in Hawaii and those who don’t have. But in reality, as you and I have looked at these bills, it’s not likely that they are going to work at helping those at the lower end of the economic ladder at all. In fact, there’s really no logic about punishing or taxing the higher-end earners and getting more income into the system. Is that your view as well, Tom?

Yamachika: What we’ve been saying is that a bill that looks like it’s just going to tax the rich, like an income tax bill, which jacks up the top income-tax rate for the highest earners, like $400,000 or more. And the argument is made, “Hey, we’re only taxing people who earn $400,000 or more. Obviously, this is a tax-the-rich bill. What the heck are you talking about, Tom?” 

My response normally is, well, to say it just taxes the rich is kind of short-sighted, and the reason I say that is because, do you really expect that if somebody is wealthy and is affected by a tax increase like that, do you think they’re just going to sit down and take it? I don’t think so. If people can have, like, maybe one of two responses and maybe both: One is, I’ll pass it on. Oftentimes, these people are highly placed in a business that the earnings come from. Our place [is] to then factor those costs, that excess tax into the price of their goods and services.

You need to know that 95% of all business is not in corporate form. It’s in your partnerships, in your S corporations, your LLCs. In those types of businesses, the entity that’s doing business is not itself being taxed, but the owners are, and the owners are being taxed individual rates. So if you think that a hike in the individual rates won’t affect business, no, that’s not correct.

Secondly, another thing that these people can do is they can get on a plane. I know that your organization has been doing lots of work following many people who’ve done just that. Right, Keli’i?

Akina: You’re absolutely right. One of the things that happens is Hawaii becomes less attractive for people with higher incomes, and that income then is removed from our system. As you pointed out, many of these people are often responsible for jobs in the marketplace because of their businesses. If they leave or their capital leaves, we lose those jobs here in our own marketplace. In addition to that, we also lose income from taxes, because they won’t be paying taxes any longer.

There was a bill at the start of the session, SB56, which made national news because of its provisions for raising the top marginal income tax. Now, we think it’s dead because it was quadruple referred, which means it was referred to four committees that it couldn’t possibly pass through in time to make legislative deadlines, but really nothing is dead in the Legislature until a session is completely over.

Can you talk to us a little bit about the problem in terms of the top marginal income tax rate that SB 56 was dealing with? Do you think that it might appear somewhere else as well?

Yamachika: Well, you’re absolutely correct. Nothing is over until it’s over. The saga of Senate Bill 56 gives us a shining example of what can happen. Senate Bill 56 contained hikes in the income tax, capital gains, corporate income tax. It contained provisions that would have suspended a number of exemptions on the general excise tax. It would have made significant hikes in the conveyance tax. In other words, it was an all-around omnibus tax bill. When it went over to the House, people complained, and the House did a few steps to try and kill it.

One of those steps, as you remarked, was the House Speaker’s office gave the bill a quadruple referral. What that means is, it set up an assignment to four committees that had to hear it and pass it for the bill to be done in the House. Three is about the limit you can go, given how fast our legislative session runs. Four is basically the kiss of death. That’s what happened.

But do you think the Senate took that sitting down? No, they didn’t. What they did is they grabbed another bill that had been referred from the House to the Senate and was sitting on their side, and it’s an unrelated bill but with a very attractive title, because the only thing in a bill that cannot change is its title. The title of the bill was Relaying the State’s Funds, and it’s House Bill 58. 

The Senate Ways and Means Committee, which is the chief money committee over there, published an intent to pass out what we call a proposed Senate draft. What that means is they are publishing the draft so people can take a look at it and comment on it when it comes up for testimony, and that will be tomorrow morning. What they did was they stuffed into House Bill 58 a number of the provisions that were in Senate Bill 56: The general excise tax suspension, the conveyance tax increase, and they also put in one more thing that would increase the estate tax, estate and generation-skipping tax. [The tax would] make it applicable to more estates because they had lowered the threshold from $5.5 million into $3.5 million. 

We call that a Franken bill. What that comes from is — remember the story of “Frankenstein,” where good old Dr. Frankenstein, the mad scientist, figures out a way to make a larger-than-life being by putting together parts of corpses. That’s what happened here. You had a number of pieces from Senate Bill 56, which was dead, and they shoved it into another bill so those pieces now have new life.

Akina: Despite the public outcry against many of the measures in Senate Bill 56, we’ve seen them taken and put to a new package in HB58. Now, you mentioned several items that are going to go forward in HB58 and be considered by the Senate, but there’s one that some people think is dead, and that is the original plan to raise a top marginal tax rate on the highest wage earners in Hawaii. But is that really dead, although I don’t see it anywhere?

Yamachika: Like I said, we never really know until the session is over, because there is time to shove that part into another bill, maybe when the deals with capital gains, or one that deals with income tax on another scale. It may be a bill that gives an income tax credit. Because the bill is titled relating to income tax, it’s fair game, it can go in. It could get passed with an income tax hike.

Akina: Tom, we’re going to take a quick break, and when we come back, I want to take a look at each of the elements in HB58, and to see whether or not they really are going to be innocuous and not harm the general population, or whether they actually will harm most people. We’ll return in just a moment.

My guest today is Tom Yamachika, president of the Tax Foundation of Hawaii. Don’t go away, we’ll be right back after this brief message.

[music]

Akina: Welcome back to ThinkTech Hawaii’s “Hawaii Together.” I’m Keli’i Akina. My guest today is Tom Yamachika. We’re talking about a tax bill that contains some provisions that may be harmful to the economy. HB58, Tom, let’s go back to that, would impose the general excise tax on construction contractors, federal contractors, airlines, telecommunication companies, sugarcane producers, tugboat and towing services, high-tech companies, liquor, tobacco and petroleum. How will all of that affect the economy?

Yamachika: Well, OK, there are a couple of those that got taken out. The one for regular contractors got taken out. It still would disallow reimbursements received by federal cost-plus contractors. It would disallow amounts deducted from the gross income of real property lessees because of receipt from sub-lessees, which makes leasing property cost a whole bunch more. It does, again, suspend amounts received for transportation services like loading and unloading, tugboat and towage, transportation of pilots or government officials and other maritime related services, and products to the federal government.

Akina: How does all that affect the economy?

Yamachika: Whenever you take out money from the economy, the place where you take it out from is going to spin more slowly. If you think of the economy as an engine, you start taking money out of it, and it spins more slowly. It’s like a breke, B-R-E-K-E, not B-R-E-A-K, although sometimes you wonder.

Akina: Well, the justification given is that it will actually raise revenues for the state. Is that such a certainty, that we actually would be raising net revenues.

Yamachika: In the short term it probably would raise revenues, but in the longer term, you’ve got to wonder, because businesses are not hail and hearty. They’ve taken some big hits from the pandemic. Transient accommodations revenue, for example, is down more than 80%. It’s not going to take that much in terms of other hits to plop those types of businesses down on the pavement again. The question then becomes, do we really want to hit them when they’re down?

Akina: We’ve often heard that the measures in these tax bills are designed only to make the “rich” sacrifice something for the good of others, but are there ways in which these measures can actually hurt the middle class and the poor?

Yamachika: Well, of course. Remember, we were talking about how, if you have a tax increase that is so-called aimed at the rich, then the rich can do something about it: to shove it into the price of goods and services, for example, or to get out of Dodge. Either way, it spells trouble for the rest of us. If, to put into the price of goods and services, then more of us are going to feel the pain. If they get out of the Dodge, it may take a little longer, but there will be fewer people to shoulder the cost of government services. And if that doesn’t go down, then the cost for the rest of us is going to go up. That’s just simple math.

Akina: There is some subjectivity, isn’t there, Tom, to the definition of who is rich. I once heard an adage in the Reagan-era that went like this: “There’s good news and there’s bad news. The good news is that the government is now only going to tax the rich. The bad news is now you are rich.” It’s really something to live here in Hawaii’s economy with the cost of living. Does $200,000 make somebody “rich”?

Yamachika: That’s a very good question. The area median income is now $100,000 and change, isn’t it? Just making six figures really isn’t an indicator that you are rich. Maybe you have a house, maybe you have the mortgage that’s paid off. If you do, congratulations, you’re rich. [chuckles] That’s pretty much all it takes.

Akina: A lot of the dip in the revenues has been linked to the pandemic, and yet some of the state’s own economists have shown that, with a slight increase of economic activity, revenues will go up quite a bit.

In general, why is raising taxes not a good idea to solve our revenue problem?

Yamachika: Well, again, these studies that I’ve seen show that taking taxes out of the economy puts a break on the economy. Our state government, especially, is heavily dependent upon business tax revenues. Half of our general fund comes from the GET, the general excise tax, which is a business privilege tax. If there’s no business, there’s no GET. It’s been, I think, well documented here that while people in state government are getting worried and anxious about possible furloughs, what’s going on in the private sector? We have business closures, we have layoffs. Furloughs would be great compared to what they’re actually going through. At least if you’re furloughed, you have a job in the future, maybe the next day. If you’re laid off, who knows. If your business closes, that’s it for that job. You’ve got to find something else, assuming there is a something else.

Akina: We’ve heard a couple of words used quite a bit during this legislative season, and I’m wondering if you could explain for our audience what these terms mean. “Progressive” is one of the terms, “regressive” is the other. They’ve been applied to our tax system. What do they mean, and how would you characterize Hawaii’s tax system, regressive or progressive, or both?

Yamachika: Sure. If a tax system is progressive, that means people with more means are able to and do pay more. Now, the only tax with that feature, that we have here in Hawaii, is our income tax, because they do collect information about how much you make, and the more you earn in a year, the more tax you pay. And that’s an example of progressivity.

The opposite of progressive is regressive. One example of that is our general excise tax. It’s applied the same percent regardless of the transaction. It doesn’t matter if you’re rich, poor or indifferent, it doesn’t matter if you’re buying milk or groceries to save your family, as opposed to buying caviar at a fancy restaurant, the GET is still the same. 

Because our tax system is heavily dependent upon the GET, we’re probably classified as regressive. Some of the statistics that the political progressives love to cite is that 13% or 14% of income is what the people at the lower end pay in state taxes, while people at the higher end pay maybe 7%, 8%, 9%. The progressive elements use that as evidence to tell our lawmakers that we need to tax the rich more.

Akina: What solution would you recommend if there were a different way of approaching it?

Yamachika: Well, as I mentioned, our tax system is heavily dependent upon business. What I would like to see, and what I’ve been recommending to lawmakers, if I have the chance, is as much as possible, get out of the way of business. Let them make their money, take your taxes. If businesses are making money, they’ll pay their share. 

Once the economy starts spinning and spinning and spinning, then you can take the government’s share without as much pain as other possible ways of doing it. The question is going to be, “Who is going to bear the overall pain?” Is it just going to be certain classes? Is it going to be everybody? How is the pain being spread among the populace?

Akina: We just have a question that came in from a viewer, and it’s somewhat related to what you had to say. I’ll let you take a stab at it: How do we fix the economic gap between the rich and the poor, if taxing the rich is not the answer?

Yamachika: Well, you’re assuming that that’s a problem in the first place. I’m not sure that a gap between the rich and the poor is a problem. There may be various reasons justifying it. I think it depends on what you consider as a measure of contribution to society, and whether that is being taken into account at all.

Akina: Just before you go, there’s one segment of the population that has reacted quite vehemently against these tax bills, and that is our private physicians, physicians in private practice. We have a major shortage in the islands, particularly on the neighbor islands. What is your thought about how these tax measures, if enacted, would impact our physician shortage in Hawaii?

Yamachika: Well, as I mentioned, one reaction to taxing “the rich,” is that “the rich” get on a plane and get out of Dodge. What I’ve been seeing from the Grassroots research, among other places, is that that’s actually happening a lot in the medical services sector. The docs are packing up their bags and getting on a plane. Meaning that if we have a physician shortage now, adding a whole bunch of tax to them isn’t going to make it any better.

Akina: One thing I might add is that the so-called rich, such as physicians, are not necessarily that rich per se. Many of them have major medical school loans. They’re trying to work with very small margins because of laws like the GE tax and so forth. So it’s a survival issue for many of them.

The other thing I might point out is that, even if they’re not getting out of Dodge, so to speak, if they’re going to keep their homes in Hawaii, people will move their capital elsewhere, perhaps incorporate outside of Hawaii, and we not only will lose some of our population, but for those whom we don’t lose, we might lose their money and their contribution to our economy.

Tom, any last word before we close today?

Yamachika: I think you’ve summed it up pretty succinctly. Thank you very much for having me on your show.

Akina: Well, thank you for being here, and thank you for the good work that you’re doing at Tax Foundation of Hawaii. Everyone, my guest today was Tom Yamachika, a tax attorney and president of the group that really does the best research on impact of taxes, the Tax Foundation of Hawaii.

I’m Keli’i Akina with the Grassroot Institute for ThinkTech Hawaii. Until next time, Aloha.

 

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