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Why raising taxes on the wealthy hurts everyone in Hawaii

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“Raising taxes at this time, it’s like kicking someone when they’re down.”

That was one of the many astute observations made by Keli’i Akina, president and CEO of the Grassroot Institute of Hawaii, during an interview Sunday, March 21, 2021, with radio host Johnny Miro on the H. Hawaii Media family of Oahu radio stations: 101.1 FM, 101.5 FM, 107.5 FM, 103.9 FM, 97.1 FM, and 96.7 FM. 

The topic of the conversation was, “Killing the goose that lays the golden eggs: How raising taxes on the wealthy here will hurt everyone in Hawaii.” Specifically, Akina and Miro talked about tax bill SB56, approved by the state Senate earlier this month by a vote of 24-1, which, among many other tax increases, seeks to hike the Hawaii’s personal income tax rates to the highest in the nation, focusing especially on individual incomes of $200,000 a year or more.

Akina said nobody can say for sure yet, but the bill appears likely to die in the House. He called it a “real victory for the people, because of all the bad press about the bill that resulted from people speaking out. So many people called up legislators and called up the media to voice their opposition.”

Listen to this highly educational 18-minute conversation below. As Miro concluded: “Great information once again, Keli’i. Mahalo. We look forward to our next discussion, and thanks for joining us.”

3-21-21 Keli’i Akina with Johnny Miro on H. Hawaii Media radio network

Johnny Miro: Good Sunday morning to you, I’m Johnny Miro. It’s time for our public access programming on our six stations here on the Island of Oahu terrestrial radio. We have 101.1 FM, 101.5 FM, 107.5 FM, 103.9 FM, 97.1 FM and 96.7 FM. Also available streaming at hawaiistream.fm. Just click on the preferable icon that you would like. 

Joining us once again this Sunday would be Keli’i Akina, the president and CEO of Grassroot Institute of Hawaii. You can find them, everything about them, at grassrootinstitute.org.

This morning, we’ll be talking about a subject that’s not too pleasant to talk about, but it’s in the news on a national and a local level, big time. Good morning to you, Keli’i.

Keli’i Akina: Good morning, Johnny. So delightful to be with you and your listeners today. Much aloha.

Miro: Talking about taxes, the potential of taxes being raised locally. The topic is “Killing the goose that lays the golden eggs: How raising taxes on the wealthy here will hurt everyone in Hawaii.” The Hawaii Senate, of course, passed that bill, SB56, which would impose a raft of tax increases in Hawaii. What kinds of tax increases does the bill propose?

Akina: Well, SB56 is not just a single tax hike. It’s what we call an omnibus tax hike. In fact, one tax analyst said it was the Enola Gay of all tax hikes. What it means is that it would increase a whole host of taxes. We’re hopeful that that’s not going to pass at all, and we really believe it’s dead, and we’ll talk about the prospects of this bill later on, but it reveals exactly what our legislators were thinking.

This SB56 would increase the top marginal income tax rate from 11% now to 16% on single earners who make more than $200,000. That would boost us into the highest bracket in the entire country. It’s not something we should be really proud of.

Secondly, it would also increase the capital gains tax, the corporate tax, the conveyance tax as well, and it would repeal more than two dozen exemptions to the general excise tax, which effectively would be tax increases on people. It’s not a good thing at all.

Miro: What are the prospects for its passage?

Akina: Well, the Senate passed the bill on March 9, 24 to 1. That’s almost unanimous. That is just staggering. The only vote against it came from Sen. Gil Riviera, a Democrat from North Oahu. Now, the bill is moving to the House where lawmakers say it’s expected to die. It has been quadruple-referred. In other words, it has been referred to four committees that it has to make its way through before the next deadline in the Legislature, which is virtually impossible.

Basically, it looks like the House of Representatives is saying, “We don’t want this to pass because we’re so embarrassed by what our senators have done,” that they’re not even going to give it a discussion. Nobody can say for sure yet, but it’s pretty much dead, and we hope that that’s going to happen.

Miro: Why is this bill expected to die then?

Akina: Well, we think that this is a real victory for the people. It’s going to die because of all the bad press about the bill that resulted from people speaking out. So many people called up legislators and called up the media to voice their opposition.

In fact, the bill also received coverage in The Wall Street Journal. Let me quote for you. The Journal said, “If the Hawaii Legislature’s goal is to shrink the state population, its new tax grab might do it.” Isn’t that amazing?

Miro: [chuckles] Talking with Keli’i Akina, president and CEO of Grassroot Institute of Hawaii. What are people actually saying about this bill?

Akina: Well, in response to the bill, our phones have been ringing off the hook. People across the state have reached out to us at Grassroot Institute, saying that they are thinking about leaving. In fact, I know one individual who actually filed his residency in the state of Nevada in order to avoid the prospects of the bill.

One local businessman told us raising the state income tax for seven years is too drastic, and the length of time for such a high increase is not good. It’ll give Hawaii a bad reputation. Now, that’s not only coming from business people, but even state officials. The state tax director said the bill will scare wealthier individuals away from Hawaii, and might lower tax revenues.

One group that has been especially vocal about opposition to this bill has been local doctors who are having a hard time making a living here.

Miro: Oh, wow. What are the doctors saying?

Akina: Well, a Maui doctor, Colleen Inouye, said, “Already my patients have asked me if this would be something that would make me consider moving.” A Hilo doctor, Scott Grosskreutz said, “In Hawaii, our practice startup costs are often hundreds of thousands of dollars. The high overhead costs of offices and support staff, high-income taxes and very low reimbursements make our state unattractive to most young doctors looking to start a startup practice.” In fact, Scott said that a major tax hike would likely worsen the the doctor shortage, which is in critical condition right now in Hawaii.

Miro: How bad is Hawaii’s doctor shortage?

Akina: Well, people don’t realize — well, actually, many do — but right now our state is missing about 1,000 doctors in various specialties. A major tax hike would make it more unattractive for new doctors to practice in Hawaii, as it would raise the cost of living for them significantly.

For example, recent medical school graduates, they’re loaded with hundreds of thousands of dollars in debt, and they would not see Hawaii as a state to move to. WalletHub already ranks Hawaii one of the worst states in which to practice medicine.

In the Legislature’s efforts to raise taxes on the so-called wealthy, it may actually weaken Hawaii’s health-care industry, which would hurt the poor and middle-class, too, who have really big access issues, especially on the neighbor islands when it comes to getting medical care.

Miro: We’re speaking with Keli’i Akina from Grassroot Institute of Hawaii. He’s the president and CEO. On a related note, how might Hawaii entice doctors to basically stay, to move to the state?

Akina: Well, there are several ways, and it’s really, Johnny, about incentives. The kind of tax that would ensue following SB56, if it’s passed, is a negative incentive. But there are some ways in which we can get doctors to stay related to fiscal and tax policy that legislators can look at.

One tax policy fix would be to reform the general excise tax for doctors. At Grassroot, we did a study in which we found that Hawaii doctors and their patients would retain a total of $200 million in income if the state were to exempt them from the GET, just like other states do. This could help keep doctors in the state and would make it more attractive for new physicians to move to Hawaii.

It really, Johnny, makes a big difference because doctors who are practicing on their own make a very, very small margin, and the GET cuts into it significantly.

Miro: Well, how might this raft of tax hikes affect individuals generally?

Akina: Well, overall, raising taxes raises the cost of living, and Hawaii already has the highest cost of living in the nation. Everyone can understand how raising taxes is going to impact our wallets, and that’s the main reason that 22,000 — that’s 22,000 — residents moved away to the mainland since 2016, and that’s a net figure, so that’s a loss of population.

Of those Hawaii residents who are considering leaving, 47% of them say that the cost of living is the biggest reason. 

Now, the two largest reasons for considering leaving are related: Fifteen percent said there were more job opportunities outside the state, and 10% cited the high cost of living. Factoring tax hikes, that would make leaving far more attractive for the everyday person, and we’ve already got one of the highest rates of residents leaving the state anywhere in the nation.

Right now, we’re losing population, and that population happens to be the productive population that really wants to work hard and really wants to make a living. Tax hikes will only make that situation worse for our state.

Miro: Speaking of working, how does this bill affect small businesses?

Akina: Anyone who knows a small-business owner knows that most small businesses are already struggling, especially because of the lockdowns from the pandemic. For example, 49% of Hawaii businesses reported that they could not pay their full rent last year, and for enterprises still trying to get off their feet economically, more taxes could be the straw that breaks the camel’s back.

That is something pretty obvious. Higher taxes make it more expensive for businesses to operate, and that’s going to kill a lot of jobs, and Hawaii’s unemployment is already the highest of any state in the country at 10.2%. 

Discouraging businesses with higher taxes will not be conducive to job creation. In short, businesses might have to lay off employees or raise prices to cope with this increase, and some, or actually more, will even consider closing. That’s very bad. That’s one of the consequences of raising taxes at this time. It’s like kicking someone when they’re down.

Miro: We’ve had the relief packages. How is this federal COVID relief package playing into the situation right now?

Akina: Well, the federal COVID-19 relief has poured $1.6 billion into the state budget. That may have changed lawmakers’ minds about raising taxes. We know some who were more inclined to drop the SB56 as a result of the federal funding that is anticipated.

In addition, the state is also getting an extra $800 million this year from an economy that is performing better than expected. It would be more embarrassing for lawmakers to raise taxes when they already have billions of dollars of extra money. The rationale that many said that we need to have more money in the state coffers, that’s gone, basically. It’s really puzzling as to why legislators want to raise more in taxes.

Miro: Yes, it is extra money. What are lawmakers doing with this extra money?

Akina: Well, it’s actually pretty obvious to track if they’re planning to increase spending, which is a direction they shouldn’t be going at this time. It’s the exact opposite. It’s astonishing that Hawaii is in such a devastating financial crisis, and yet lawmakers are taking out a massive amount of debt to keep the spending going and to increase it.

Instead of paying off debt, which is what many households would do if they had any increase of money, lawmakers are increasing spending so as to avoid any cuts. But just think: Thousands of businesses and individuals across the state have had to cut back last year. It only makes sense that the state should also tighten its belt.

Miro: What kind of debt is the state taking on right now?

Akina: Well, it’s a dangerous kind of debt. For the first time ever, the state is taking out debt to pay for payroll expenses. That’s a very, very bad sign in terms of the health of our fiscal policies. The state is also skipping its payments for pre-funding the public health benefits fund. That will add billions of dollars of debt since it all has to be paid back with interest.

When you add up all of Hawaii’s unfunded liabilities and debt, that equates to $29,000 per person, and that’s just too much debt. Lawmakers created all that debt because they wanted to keep spending high and avoid making any budget cuts. 

But instead, and this is what we say strongly at the Grassroot Institute, lawmakers should focus on using any windfall money, such as from the federal government, to pay down debt.

Just ask a personal financial counselor, and they’ll let individuals know in their own households that when you get any more money than you need, pay your debt off because your debt will choke you in the future.

Miro: President and CEO of Grassroot Institute of Hawaii, Keliʻi Akina. What else should lawmakers be doing right now to balance the budget?

Akina: Well, we look around the nation at best practices, and the states that are thriving are the ones that follow these best practices. For example, lawmakers should follow the “golden rule” of state budgeting, which is this: Keep the growth of the government lower than the growth of the economy. In other words, make sure that the government’s spending doesn’t exceed in its pace the growth of the economy.

Remember that the government gets its revenue from the economy. So it’s very unsustainable for the government to grow faster than the economy, yet over the past decade, the state general fund in Hawaii has grown at 3.6%, which is more than double the rate of the economic growth of 1.7%. That’s the exact opposite of the definition of a healthy economy. It needs to be reversed.

Otherwise, the state government takes more wealth from the private economy than businesses and individuals create, and that’s always going to lead to a downward spiral. This results in less personal income for savings, investing in child education, or starting new businesses. It’s a very bad situation. Most people aren’t aware of it.

Miro: What should lawmakers do when it comes to taxation?

Akina: Johnny, forgive me for my language, but let’s face it: Hawaii is a tax hell. Hawaii has among the highest taxes in the nation. We have a highly regressive general excise tax and that targets the poor, and we have a highly progressive income tax, which targets the wealthy. But the entrepreneurs across the country now are moving away from places with high taxes, to states with low taxes or no taxes, and they’re taking their money and their businesses with them.

Lowering taxes could help foster more job creation and entrepreneurship. That would also help residents keep more of their hard-earned money. But unfortunately, that may be out of the question for the next four years in Hawaii.

Miro: Why is that?

Akina: Well, this is a little complicated, but if I can reduce it to simple terms: The federal relief money just passed last week comes with strings attached. Any state that takes the money is prohibited from using the money to lower taxes for the next four years, and that’s going to be a problem for us.

Miro: The federal relief money stops states from lowering their taxes?

Akina: Exactly. It’s like golden handcuffs. If the state takes the money, then there’s almost no chance the state will ever lower taxes in the next four years. That’s really too bad, because this could have been a great opportunity to reduce taxation, and as a result of reducing taxes on businesses and the wealthy, we would actually foster economic growth.

Miro: What should the state do?

Akina: Very simple. If we can’t reduce taxation, then at least don’t raise the taxes. But that requires fiscal discipline, which we’ve seen many of our lawmakers just don’t display. Hawaii lawmakers need to get serious about keeping spending low and not raising taxes. Policy leaders should also be looking at reducing regulations to help grow the economy.

Just think, Johnny, our economy this year grew a few percentage points faster than expected, and already that’s resulted in $800 million of windfall tax revenues for the state. Just let the economy grow, and we’ll have all the money the state needs coming in through taxes. Just think how much the state could have if it focused on growing the economy rather than taxing the goose that lays the golden eggs? The numbers could be in the double or triple digits.

Miro: SB56.

Akina: I’m sorry, what I meant to say was the numbers could double or triple.

Miro: OK, well, it’s SB56. The discussion has been once again, very enlightening, Keli’i Akina. If listeners want to learn more about The Grassroot Institute, where can they go?

Akina: We invite everyone to come to our website, grassrootinstitute.org. That’s grassroot, there’s no “s” after it. It’s grassrootinstitute.org, and you can sign up for our weekly email newsletter where we provide behind-the-scenes looks into policy in Hawaii, lots of fun cartoons, and easy-to-explain analysis of what’s going on in the state.

Miro: Great information once again, Keli’i. Mahalo for chiming in. We look forward to our next discussion, and thanks for joining us.

Akina: Much aloha to you and all your listeners, from the Grassroot Institute of Hawaii.

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