Photo by Charley Myers
New taxes being considered by the Honolulu City Council were the focus of Institute President Keli’i Akina‘s “Hawaii Together” program on Monday. His guest on the ThinkTech Hawaii program was Tom Yamachika, Grassroot Scholar and president of the Tax Foundation of Hawaii, which keeps track of changes in tax law and how taxpayer dollars are used.
Among proposals being considered are a 3-percentage-point county surcharge to the 10.25% state transient accommodations tax, and new tiers or thresholds for property taxes that supposedly will affect only the more well-to-do.
Yamachika said continually increasing tax rates on residents comes with a risk: “There is a point at which you squeeze these people too hard and they say, ‘Heck with this, I’m out of here.'”
Yamachika said adding a county surcharge to the TAT, which is mostly paid by tourists, also is problematic.
“Somebody who is staying in a hotel is going to find lots of tax on the bill because we have [the] 10.25% [TAT], plus 4.7% [GET], plus another possible 3%. That’s a lot of tax. It’s close to 20%. Whether that’s going to affect demand, it probably will. We just don’t know how much.”
To see and hear the entire conversation, click on the button below. The full transcript is also below.
8-30-21 Tom Yamachika with Keli‘i Akina on “Hawaii Together”
Keli’i Akina: Aloha, everybody, and welcome to “Hawaii Together” on the ThinkTech Hawaii broadcastnNetwork. I’m Keli’i Akina, president of the Grassroot Institute.
Is your pocket book getting more and more empty? The cost of everything in Hawaii is going up. If you live in the City and County of Honolulu on the island of Oahu, the cost of government is going up. We’re in the midst of a coronavirus pandemic crisis response right now, and that’s driving costs up.
In addition to that, prior to the coronavirus crisis, our cost of government was going up. This is not to mention, of course, the cost of the Honolulu Rail project.
If you’re a lawmaker in Honolulu, you’re tempted to look at the taxpayers to solve the problem of rising costs. On their minds now is the issue of whether or not taxes are going to rise in Honolulu in this coming fall.
I’ve got an expert today who’s a dear friend of the Grassroot Institute who will give us some answers to this. He probably is the most well-versed analyst of the tax situation in Honolulu and Hawaii: my good friend Tom Yamachika, president of the Tax Foundation of Hawaii. Before I bring him on, I just want to say I appreciate the work that he does. It’s tremendous work informing lawmakers, as well as the general public.
Tom, thanks for being with us today. I appreciate you joining us on “Hawaii Together.”
Tom Yamachika: Oh, and thanks for having me on the show. We’ve got a lot of interesting things to talk about today.
Akina: Absolutely. Before we do, I’d like you just to take a moment to let our audience know a little bit about the Tax Foundation of Hawaii.
Yamachika: Sure. We’re a taxpayer watchdog organization. We follow mostly state legislation as it’s going through the process. We also get involved to a lesser extent on city or county enactments. As long as it has something to do with tax or public finance, we can be on it.
Akina: We’re just proud to say that Tom Yamachika is a great partner of ours at the Grassroot Institute of Hawaii, and together we work on tax issues here in the state and in the City and County.
Now, as I mentioned at the beginning, the Honolulu City Council is considering adding a new tier to its property tax structure. That’s going to bring into question whether or not it’s a good idea to tax the rich. I’m going to ask Tom a little bit about that later on.
At the same time, the county is going to decide whether to adopt a newly allowed county-level transient accommodation tax. That would be up to 3 [percentage] points above the existing state tax, or TAT tax, which is currently 10.25%. That’s a huge increase. Now, is the City and County going to go for the entire 3% or just part of it? We’ll hear from Tom in a little bit about that.
Should the over-budget and behind-schedule Honolulu Rapid Transit project, the rail, get a portion of the revenues? That’s a hot issue as well.
I’m so glad Tom is here because I’m going to throw him some key questions that will help illuminate where we are in terms of taxes. Ready to go, Tom?
Yamachika: Oh, sure.
Akina: Here, let me throw this out to you. Earlier in the year, the state Legislature also considered multiple tax hikes, and we worked hard to stop some of those. That was despite the fact that increasing taxes during a recession is generally not a good idea. Now, the City Council is looking at a few tax proposals. One of them, Bill 20, would rework the property tax tier system. Can you explain what that would mean for Honolulu homeowners?
Yamachika: Sure. What you mean by a tier system is that for certain classes of property, there are bands like the income tax, where if you have property up to a certain amount of value, then you get a certain tax rate. If you exceed that band and go into another band — so right now we have two bands — then you go into another tax rate.
Right now, what we’ve got in Honolulu is something called Residential A. What Residential A is, is if you have a property that’s residential but is not eligible for the home exemption, and it’s valued at $1 million or more, you get a higher rate called Residential A.
That’s where the tier structure comes in, because the current rate for residential is $3.50 per 1,000, so 0.35%. Residential A is $4.50 per 1,000 for the first $1 million, but if it’s more than $1 million, you go up to $10.50 per 1,000.
Akina: Well, that’s something. Bill 20, which they’re considering, would add a new tier of taxation for property that is valued over $5 million. Who would this really affect, ultimately, in the new tax structure?
Yamachika: Well, at this point, we really don’t know because there aren’t numbers attached to the new rates. That’s something that’s set annually by the budget ordinance. It just gives the City Council more wiggle room to give very high tax rates to the most valuable tracks of property.
Now, what I wanted to mention is that we’re not the first county to try this. The Big Islanders already have two tiers. Kauai doesn’t. Maui has three. They already have what is proposed in Bill 20.
They not only have three tiers for nonowner-occupied like Residential A, they have three tiers for owner-occupied and they have three tiers for short-term rental, which is a different classification and one that’s taxed much more heavily at that.
Akina: What is their experience with this? Has this been ultimately beneficial to the taxpayers? Has it been beneficial to the counties?
Yamachika: I think the experience is that the counties have gotten some more money out of it. Obviously, they’re not complaining. Over and above that, I really don’t know.
Akina: Well, back to Honolulu. Bill 20 also raises the limit for properties that fit under our tier A, from $1 million to $1.3 million. Now, is this a warranted tax increase, or is this overdue?
Yamachika: Well, I think it’s good to move the thresholds every once in a while to keep pace with inflation.
Akina: Do you think it should be greater, Tom? Is it enough?
Yamachika: I don’t know. That’s more of a policy and economic decision. The part that I’m worried about, and it dovetails with another question that we have — maybe we got to go to that now. That is, what happens when you put the screws to the rich too much? The answer, basically, is they get on a plane. There is not only anecdotal evidence saying this, but there’s also empirical evidence. There was a study that came out in 2019 by a trio of economists, and what they tried to do is they tried to quantify the movements of the Forbes 400, which is the 400 most wealthy people in the United States, through various permutations of estate tax.
They were primarily looking at estate tax, because that’s a tax that hits the wealthy and tries to hit the wealthy exclusively. What they found, surprisingly, is that if you add an estate tax to most of the states, you gain revenue, but if you add it to a few of them, they’ll actually lose money, because of effects caused by these wealthy people saying, “Well, I’ve had it. I’m moving out.” When they move out, they take with them income tax and sales tax because they’re not in the state to spend money on goods and services anymore.
They’re someplace else. And guess what? Hawaii was one of the states that was past the inflection point: We would lose money if we added an estate tax. That’s what they found. My point for that is that, there is a point at which you squeeze these people too hard and they say, “Heck with this, I’m out of here.”
Akina: What you’re saying, Tom, is that if we create a new tier of taxation for high-valued property, claiming that we’ll only be taxing the rich in order to help the poor, that that’s actually counterproductive. We actually are going to be killing the goose that lays the golden egg, so to speak. We’re going to be sending away the very tax base that we’re looking to in order to provide taxation.
Yamachika: Yes. There’s definitely a risk of that. All of this, of course, is predictive science. It’s whose crystal ball is better, but there is a risk, and that’s all I’m saying. There’s a risk that this is going to happen, that you’re going to shoot the golden goose, and the goose will fly somewhere else, and what do you have left? That’s kind of the problem.
Akina: What concerns me is that many policymakers and many individuals in the public are not necessarily looking at this from the empirical side, from the data side, which you talk about. They’re looking at it from the ideology side, in terms of what seems to be the right moral value to follow. The rich are rich. They already have their money. We have so many poor here. We need to be Robin Hood, take from the rich and give to the poor, and so you have strong public sentiment sometimes for this kind of policy. What are your thoughts about that when it enters the public policy realm?
Yamachika: Well, policy is one thing, but people have to be realistic. If there is a risk that we’re actually going to lose money by doing this, I don’t want us to be the state that finds out this theory is true, because you do that and you learn a lesson the hard way. I don’t want us to be in that position, because the rest of us poor guys who have to bear the brunt of the cost of the government services, taxpayers like you and me, are going to wind up eating it if there’s any miscalculation that’s done by the Legislature or other lawmakers on that school.
Akina: Let’s narrow down a bit in terms of heavily progressive tax structure. What is that impact upon businesses and the potential for businesses owned by small-business owners to leave the state?
Yamachika: I think that’s one of the variables that was factored into the study. Most of these so-called rich people aren’t just lying around, just sitting on a pile of money day after day. They have done something to get it. A lot of them are entrepreneurs. A lot of them run businesses. If they leave the state, parts of the business are going to go with them, naturally.
Akina: One of the interesting things I’ve noted in numerous conversations since both the state and the counties have been considering increasing the taxing of the rich, is this phenomenon: There are wealthy people who love Hawaii, who consider Hawaii their home, but who own more than one home. They may own a home in Hawaii, and also in Nevada, and they are looking at strategies for moving their capital and their businesses out of Hawaii, while being able to find ways to spend the maximum number of days here in their “second home.” What are your thoughts about that, and that impact on our economy?
Yamachika: Well, we know that people are doing this. We’ve seen instances of this. Nevada is a very attractive destination because it has no personal income tax. They make enough off of gaming revenue, so that they have done that for their citizens and they’ve attracted a few from here. So the danger is real. We have seen instances of it, and the question is, to what degree is it going to happen? Some people — and this is the part that’s very hard to quantify — are going to say, “Oh, I love Hawaii. I was born and raised here. I’m not going to leave no matter what, even if they tax me to death.” But more of them won’t. They won’t have that much inelasticity as the economists say.
Akina: Very good. Tom, we’re going to take a quick break now. When we come back, I’m going to ask you a bit about the county TAT increase, which could be as much as 3%.
Before that, let me mention to our viewers that we have a project at the Grassroot Institute called “Why We Left Hawaii,” story after story of individuals, businesses and others who have left Hawaii for some of the reasons we talked about today. You can access those stories at grassrootinstitute.org.
Don’t go away. We’ll be right back on ThinkTech Hawaii’s “Hawaii Together.” I’m Keli’i Akina. Stay right there.
Akina: Welcome back, and thanks for staying around. I’m Keli’i Akina and you’re watching “Hawaii Together” on ThinkTech Hawaii. My guest today is Tom Yamachika, and we’re talking about potential tax increases for Honolulu County, and also for the neighbor islands.
Tom, another new potential tax is the county transient accommodation tax. That could be adding up to 3% to the tax burden. Many critics have pointed out that if you combine the existing state transient accommodation tax with it, it will give Hawaii the highest tourism taxes in the country. What are your thoughts about that, and what would the impact be?
Yamachika: Sure. Not only that, but you’re perhaps maybe forgetting one thing: If you’re going to stay at a hotel here, if you’re local, if you’re a tourist, or whatever, you’re going to have three things to worry about: One is the state TAT, which is 10.25%. After this past legislative session’s veto override, the state’s going to keep all of it, whereas before, they were giving $103 million every year to the counties. Second, there’s the county tax, which was just authorized with this new legislation.
A lot of the counties are still figuring out what to do and how to go about doing it. Third, is we have this ubiquitous tax called the general excise tax. That applies to hotel rooms too.
Akina: There you go. That was the third shoe I forgot about.
Yamachika: Somebody who is staying in a hotel is going to find lots of tax on the bill because we have 10.25%, plus 4.7%, plus another possible 3%. That’s a lot of tax. It’s close to 20%. Whether that’s going to affect demand, it probably will. We just don’t know how much.
Right now, the economy has been bouncing back after the drop in COVID-19 cases around the world, but now the delta variant is getting in there and causing the cases to rise again. Our governor goes up on the world stage and says, “Tourists stay away, please. We don’t want you, at least for the time being.”
Akina: I’d love to chat a little bit more about that subject, but that’s for another day, in terms of the government’s role with regard to tourism.
Just going back to the point you’re making, at the heavy rise in taxation of tourists — let me throw this out to you. Even if that does not curtail tourists coming to Hawaii, in what way may it curtail their spending behaviors in stores, restaurants and ABC stores, and so forth throughout the islands.
Yamachika: Well, if they’re not here, they’re not spending money.
Akina: For those who do come, how does the increase in taxes affect their spending and behaviors?
Yamachika: Well, like I said, this is a transient accommodation tax only, so it may affect the length of their stay and if it affects the lengths of their stay, it’ll affect how much money they’re spending here.
Akina: This is where I’d like to think about the ripple effect, in terms of money that doesn’t go to stores, doesn’t go to employees, doesn’t get on the table, and so forth. We have this residual impact upon the economy and the impact upon the consumer here in Hawaii. Now, should we be concerned, Tom, that there might be another transient accommodation tax this term, or an increase beyond what we’re aware of?
Yamachika: We’ve hit the thing a lot already. You got to remember, this was a 5% tax when it was originally enacted. Now, it’s more than double, and it was supposed to be temporary. It was supposed to fund the convention center and then drop off soon after that, but lawmakers liked having the money around, so it got extended and extended and extended, and then people found more uses for it. So more earmarks were put on it, and it kept looking like a Christmas tree because there were so many ornaments, saying this money goes here, this money goes there, and it was just a little budget unto itself.
Akina: As you say that, it comes to mind that there appears to be quite a bit of competition for the revenues from the county TAT, in particular, the Honolulu rail is hoping to lay claim to the TAT revenues to overcome their budget shortfall. Do you think the rail should get a slice of the TAT?
Yamachika: Well, I don’t know if they should or not, but I think the practical fact is they’re going to. It’s a cost of Honolulu County government, and if we can’t get the feds on board, if we can’t get the state on board to bail out more of it, guess who’s left? The county. And guess what, governments don’t pay taxes. They impose taxes, but they don’t pay taxes. So guess who comes up footing the bill? The taxpayers; that’s all of us. There are so many different ways and devices that the government takes our money, this is just one of them. But it just keeps on going and going and going.
Akina: Let’s go back to the GET, and in particular, the GET surcharge set aside that already goes to rail. What do you think is going to happen there?
Yamachika: It’s going to stay in place. There’s been no movement to kill that off. The situation by which the counties got control of the 3% surcharge, I think, was travesty in more ways than one. Not only because it was foisted upon the counties the last minute, but it’s very different from the other state taxes that the counties are administering, because the counties didn’t want to get the authority for 3%. They opposed it, but they got it anyway, and worse than that, it came with no assistance whatsoever from the state.
Let me explain what that is. For the county surcharge on the GET, the state collects the GET, and they collect the surcharge on top of it. The economy doesn’t have to work, the state just writes them a check. When coming up with this 3% surcharge bill, lawmakers deleted all those provisions. Basically, they get the opportunity to impose up to a 3% TAT on their own, but they have to come up with all the infrastructure to do it. They got hire their tax collectors. They have to train them. They have to get them out in the field. It’s something that the governor and several county councils said was terribly inefficient, which it is, but that’s what they got.
Akina: We’re winding down now, Tom. What do you think the TAT revenues really should be used for, now that they’re available? Would one of those usages be to curtail some of the externalities affecting the tourism industry?
Yamachika: That’s what it was originally intended for. But let’s be real. Taxes go into a county government and they’re mixed with everything else. So we really have no control, or really should have no control over, what a particular dollars collected by a particular tax is used for. It’s all part of one big melting pot. Of course, it’s then the Legislature or the county council’s responsibility to make sure that the money is used wisely. There were indications that, at least for the Honolulu rail project, some of these financial controls were avoided earlier on in the process. Now there’s more structure around it to make sure that there is more transparency and accountability, which I think is good.
Akina: Last thought before I let you go. How do you think Honolulu should handle the county TAT issue? Any good word of advice?
Yamachika: Well, like I said, they should keep the whole picture in mind. It was once observed by some wise person in Britain that the art of taxation is like plucking a goose. You wanted to maximize the number of feathers you get and minimize the hissing and the goose flying away as well. That’s really what this science is all about. It’s treading a delicate balance. So we need to wish the governments good luck in their endeavors because they’re going to need it.
Akina: Thanks, Tom. This has been great insight you provided today. Appreciate your work at the Tax Foundation of Hawaii. Thank you for being with us here at the Grassroot Institute on today’s “Hawaii Together” on the ThinkTech Hawaii broadcast network. Appreciate it. Much aloha to you, Tom, and to our viewers.