Hawaii has a budget surplus. Nevertheless, there are many bills in the 2022 Legislature proposing to increase our taxes.
On the Feb. 14 episode of “Hawaii Together,” on the ThinkTech Hawaii network, host Keli’i Akina spoke with Tom Yamachika, president of the Tax Foundation of Hawaii, about the wisdom — or lack thereof — of the many tax measures.
Akina, who also is president of the Grassroot Institute of Hawaii, speculated that the bills are based less on raising revenues and more on some kind of ideology or social purpose.
Their sponsors apparently believe that the best way to help lower-income people is to raise taxes on the wealthy — the Robin Hood syndrome. But when the entire economic picture is studied, Akina said, it’s clear that what the legislators are actually doing is killing the goose that lays the golden egg.
There also are the usual “sin” taxes, such as the proposed surcharge on alcohol drinks, allegedly aimed at discouraging the use of alcohol. Yamachika noted the irony of such taxes:.
“When you … find a cause that depends on that sin tax — for instance, using a tobacco tax to fund a school of medicine or a cancer center — the tax causes some people to stop smoking, but that means revenue goes down. Then the [supporters of the] causes being supported by the sin tax panic, wondering if [the revenues] are going to disappear. Their answer is to raise the tobacco tax even more.”
Other bills Akina and Yamachika discussed included the so-called carbon tax, HB2278, which seeks to discourage the use of fossil fuels, but also would result in a big and economically damaging increase in Hawaii’s fuel prices, and HB1208, which would change Hawaii’s Constitution to allow the state to levy a property tax while potentially eliminating the income tax.
To see the entire presentation, click on the video below. A complete transcript is provided.
2-14-22, Tom Yamachika with Keli‘i Akina on “Hawaii Together”
Keli‘i Akina: Aloha, everyone. 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.
Today is Valentine’s Day, February 14th, 2022. So I wish you a very happy Valentine’s Day. And the Legislature is in session. Our topic today is: Why the push to increase Hawaii taxes down at the Legislature?
You know, our legislators are aiming to increase taxes on fuels, property and capital gains. But. you know, that might be more trouble than it’s worth, according to Tom Yamachika. He’s the president of the Tax Foundation of Hawaii. He’s a scholar at the Grassroot Institute and a tax attorney and a good friend. I’m so glad that he joins us today to talk about what’s going on in the world of tax legislation at the Legislature.
Tom, welcome to the program. Aloha.
Tom Yamachika: Well, thank you for having me on.
Akina: Well, is it a busy session for you?
Yamachika: Oh, indeed it is. We’ve got hearings every day. We’ve been double and triple set, meaning three or four hearings at the same time. So we have to figure out which one we’re going to go to.
Akina: It’s too bad you can’t be everywhere at the same time.
Yamachika: We just have to attend all those hearings.
Akina: Well, Tom, you and I have talked and looked at things that are taking place. Many of us believe the Legislature should actually take a break from trying to increase fuel and property and capital gains taxes, especially since the state already has a budget surplus. It might be better perhaps to work for lower taxes for our residents, and that would lower Hawaii’s cost of living and help boost its economy.
I’d love to hear your thoughts on all of these ideas. But first, give us a rundown. There are of note probably five to seven or so key bills that we should be paying attention to. Would you quickly run through them and let our viewers know what we’re looking at this session?
Yamachika: Sure. We’ve got a lot of fun things to watch this session. We have a carbon tax that’s coming back for the third year or so — this time it’s House Bill 2278. We have a tax fairness bill, which basically wants to make the earned income tax credit refundable and permanent — which in itself is not so bad — but it does so by jacking up the capital gains tax from, I think, 7.25% to 9.6%.
There are a couple of bills on the Senate side — Senate Bill 3250 and Senate Bill 3182 — that aim to impose a wealth tax, which is something that we haven’t seen before.
House Bill 1208 and 1209 are bills that would change the Constitution to allow the state to impose real property tax on top of the counties. We’ve seen that a couple of years before, when the HSCA-backed constitutional amendment was going through and actually made it to the general election there, to be not really defeated by voters, but it was struck off the ballot by the Supreme Court.
House Bill 1505 and Senate Bill 2242. Again, those are also major individual and corporate tax hikes. They seem to be dead for now, but who knows? It’s not over until it’s over, in order to exclude taxing unemployment benefits. Again, both those bills are dead for now, but you never know when they’ll come back.
Senate Bill 2237 is a conveyance tax hike, same as was proposed last session in what we call the Enola Gay bill, and this one, that piece of it is there to support an exclusion for affordable housing.
Then, last but certainly not least, there is one bill that is actually being sponsored by the Department of Taxation, called House Bill 2177, that’s Senate Bill 3145. It’s relating to tax administration. There’s a lot of stuff in there, including some provisions that would greatly enhance penalties.
Akina: Well, Tom, that’s quite a slew of tax bills that are being proposed this term, and they come from many different directions. What’s puzzling is that it’s an election year in which every state legislator, House representative or senator is up for re-election, and in addition to that, what’s puzzling is that recently the state Council on Revenues, which is a panel of economists who are supposed to project tax collections each year, told us that the state tax revenue is likely to soar by 15% this year, So here’s my question, right at the outset: Why, in light of that, do legislators feel the need to increase taxes yet again, and in so many ways?
Yamachika: Well, you never know, really. There are probably some of their constituents who are pushing for various tax increases to fund various programs. There are some progressives, for example, who want more depth in the human services areas of our government, to provide additional help to working families, those under the poverty line [and] children, and they think, rightly or wrongly, that the people on the other end of the income spectrum are just undertaxed, and need to be whacked some more.
That’s where a lot of these bills are coming from. They want to lop off or attack the areas that should be particularly susceptible for higher-income people. The top rate for the income tax, conveyance tax, real property tax, they think, “Oh, jeez, people at the lower end of the spectrum won’t own real property,” for example. They’re thinking of things to attack people at the higher end of the income spectrum and go for it that way. They’re also looking to attack the people who are not residents, who buy the property and don’t stay here all the time.
Akina: On a general level, what strikes me is that these bills have very little to do in their rationale with raising revenue. As we mentioned earlier, the need to raise revenue is not so crucial, but as you have pointed out, there seems to be some kind of ideology or social purpose in going after certain segments of the population. What are your thoughts on that?
Yamachika: I think that’s definitely true. The pitch that we’ve heard at several of these hearings is, “Oh, we need to pay for more social services and we’ll just take a little bit more from those who can afford it.”
Akina: This is what we would call …
Yamachika: It sounds good when you just phrase it like that, right?
Akina: Well, this is what we would call the Robin Hood mentality.
Yamachika: That’s right, and there’s a lot of ramifications beyond that, which I don’t think people are thinking about so much.
Akina: I think very often, the entire economic model is not really examined carefully. Frequently, in pursuing the higher revenue portions of society, we are in some ways killing the goose that lays the golden egg — the population that is really responsible for generating economic activity that helps others and also generates tax revenues.
Yamachika: That’s right. We have all kinds of variations of that. Where do you want to start?
Akina: Well, first, let me continue talking about the projected surplus.
Currently, we’re enjoying a $3 billion budget windfall, and thanks to higher-than-expected tax revenues — if the Council on Revenues is right — and an infusion of federal funds, which are still available to us, money is really growing on trees for the Legislature. As a result, especially if you listened to the governor’s State of the State Address, high taxpayers are eligible for a one-time tax refund of about $100 per taxpayer, or $400 per household.
How much do you think, realistically, each taxpayer is going to receive this year, and what are your thoughts in general about this as a means of stimulating the economy?
Yamachika: It’s really going to depend on what actually makes it to the finish line. You know and I know that at the Legislature, there’s a lot of horseracing going on, a lot of jockeying for position. Things get traded, things get delayed, things get knocked off the track. There are several variations of all of that.
Now, the governor didn’t just put forward a proposal to give everybody $100. He said, “Hey, let’s also put a billion dollars into the rainy day fund,” at which legislative leaders said, “Wait, we can’t really do that; we’ve got a lot of needs, and now is a good time to start addressing some things.”
There’s going to be a lot of tension between those different paths as we go toward the finish line. We really don’t know what’s going to come up on top, but there’s going to be a lot of fighting.
Akina Well, Tom, let’s go to that list of bills you gave us at the start of the program today. One that strikes me is the one that brings up the specter of deja vu. That’s the bill that would amend the Constitution by allowing the state to levy property taxes. Now, last time we tried that, the counties were opposed to the amendment, which was removed from the ballot for technical reasons. Why should residents be concerned about this proposal, Tom?
Yamachika: Well, it’s going to affect you whether you are renting somewhere, whether you own your own house or if you’re in an apartment.
Basically, the issue is that the cost of just staying somewhere is going to increase and the ballot measure has some blanks in it, where it doesn’t really say what the amount is going to be. But once voters pass that, the genie’s out of the bottle, and it’s fair game for the Legislature to come up with any number they want.
The interesting thing is in House Bill 1209. They said, “OK, we’re going to get enough money from real property tax, so we’ll pitch the income tax altogether. Let’s make us a state like Alaska with no income tax at all.” If we did that, we know that state real property tax would have to be increased substantially, because net income tax is one of the two 800-pound gorillas in our tax system, the other being the GET. That’s where the state gets most of its revenue.
Now, if they’re serious about passing this state real property tax, they’re dangling this, “Oh, we’re going to get rid of the income tax before the general election.” But is that actually going to happen? I don’t think that’s actually going to happen.
Akina: The old bait-and-switch.
Yamachika: … is to pitch that bill entirely, bring back the income tax in all its glory. It’s a classic bait-and-switch I think is what’s happening here.
Akina: Absolutely. Now, going back just a little bit, we often hear the refrain that we have the lowest property taxes anywhere or in the nation. But when we look at that claim carefully, is there a difference between saying we have low property taxes and saying we have low property tax rates?
Yamachika: I’m not exactly sure what you mean.
Akina: How do you evaluate the claim we’ve got low property taxes here in Hawaii?
Yamachika: Well, I think what most people say is our rates are OK, and that’s true. Our rates are low relative to other states but our valuations are high.
Akina: Right, and so as a result, we end up paying a high amount of property taxes even though the rates may be low.
Yamachika: Right. It’s still lower than the median, but I think it’s not rock bottom when you look at that measure. Still, you have to think, why is that the case? The reason is because, in most states on the mainland, the property tax funds the school systems, the K-12, but for us, it’s the GET that does that.
Akina: That’s right.
Now, Tom, one of the bills being considered is the carbon tax, but the description of the bill is mostly about the tax increase on fossil fuels is going to be offset by an income tax refund. Can you explain the theory behind this bill and what effect it’s likely to have?
Yamachika: Sure. What the carbon tax is designed to do is to recoup the social cost or the cost to the environment, that is visited upon the environment by burning fossil fuel and the similar type of pollution.
There is, as the bill’s proponents say, a social cost, and to recoup the social cost, that’s why we’re imposing the carbon tax to basically discourage the consumption of these fossil fuels that get burned, pollute our atmosphere, and so on. That would result, predictably, in a very large increase at the pump.
If you think you have it bad now, commuting from one part of the island to the other, think about if you’re a truck driver. That’s your business, and while you may not pay the bill, it’s going to be a heck of a lot bigger bill. It’ll tax you also much higher if you are … No, I’m sorry, I’m mixing up another bill. But you’re going to see a big increase at the pump.
Akina: Well, thanks. We’re going to take a quick break and come back in just a minute. To my viewers, we’re with Tom Yamachika, president of the Tax Foundation of Hawaii. I’m Keli‘i Akina on “Hawaii Together” on the ThinkTech Hawaii broadcast network. Don’t go away, we will be right back with more interesting commentary on the tax situation at the Legislature this year.
[Intermission]
Akina: Thanks for staying around. I’m Keli‘i Akina on “Hawaii Together” on the ThinkTech Hawaii broadcast network. My guest today is Tom Yamachika. We’re taking a look at the tax proposals in the Legislature this year.
Tom, you mentioned earlier that there were a variety of reasons behind many of the taxes that are being proposed, or tax increases that are being proposed, and many of those reasons are not really income-related. It seems like we’re seeing a lot more bills proposing tax hikes for public policy or ideology reasons rather than for the purposes of raising revenue.
For example, the bill that would levy a per-drink surcharge on alcohol cites the need to discourage liquor consumption. That is reminiscent of Prohibition, and the carbon tax which we mentioned earlier cites environmental concerns. What do you think about this trend and should Hawaii taxpayers be wary of these quote-unquote “noble reasons” for tax hikes?
Yamachika: As we’ve said many times before in your show and otherwise, we’re not particularly fond of these so-called sin taxes. The reason being that you levy a sin tax, then you look for a way to spend it. And so you find some cause that depends on the sin tax — like, for example, for the tobacco tax, we pick the School of Medicine and the Cancer Center — then you start hiking the cigarette tax. Guess what happens? People stop smoking. And then guess what happens? The revenue goes down — which is the social goal you wanted to achieve in the first place.
So then [the supporters of] these causes that were being supported by the sin tax — such as the Cancer Center and the School of Medicine — they go into a panic saying, “Oh jeez, what’s going to happen to us? We don’t want to be extinct or thrown into oblivion because of this lack of collections of the tobacco tax. Can we raise the tobacco tax some more to give us the funding that we need?”
Akina: There’s this vicious circle and it’s counterproductive in the first place. But in the end, the taxpayer just gets soaked all the more.
Yamachika: Oh, yes.
Akina: Is the same thing true with regard to tax hikes on the rich, which we were discussing a little earlier? Lots of bills that propose tax hikes seem to have the aim of only affecting the rich, such as income tax hikes that create a higher rate for a new tier of income, a special wealth asset tax or a capital gains tax hike. If these kinds of tax bills are passed, what effect would they actually have, and is it possible to tax only the rich in a way that doesn’t affect the economy as a whole?
Yamachika: Well, that’s a very, very good question. I know your institute’s done a lot of research on that. But where I think this is headed is, you’ve got to keep in mind where this money is coming from. Most times it comes from a business venture of some kind or other. Sometimes it’s for conducting a successful business here in the islands, and it’s because this business has figured out a good and efficient way to get people what they want at a fair price. And you want to penalize that? Which is what the bills are trying to do.
If you, for example, penalize somebody who has a business with a hundred employees, he’s not going to just stand there and take it. He’s going to pull out more money from the business to cover the tax, which leaves less for the employees or higher prices for the consumers, or both. That’s one economic effect that probably we don’t want, but is going to happen as a result of this tax.
Or, the taxed person says, “I don’t need this, I’m getting out of Dodge. I’m going to jump on a plane, and I’m out of here.” So the business moves, the jobs move, and what happens to us? Well, we lose the revenue. When we lose the revenue for the hundred people that the guy employed, because they’re now working in someplace else, they’re working in Nevada, they’re working in Oregon, they’re working in someplace else which has a better tax climate.
Akina: Right. Tom, we at the Grassroot Institute have had this project for quite a while now called “Why They Left Hawaii,” which helps document the reasons that we have this massive exodus of local people. And it doesn’t only include those who cannot live here or make a living off the economy; it includes the category of people you’re talking about: some who are very wealthy, who have high capacity, who are simply not going to sit back and take the increasing of taxes and regulations that actually bite into their wealth.
But where is the research coming from when tax proposals are made, and what I’m talking about is: Where is the analysis on what the economic impact will be? Do you see that being something that legislators are looking at very carefully, or is there good research being done in that regard?
Yamachika: Well, with the testimony I’ve seen, there’s not a whole lot of research results. It’s mostly ideological. The proponents of a lot of these measures, I think at least from the testimony that I’ve seen, are appealing to the ideological propensities of these legislators to do the Robin Hood thing, and may not be aware of the economic effect, if any, that it may have.
Akina: As the saying goes, there’s nothing new under the sun, and that’s why at the Grassroot Institute, we like to scour the nation for best practices and see the impact of tax policies as they have worked themselves out in other states. I lament with you the fact that you feel, as I do as well, that there’s not enough research taking place when it comes to motivating our tax bills that we see at the Legislature.
Yamachika: A lot of research is done at the national level. There is a nonprofit named similar to [us], but they’re the Tax Foundation for the entire country. They have economists, they do a lot of research. They put [out] very interesting reports. They rank the competitiveness of our state versus others on a number of metrics. This year we were privileged to make it into the bottom 10.
Akina: Tom, let me ask you a question, if you could answer quickly as we go to our conclusion now. We got a reprieve from a drastic increase in the unemployment tax last year, fortunately, but that measure only changed the rates for 2021 and ‘22. Do you think the Legislature should be taking action now to address another potential unemployment tax hike for local businesses?
Yamachika: I think the answer is yes, and I think they are. The question is how that’s going to be done. I believe the Department of Labor has put in a very technical bill to accomplish this. It’s tough to explain very simply, but it would basically allow the department to ignore the outflow of funds as a result of pandemic-related job losses.
Akina: Very good.
Yamachika: It would help, I think, states get the rate under control for employers, because if they don’t do that, we’re back in Schedule H, or something close to it, and then some people may see their unemployment tax triple.
Akina: Yes. Now, Tom, we’ve just got a few seconds left. Which tax bill should we look out for the most? Is there one that especially troubles you?
Yamachika: No. They all have some propensities, good and bad. Some are scarier than others. Like the individual corporate tax hike one was, I think, the scariest one, but I think that one has died for the moment. We just need to look out especially toward the end of session, when things that you thought were dead start coming back to life.
Akina: Those are zombies, I take it.
Yamachika: They’re Frankenbills, that’s right.
Akina: There you go. Well, Tom, thank you so much. I congratulate you on your ongoing work at the Tax Foundation of Hawaii. We really need you out there analyzing the bills as they are passing through the Legislature. You have a great day and get back down to the square building, OK?
Yamachika: OK. Great. Thanks, Keli‘i. Thank you for having me on the show.
Akina: Thank you. To my viewers, thank you for being here today. My guest was Tom Yamachika, president of the Tax Foundation of Hawaii. We’ll be back again on our next broadcast of “Hawaii Together.” I’m Keli’i Akina on the ThinkTech Hawaii broadcast network for Grassroot Institute of Hawaii. Aloha.
