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Could ‘less is more’ approach produce more tax revenue?

With Hawaii’s budget in shambles, taxpayers could be in store for a tax hike. But could there be another way to salvage the state budget?

That was the question co-hosts Tom Yamachika and Mark Coleman discussed with guest Daniel Mitchell on the Dec. 15 episode of “Talking Tax” on ThinkTech Hawaii.

The discussion sprang from a recently published article titled “The easiest way to increase tax revenue,” by Keli‘i Akina, president of the Grassroot Institute of Hawaii, who wrote that lowering taxes rather than raising them could yield more tax revenue.

Yamachika, president of the Tax Foundation of Hawaii and a Grassroot Scholar, said there is a substantial amount of evidence supporting the argument. However, he said it would be a “tough sell” in the short term, especially given the millions of dolllars in state funds diverted to wildfire relief in Maui that puts “tremendous pressure” on politicians to replenish revenue.

Coleman, director of communications for the Grassroot Institute, said politicians are reluctant to cut taxes, even during periods of economic prosperity.

He noted, “If the times are good, they’ll say, ‘No, we can’t do that because we have to look ahead for the future,’ or, ‘We have all these new ideas about where we want to spend our money.”

Mitchell, co-founder of the Center for Freedom and Prosperity and also a Grassroot Scholar, acknowledged the challenge of convincing lawmakers of the short-term benefits of cutting taxes. In the long term, however, he said high taxes and bad economic policy means lost revenue.

“It doesn’t take that many successful people moving out of your state,” he said. “But when it happens year after year, it just creates this wedge effect of lost income for the state and lost tax revenue for the politicians.”

In addition to lowering taxes, Mitchell emphasized the need for spending restraints —  the topic of his keynote presentation at a Grassroot event in 2022.

Hawaii already has a spending cap in its Constitution, but Mitchell suggested closing the loophole that allows the cap to be waived through a two-thirds vote. Additionally, he said tying spending growth to population growth, plus inflation and rebating any surplus to taxpayers — akin to Colorado’s approach — could “create a different political dynamic.”

“Every year [in Colorado], taxpayers are now expecting, ‘I want this money back.’ And it makes it very hard for politicians to say, ‘No, no, we’re gonna keep it. We’re gonna spend it on some of our buddies and our friends and our campaign contributors,’” he said.

If you would like to hear the entire conversation, click on the image below. A complete transcript follows.

Mark Coleman with Tom Yamachika and Dan Mitchell on “Talking Tax” 

Mark Coleman: Hello, everybody. I’m Mark Coleman, your co-host again today for the latest episode of “Talking Tax.”

I understand this is our last show of the year, so it’s the holiday season. You can see I’ve got my holiday season-color shirt on. 

But in any case, my co-host and the real man of the hour — or the half-hour, as the case may be for this show — is Tom Yamachika, president of the Tax Foundation of Hawaii, and the man you really want to talk to when it comes to tax policy in Hawaii. 

And we also have a special guest today, Dan Mitchell. Daniel J. Mitchell, founder and president of the Center for Freedom and Prosperity in Washington, D.C., all the way from Washington, he joins us today. We’re so very grateful. 

And he is also an expert on tax reform, as well as international tax competition, and the economic burden of government. We brought him out to Hawaii — I didn’t mention it, but I’m with the Grassroot Institute of Hawaii, comms director and managing editor — and we actually had Dan out here a couple of years ago to talk about spending caps and how to, you know, control spending in Hawaii.

But today, we’re actually talking about the flip side of spending. Or the other — taxes, we’re talking about taxes. You can’t spend if you don’t have money to spend. And the way they raise money around here is through taxes. 

So, the springboard for our discussion is a column that Keli‘i Akina, president of the Grassroot Institute, wrote this past week. It was about the easiest way to raise taxes. 

Hawaii’s economy, as the title of this episode indicates, isn’t doing so well. We had a $3.5 billion surplus estimated for this year at the end, at the beginning of, at the end of last year. But then the Legislature kind of blew through that like crazy. 

And now, we have a sluggish economy for reasons that are somewhat out of our control. And we had the event on Maui, which was a tragedy, and it’s going to be costing a lot of extra money here and there for the government of Hawaii and the counties to try to help them out over there. 

So, the question, so the point of the column, ultimately for Keli‘i, was: Well, how are we going to raise taxes to pay for everything? 

Coincidentally, the government, the state, is also going out to market right now, trying to borrow $750 million. And they put out a forecast saying, you know, sounding, making, putting on the rose-colored glasses, making it sound pretty good. But really, things aren’t looking so good. 

And what we’re afraid of — or what a lot of people are afraid of — is that we’re going to have to raise, that a lot of the legislators are going to look for ways to increase tax revenues by raising taxes. Keli’i’s argument, essentially, in the article, was that we might do better lowering taxes because there’s a lot of research that shows that’s a good way to do it. Kind of a less-is-more philosophy. 

And so, that’s one reason we’ve invited Dan Mitchell here to join us today. He is an expert on that topic.

But let’s start with you, Tom. What did you think that? What [were] your thoughts about that thesis of Keli’i’s that less is more, that lowering the taxes might be the way to increased revenue in Hawaii? Does the Tax Foundation ever look at that idea?

Tom Yamachika: Well, I mean, it has a lot of support in the economic literature. But I’m just kind of afraid that, you know, with politics at the state Capitol, the way it is, it’s going to be very tough for that argument to take root.

We, at the Legislature, we go and do our budgeting based on projections of the state economy that the state Council on Revenues puts out every so often, which is a board of economic types that is appointed by the governor, confirmed by the Senate and it remains kind of intact from session to session. So there’s a lot of continuity there. 

The forecasts have kind of gone south, you know, after Lahaina burned down, which is of course not surprising at all. And it’s kind of going to stay that way. And like, in order to fund some of the repairs in Lahaina, the governor this year had to divert, you know, many millions of dollars from other programs. 

And once the legislative session starts, you know, the constituencies behind said other programs are going to come and say, “Well, look, we need to be made whole, etc., etc.” And there’s going to be tremendous pressure to, you know, to get that revenue back. 

And certainly, if you cut taxes and you get some long-term economic effect, I mean, that’ll be a, you know, a good thing and the budget may balance eventually. But in the short term, that’s going to be a tough sell.

Coleman: In the short term, it is an election and that would make it a bit harder, I would imagine, also to raise taxes. But in the short term, we’re already the highest tax burden in the country.

Wouldn’t it? Would that be? Would you? Are you saying perhaps that instead of raising taxes, they would at least control their spending?

Yamachika: Well, that would be a viable alternative, yes. I mean, I think we ought to be, you know, putting pressure on our legislators to do that. I mean, we can’t as a government, be all things to all people. So, we have to concentrate on what we can do and what we can’t do, you know, we leave to others. 

Coleman: Dan, what are your thoughts on this subject? The balance between spending and taxes. And I should add to that, that the governor did cut [$1 billion] from the 2023 Legislature spending package, and it was still over the legal spending cap, as was the governor’s own budget. But he actually cut a billion bucks away from the budget, and we still are in this mess. 

And also, Keli‘i Akina, in his column, had targeted three taxes in particular to try to cut. One would be the state personal income tax, another one was the corporate income tax and then the estate tax. He said there’s others, but he thought those would be a good start. So, what’s your idea about this less is more, cutting spending, and those three taxes? 

Daniel Mitchell: I’m all in favor of having the lowest possible marginal tax rates on productive behavior. Have a low personal income tax, a low corporate tax. Heck, I actually like the states with zero income tax the most.

Having said that, I’m not sure that you can make an argument all the time, or even most of the time, that lowering tax rates raises revenue. I’m a big believer in the Laffer Curve. But the Laffer Curve simply means that when you lower tax rates, you get more taxable income. It then becomes an empirical question: Well, you lose revenue because of the lower rate, but you gain revenue because of the increase in taxable income. And which of those two things is bigger than the other? 

In some cases, like when Reagan cut tax rates significantly in the 1980s, we got a lot more revenue from rich taxpayers. Would lowering the marginal tax rate — and Hawaii does have a very high personal income tax — if you lower that by a point or two, would that raise revenue at least in the short run? That would be probably a difficult sell, but I don’t view that as a problem because good tax policy is one half of the equation. The other half of the equation is [to] have some spending restraint. 

Now, it’s kind of ironic talking to you guys out in Hawaii about this because, you know, normally when I’m speaking to an audience, I say, “What you need is a spending cap.” Well, you guys already have one. The problem is your politicians just waive it. You know, they say, “Oh, it doesn’t count for this year.” And you do that every year, year after year. 

So, maybe you need a spending cap, but instead of what you have — a 60% or two-thirds requirement to waive it — maybe you need 105% of the Legislature to waive it. That way it would actually be a real discipline. But yes, control spending, and I guess it’s good that the governor cut a billion dollars out of an ever-growing baseline of government. 

But obviously, more needs to be done to get spending under control. Because Hawaii also, by the way, not only do you have a high spending burden, a high tax burden, but your government pension debt is among the highest in the country. So, there are a lot of fiscal issues to work on.

Coleman: Well, Tom, as you know, that one of the other suggestions that the governor made last year — well, early this year, last legislative session — was to peg the personal income tax to inflation rate. We have like, I think we have 11 brackets. We have the second most brackets of personal income tax in the country. I think California is 13, I might be wrong about those figures, but we’re way … 

Yamachika: I think we have 12. 

Coleman: Yeah, 12. Thank you. You would know.

Yamachika: And the problem is, you know, many of the brackets are almost meaningless now because, you know, somebody who earns at the federal poverty line is already in the fourth bracket.

Coleman: Wow. 

Yamachika: So, you can kind of expect, right, because the brackets were enacted, I think, in the 1960s, which makes them a little bit dated. That kind of gets into one of your other issues and then that is, you know, what tax type should we be looking at? 

And, to kind of refocus a little bit on the personal income tax, I think is good because, when you look at how much revenue is produced by the corporate income tax, it’s not very much. And by the estate and gift tax, not very much — well, I mean, we don’t have a gift tax — so the estate and generation-skipping tax, that’s not very much. Those are two drops in the bucket. 

The two 800-pound gorillas in the room for our tax system are the personal income tax — not the corporate income tax — the personal income tax.

Coleman: Right. 

Yamachika: Because there’s so many more people affected. And the general excise tax, which is our equivalent of the sales tax. Now, the likelihood that people are going to touch the general exercise tax is very, very small. It’s just too dangerous because even a little bit of adjustment to the GE tax is many, many hundreds of millions of dollars. So, people tend to leave that alone. 

If lawmakers are considering like, you know, 50 basis-point or 100 basis-point increase in the general exercise tax, people are going to notice and people are going to start, you know, calling legislative offices, and they will be upset. Which of course is not the greatest thing to have happen in an election year, like you mentioned. 

So, let’s talk about the personal income tax, which I think is the lever with, you know — out of the three that were mentioned in the article — the one that has the most punch. And, I think, yeah, we really shouldn’t be taxing people who are at the federal poverty line. You know, having them in the fourth taxable bracket from the bottom is absolutely insane, as a policy matter. So, my recommendation would be at least to eliminate the bottom brackets. 

And yes, last year, the governor had proposed indexing, the brackets for inflation. A lot of, you know, most states do that; we don’t. We haven’t done that for many, many years. And all kinds of different excuses were given. I think the most recent one being, “Well, you know, our computer system can’t take it.” 

But that was, you know, but that was before 2000. Now the computer system is different and it can do a lot more things at lower cost. And it doesn’t necessarily mean reprogramming the entire system with a million-dollar price tag.

Coleman: So, it’s a good idea, but it’s not feasible?

Yamachika: It’s a good idea. But I think there’s going to be a lot of effort that’s needed to make sure that legislators understand what’s going on and buy into it. Last year, when the governor tried to do that, the speaker of the House came out and said, “Well, this is too complicated.” And I’m thinking to myself, “What’s too complicated?”

You look up, you know, you look up your income in a table to get your tax anyway. If the numbers in the table changed a little bit, how much more complicated is that? You’re doing the same amount of effort.

Coleman: Dan, are you aware of any other states, or countries even, that do this, index their income tax to the rate of inflation?

Mitchell: Certainly. The United States, we went to indexing back during the Reagan years and that eliminated what’s called “bracket creep,” where over time you just wind up being in a higher tax bracket simply because the overall price level increases. But there’s also something called “real bracket creep.” And that’s when your income goes up and you just wind up being in higher tax brackets. And then you’re facing higher marginal tax rates, so your incentive to further climb the ladder is a little bit diminished. 

I don’t know what the status is on other countries. I suspect most of them do index, especially since we had that horrible bout of inflation in the ‘60s and ‘70s. I suspect there was pressure in all countries to make those reforms. And then of course, almost globally, we had another bout of inflation just in the last couple of years. But even though we had that bout of inflation, I do follow international tax developments and I did not see much reporting at all about bracket creep. 

And so, I suspect that most countries do index, but I’m afraid I just don’t have that kind of information at my fingertips.

Coleman: Oh. Well, about the GET, what’s your thoughts about that here in Hawaii? It’s not really a sales tax, it’s a gross receipts tax. You know how it works, right?

Mitchell: Yeah, it is a remarkable tax compared to the normal sales taxes in most states in America. Now, of course, the normal sales tax in a state might have different items exempted, like groceries or clothing or things like that. So it’s not like they’re simple and pure revenue-raising mechanisms. 

But your general excise tax, if I understand correctly, you have a lot of what’s called “cascading” in that. Where as a good moves through the production process, it might get taxed over and over again. 

And so, it’s not the most efficient tax but it certainly, as was just mentioned, it’s a major revenue source for the state. And politicians would be very, very reluctant to do anything that curtailed their ability to generate that revenue because they want the money to spend so they can buy their way to re-election.

Yamachika: Yeah. That plus, when people talk about the general excise tax, they look at the nominal rate, which is 4%, and they go, “Oh my God, you know, amongst all of the states in the country, that’s pretty darn low.”

Coleman: Yeah. 

Yamachika: So, why don’t we get up there, you know, jack it up 100, you know, 100 basis points, 200 basis points. Get it on par with some of the other sales tax states. And that is, I think, a real fallacy because most sales tax states, they only tax tangible personal property sales and maybe a service or two.

We tax everything. Tangible personal property sales, sales of services, intangibles, interest, rent, lots of things that, you know, most sales taxes just leave alone. Our taxes, you know, are broader based than even the New Mexico gross receipts tax.

Mitchell: Tom, can I ask you, is my memory correct that there’s a problem with cascading with the GET?

Yamachika: Well, yeah, of course there is. All gross receipts taxes have a pyramiding problem. Ours tries to compensate for that by assigning a lower rate to, like, B2B transactions. So, instead of applying, like, the full 4.5% with, you know, with county surcharge, we apply only 0.5%. But that’s still, you know, that’s still cascading, that’s still pyramiding.

Coleman: And yet, we do have a lot of exemptions for the GET. I wonder, you know, a lot of people would like more. In fact, the governor was proposing more initially last year for the 2023 session for food and groceries. 

What’s your thought, Tom, about exemptions for the GET?

Yamachika: I think just like last year, with the current economic conditions, selling a GET exemption, even a small one, is gonna be very tough. You try to sell a big one, it’s gonna be DOA.

Coleman: But I was surprised because I mean, the general population, I would think, if you did polls, would say, “Yeah, we want a GET exemption for food and medicines and you know, whatever.”

Yamachika: Well, who wouldn’t?

Coleman: Right. So, why wouldn’t the politicians respond to that? Are they so concerned? Isn’t this where, like, they should be cutting their spending? What’s the problem here? Why do we have to pay such high taxes on necessities, so-called?

Yamachika: Well, I think the problem happens whenever you try to cut something, there’s a constituency behind it, and said constituency goes to the politicians and says, “You can’t do this!”

Like, for example, if you want to, you know, try to cut an environmental program, hordes of people go into the hearing and say, “You can’t do this, you know, got to save the planet,” and all that kind of stuff. 

You cut another program that, you know, subsidizes agriculture. All the farmers show up and say, “You can’t do this, we’re going to decimate our industry,” and so on and so on. There’s always a constituency and there’s always people who show up and say, “You can’t do this.”

Coleman: Well, those are people that would not want their exemptions taken away, right? 

Yamachika: That’s right. 

Coleman: But I’m suggesting maybe we should have more GET exemptions. I’m just trying to look at how we could increase economic activity. You know, going back to the idea of the article, there’s never a good time to [cut] taxes, if you ask politicians. And, you know, if the times are good, they’ll say, “No, we can’t do that because we have to look ahead for the future,” or, “We have all these new ideas about where we want to spend our money,” you know. 

Yamachika: Well, I think in our state, it’s been kind of more of the latter. Yeah, we have all these great ideas to spend our money. Like this centralized training hub for first responders in the middle part of our state. That’s one of the projects that got cut in that one billion dollar slice that the governor gave the budget last year. And there was a very powerful constituency behind that one. 

Coleman: Well, I’ll get off the top here for a minute. I’m constantly amazed at how many people in Hawaii — well, actually everywhere — but there actually is a prominent think tank here that all they ever talk about is raising taxes. Either that or spending programs, which obviously means, you know, you got to pay for it. And that idea going in Hawaii, that idea of having progressive income taxes, special funds taxes, tax credits, on and on, as a way to manipulate policy. 

They really believe that using the tax system is the best way to achieve our goals here. But if you do that, how do you actually lower the cost of living and increase opportunity and generate a friendly business climate? We have one of the worst business climates in the state. I’ll throw that out to you, Dan.

Mitchell: Hawaii’s problem is that people vote with their feet. Now, obviously, it’s easier to vote with your feet and move from California to Texas or to move from New York to Florida. But even still, people move in and out of Hawaii. And when you have one of the highest income tax rates in the country — not to mention a death tax, which plays in the minds of our rich senior citizens. 

And you know, it’s not just fiscal policy, by the way. If you look at the “Economic Freedom of North America” published by the Fraser Institute, Hawaii’s in the bottom five for overall economic policy. You look at the “Freedom in the 50 States” just published by the Cato Institute, Hawaii is in the bottom five of all states looking at overall economic policy.

And these kinds of things add up. It doesn’t take that many successful people moving out of your state, you know, maybe it’s only a couple of hundred a year. But when it happens year after year, it just creates this wedge effect of lost income for the state and lost tax revenue for the politicians, which sort of brings us back to what we were talking about earlier, Mark. 

Yamachika: As a matter of fact, our censuses have told us that we lose about 11,000 people a year and it’s been that way for the past few years.

Mitchell: And that adds up and it means lost revenue. So, it’s more evidence that there is a Laffer Curve that politicians should be paying attention to.

Coleman: Yeah. It always amazes me that this could go on for so long. It’s kind of like the housing crisis, you know. Not to switch gears here, but you know, what does it take to shake up the Legislature? The Capitol building — the square building, I think you call it, Tom.

Well, we’re coming close to the ending here, but about spending cuts. You know, Dan, when we brought you out here to Hawaii a few years ago, you talked about the spending cap, you know, a spending cap with teeth. And you talked about Colorado being a good example. We have a spending cap, but it has no teeth. 

What do you think about that now? And Tom, jump in if you’ve got any thoughts about that. Is there a way we can really bring the state legislative spending under control so that taxes isn’t always the big issue? 

Mitchell: What makes the Colorado spending cap — called TABOR, Taxpayer’s Bill of Rights — what makes the Colorado spending cap effective is that it limits tax revenue to population plus inflation. Anything above that automatically gets rebated to taxpayers. 

So, every year, taxpayers are now expecting, “I want this money back.” And it makes it very hard for politicians to say, “No, no, we’re gonna keep it. We’re gonna spend it on some of our buddies and our friends and our campaign contributors.” So, I think maybe if Hawaii’s spending cap also was modified to include a revenue cap with excess revenue going back to taxpayers, that might create a different political dynamic.

Yamachika: Yeah, certainly it would require a constitutional change. And even, you know, when Colorado did change its Constitution to adopt TABOR, there were lawsuits challenging it as an infringement on the Legislature’s power. But fortunately, the Supreme Court at the time said, “No, no it doesn’t. Taxpayers are king,” so … 

Coleman: TABOR, being the Taxpayer’s Bill of Rights. 

Well, gentlemen, happy holidays to both of you and to all of our listeners and viewers out there. I want to give a special thanks to Dan for joining us all the way from Washington, D.C. through the wonders of technology here. Have a great holiday. 

Mitchell: Great to be on the program, Mark.

Coleman: Thank you, Dan. Good to see you.

And go Bulldogs, right? I’m an FSU grad and he’s a Georgia Tech. He’s a — no, a Georgia grad — and they’re both facing off in the Orange Bowl in a few, a couple of weeks. And Tom, what was your alma mater?

Yamachika: Oh, I’m a Yale Bulldog. 

Coleman: Oh, wow. That’s cool! 

Yamachika: Yeah. So, I saw Daniel’s Connecticut license plate with, you know, “Go Dogs” on it. And I went, “Oh, must be Yale Bulldogs,” it’s blue also, right? Which is our color. 

Coleman: So, are you, by default, would you be for Georgia in the Orange Bowl? Because of their bulldogs?

Yamachika: I’m non-partisan in the Orange Bowl.

Mitchell: Spoken like a politician.

Coleman: Thank you both again, and thank you viewers again for being here today. Hope you learned something and enjoyed the conversation, and we’ll see you — this is our last show of the year — we’ll see you next year. All the best. Aloha.

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