3-22-23 Seth Colby, Luis Salaveria and Keli‘i Akina on Gov. Josh Green’s 2023 tax plan
Keli‘i Akina: I want you to know that your Grassroot is active in learning and applying the principles of influence. We want to do what it takes, not to stand at the outside and simply criticize, but to engage our public leaders.
So today I would like publicly to thank Gov. Josh Green, who has allowed two of his most significant staff members to come here today and to explain the Green economic plan.
We believe that it’s very important to have high integrity in everything we research and comment on. And so we want you to hear firsthand what these gentlemen have to say. Would you give a big hand to Luis Salaveria and Seth Colby as they come up to the stage with me?
I’ll be introducing them in a moment, but first, let me let our cameramen and others queue up as we prepare for our seminar. Team, are we all set to begin? Just need a cue from David Patterson.
David Patterson: I’m here.
Akina: Sean? Very good.
If you’ve been following the work of Grassroot Institute, you know we have a project called ”Why We Left Hawaii.” That chronicles the stories of people who have moved out of the state. Thousands of Hawaii residents have fled to the mainland over the past six years to escape Hawaii’s high cost of living. Statistics also show that even Native Hawaiians are moving out of Hawaii.
Did you know that more than half of all Native Hawaiians have left Hawaii and are living on the mainland now? And the fundamental reason is the “price of paradise,” the cost of living, everything from housing to taxes and so forth is rising.
That’s why Gov. Josh Green’s Green Affordability Plan is a welcome message from government. We actually commend the governor for making that a high priority, and that’s why we’re going to look at that today.
There are many aspects of the Green Affordability Plan that we praise, and we have published that praise and we commend the governor for a sweeping plan that Hawaii has not seen in many, many years, if ever.
At the same time, we have made suggestions — friendly suggestions — as to how the plan could be better. Critical suggestions, as fellow members of the state of Hawaii who care about our future.
We’re very glad that we’re able to have with us some of the governor’s key advisors today to help us examine that.
What exactly would the Green Affordability Plan do? That’s a key question that we’re going to answer today. And how much would it cost? Would the offset between taxes and credits actually work out?
I want to give these gentlemen an opportunity to put their case on the table, but at the same time, I want to invite everyone here to participate in a question-and-answer session so that we can really understand it.
Seth Colby — so glad you’re here with us today — is a tax research and planning officer, the tax research and planning officer with the Hawaii Department of Taxation. That’s a role that he’s held since 2017.
Prior to that, he’s spent several years researching economic development in Latin American countries. He also spent four years working with the Peace Corps in El Salvador. Seth did his undergrad work at UC Davis. He’s got a master’s and Ph.D. in economics from Johns Hopkins University. Give Seth a big hand and I will let you say some words of welcome.
Colby: Aloha. Thank you very much for having us, and I look forward to presenting the Green Affordability Plan.
Akina: We’re very grateful to Seth for being with us on the island of Maui yesterday for a similar gathering at the Maui Cultural Center. So, thank you very much, Seth. Appreciate it.
Luis Salaveria is the director of the state Department of Budget and Finance. That’s a position he took over from Craig Hirai in January. He brings more than 30 years of experience in the public and private sector. Before taking his position with the Department of Budget and Finance, Luis was senior director of government affairs for the law firm Ashford & Wriston.
And before that, from 2014 to 2018 — you’ll remember this — he was the head of the Department of Business and Economic Development here in Hawaii.
Luis is a local boy. He’s lived in Hawaii all his life. He graduated from UH Manoa with degrees in economics and political science, and in his new role as Budget and Finance director, he’s in charge of putting together the governor’s budget proposal.
We’re also grateful to Luis and his team for having worked with Grassroot Institute in providing us information on the governor’s plan before it was published. Please welcome Luis Salaveria.
Luis Salaveria: Aloha, and looking forward to having a wonderful and healthy dialogue with everyone here.
Akina: We’re looking forward to hearing from you.
This is going to be our format today. I’m going to invite Seth to speak for about 10 minutes, and in that time to take a 3000-page document …
… and explain it in CliffsNotes version.
Later on you can ask him for detail, and I think he understands this plan so well that hearing it from the horse’s mouth will give us a great understanding.
Then after Seth has done that, I want to ask Luis to continue for another 10 minutes or so to help us understand the feasibility. We’re very concerned about the cost of the tax plan. Does the state really have enough money this year, and in future years, to provide a tax reduction? Is this going to work?
After that, I’m going to ask my own questions of these two gentlemen and then open it up to all of you, so take some notes and jot down your question because we’re eager to have you participate in the question-and-answer.
So right now, please give a big hand to Seth Colby again, and the microphone is yours.
Could you kind of talk close to it?
Colby: Yeah. OK. Aloha everybody. It’s a pleasure to be here and to present this very ambitious plan by the governor.
So just to give you a little bit of more background about who I am, I am the tax research and planning officer, and I manage the Tax Research & Planning Office. There is an office within the Department of Taxation that is not really … Yeah. OK. Is that better?
Colby: OK. Perfect. Thank you for the feedback.
There is a[n] office within the Department of Taxation that does most of the economic analysis on taxes. We have access to all the tax records in the state, which is some of the most richest economic data that we have, and what we do is we use that data to produce statistical reports. We consult with the governor, legislatures, other decision-makers about how their proposals and we provide economic analysis on that, right?
So we work a lot with macro-economic forecasting and we work a lot with the Legislature. So, in that capacity, when the governor was elected, one of the major things he wanted to do was come up with a tax initiative, right? And what happens oftentimes is, a Legislature, or in this case, the governor, comes and says, “These are my priorities. This is what I’m thinking about. These are my priorities. What do you think?”
And then we sit down with them, and then we help them think things through, and we provide a little bit of robust economic analysis on that.
Over the course of that dialogue, the governor came and proposed the plan that I’m about going to present to you today, which is affectionately known as GAP, the Green Affordability Plan. It is not an environmental plan. It is in the name of Gov. Green. so that’s what I’m going to be doing today. And I’m going to go quick. I mean, I’ve been given now probably nine minutes to overview one of the most …
Akina: Eight. Eight.
Colby: OK. One of the most comprehensive initiatives in the history of the state. But essentially what we’re trying to do is we’re trying to alleviate the cost, some of the cost burden that Hawaii taxpayers face.
One of the things that … a huge source of cost of living for most people is our taxes, right? And so what we’re doing is we’re trying to have a strategic way of disseminating taxes in a way that’s 1) supports economic or families that are struggling, and B) economically robust.
So right now, what you see is, that is a chart of the number of tax credits along different income spectrums, right? So the part on the farthest right — my right, your left — is the lowest end of the income spectrum. And on the right is the highest end of the income spectrum. And what you’ll see, those are existing tax credits that focuses on social welfare.
What you’ll see is most of our tax credits go to the lowest-income individuals, which is appropriate, right? We have a social safety net and we target that.
However, there’s large concern about what a lot of people in Hawaii call the ALICE population, which is ALICE, asset limited, income constrained [and employed], which are basically working families, right? That don’t qualify or they’re above the federal poverty line, but are having a hard time.
Now, you can imagine if you have a family of four and you make $50,000 a year, you’re above the federal poverty line, but it would be very difficult to educate your children, rent a house, do all that. So what we’ve done is the governor and we worked together, constructed a tax plan that would address this.
And by the way, this is a very long presentation. It’s comprehensive. I’m going to give it to the Grassroots Institute so you guys can all have this. And I’m going to skip over a bunch of slides in brevity, but you can use this as a resource.
And essentially what we’re doing is we’re focusing on four different segments. One, we’re focusing on the people at the lowest-income quartiles, the people who are receiving the tax credits are going to receive more tax credits under this plan.
Then you are going to … actually, we’re going to offer more income support through tax initiatives through this to the people in the middle income of the spectrum that are really struggling here in Hawaii.
And then they’re going to do something that’s slightly different but it’s very important. What I think it’s called … it is through the child and dependent care tax credit, right? And this really focuses on childcare.
So, one of the major issues for all families is childcare has gone up much higher than the average cost of inflation. And it is a huge determinant, particularly for women entering into the workforce, and so … or staying in the workforce.
So, for example, I’ll go over this a little now since I’m going fast is, you know, we’ve all heard the statistic that women make 70% of men in terms of income, right? That when you look at somebody it’s not normally, according to the studies, it’s not normally because a boss looks at a woman, or looks at a man, and decides to pay them 30% less. What happens is a woman — typically it’s women, it’s not always women but typically it’s women — when they have children, they drop out of the workforce or are more likely to drop out of the workforce.
So when, during COVID, female labor participation decreased. Now if anybody has a seven-year gap on their resume, that’s going to hurt their overall professional career and hurt their overall lifetime earnings. So this is an attempt to really encourage women and at least give the women — and not all women, it can be men too, right? So I want to be gender-neutral but just traditionally it is, because of our social norms in our society, often it’s females, that really encourage labor force participation.
And so if we can increase labor force participation within Hawaii that would really boost economic growth.
And then we’re boosting helping our teachers through their supply credit, or teacher supply credit, so they can buy supplies for their classrooms.
Also, this is a list of all of the tax initiatives, pretty comprehensive. It’s also it’s about $315 million. To put that in perspective, that was about the cost of the constitutional refund that went out last year. So we can talk more about that going forward.
Now, I’m going to skip about all the way down here to see this graph that we saw this again. Now, what happens after … if the entirety of the gap plan was passed, it’s this, right? So what you see is these are all the individual tax credits in all the individual initiatives and what you can see and they’re color-coded by the different initiatives, right?
So I just want to highlight a couple of things that are going on there. One is the people in the lowest income end of the income spectrum are benefiting immensely, right? Their income support through the tax system goes up by four, a magnitude of four.
And then what also is happening is we are supporting a lot of people in this very difficult zone to be in Hawaii. Families afford. And this is for joint filers with two children.
The people in the kind of, like, the middle income of the spectrum, you know, the people who are making between $50,000 to $150,000 jointly, right? So that would be two teachers, senior teachers, who make $150,000 collectively, right? So we’re not talking about high-income earners, but we are really supporting these people.
So, and the other thing I do want to highlight is different tax credits and different elements support different aspects of the income spectrum, right?
So one of the things that has been levied against or one of the critiques of the Green Affordability Plan is it’s very complicated.
However, Hawaii’s economy is incredibly complex. We have … 1.4 million people live here, 750,000 taxpayers, and each one of you is a taxpayer. And you have an individual story, right? So you need to use a number of different policy levers to get to what different societal elements. And that is what the Green Affordability Plan does.
I think I’ll stop there and go to the next slide. So what you can see on this slide is this is a monetary impact for a family of four. If they were, the Green Affordability Plan in its entirety would pass. So what you see is, these are quintiles, income quintiles. And what you can see is for the lowest two quintiles, they’re receiving more than $2,000 extra in income a year, right?
So that is an additional paycheck for these people. This is significant income support, like life-changing income support. What you’ll obviously see is everybody in Hawaii, every single taxpayer, will see some kind of tax reduction in this plan. However, it is focused on certain elements of our society, right? So the lower the income, usually especially proportional to their income, the bigger the tax savings.
This is just another way of showing how progressive our tax system is currently. And this is for all Hawaii taxes, right? This is for the GET. This includes the individual income tax. And what you see is lower-income people, this is a percentage of their income, pay less, and then it goes up and to the right? And this is what we expect. This is what in public finance goes “ability to pay.”
There’s generally an assumption that people with higher incomes have more ability to pay a greater percentage of their income to support societal needs. And that is exactly what we have in Hawaii.
However, I’m showing two different things: the impact of two different policy proposals that are on the docket for this year. One is exempting food and drugs from GET; that is the dotted line up top. So you see that initiative would benefit Hawaii taxpayers a little bit, but the Green Affordability Plan is much more effective. Why is that?
That’s because when we’re talking about individual income tax, residents pay 92% of our individual income tax, whereas the GET, 30% of that is paid by non-residents. So we already have something right there.
Again, this is just showing the impact of the different plans in absolute terms, right? So you can see on the lower end side that you’re going to start to [unintelligible 00:27:57], They would actually get more money from the government and they’re actually paying it, but it would benefit every single tax-income level.
So just two more slides and I’ll be done. I know I’m making you nervous already.
So, like, as an economist, I just want to help share with how I think of the plan, right? Because there’s different elements of this plan.
So first of all is updating the tax code, right? One of the things that we are doing is we are … Hawaii is one of the few states that does not index their income tax to inflation, right? So at the federal level, you have the thing called COLA, which is a cost-of-living adjustment. And every year you do that. Hawaii does not have that.
So what happens is, like, I work for the state, right? So sometimes I get a cost-of-living adjustment. It’s not a raise; it’s a cost-of-living adjustment. But I get bumped up into a higher tax bracket every single year, right?
And that is not the intention of the cost-of-living adjustment, right?
So one of the big initiatives here is actually creating an indexation link that would allow our tax code to adjust to prices over time. And now this has a small impact year-to-year because most people get the cost-of-living adjustment of 1[%] to 2% percent. But over the next 30 or 40 years, it’s quite significant.
I would argue it’s one of the most revolutionary parts of this bill.
Just to put this in perspective, before they had the highest they inserted the 9[%], 10[%], 11% income brackets in the state of Hawaii, 8.25]%] was the highest income bracket. For a single filer that goes into effect at $48,000.
Now, most people wouldn’t think $48,000 is correct for the highest income brackets. So how did we get there? The answer to that is in the 1980s, $50,000 was a really … it was a great salary. But they lagged in updating all those things. So one of the initiatives is we’re going to put a … we’re going to insert this so our tax system can adjust to prices over time.
We’re also going to update the standard deduction and the personal exemption, which we can talk about this. You know, there’s a million different levers within the tax code, and we can all … you can get to the same point doing different things, but we’re going to update that.
Then there’s also the redistribution part, right? And so this is a political choice, but, you know, Hawaii’s a very progressive state and they really care about people who are struggling in the lower-income classes, right?
So these tax credits — the food/excise taxcredit, the EITC, which is the earned income tax credit, the renter’s credit — these are designed to really support people who are in need most. Then you have the child and dependent care credit, which I talked a lot about, which is really focusing on a sector that really reflects changing norms in societal behavior within our society.
So we have higher levels of workforce participation by all members of the family in figuring out how we can support those people as we make that transition and more and more people are working in the workforce.
And then we’re focusing on teachers.
So those are kind of like the broad elements of that.
I just want to share where the Green Affordability Plan is in terms of the Legislature right now, right?
So all these elements were included in one bill proposed by the governor in HB1049. However, as they’ve gone through the committees, they’ve been divided up into three different bills. One is HB954, which has the EITC, the earned income tax credit for … it doesn’t say how much right now, but it’s in there, as well as the standard deduction, personal exemption and inflation indexation.
Then there is another bill for the food and excise tax credit, which is starting to be geared less as a credit, but more as a one-time way of, like, distributing the constitutional refund over and over again to people below a certain income threshold.
And then the third is HB1049, where they kept the rest of the tax credits.
So that is a super whirlwind view of the Green Affordability Plan. I welcome all of your questions in the future. Like, I intentionally left a lot of things open, and I am happy to discuss the specifics going forward.
Akina: Thank you, Seth. I really appreciate that concise presentation. Thank you.
And we know that you were put under the gun in terms of the amount of time. Later on, I’m going to invite all of our audience members here today to ask whatever questions they have.
But first I’d like to hear from Luis on the feasibility of this.
Luis, we’re looking at something that is supposed to balance tax credits — a good number of them, admittedly from Seth, a bit complicated, along with tax deductions. And the bottom line question is: Does the state over the next several years now and in the future, have enough money to result in that net savings to the individual taxpayer?
And one thing I’d appreciate it if you’d address, you come into your office at a unique time in Hawaii’s history, one in which our legislators are using a term that we don’t really like to use that much at Grassroot Institute, but many of our legislators are saying we’re facing a record surplus. We have all of this money, we’ve got $2 billion available to us.
Now, how feasible is it to regard that money as a surplus? How much is the Green Affordability Plan relying on it? And do you have any concerns about that as well?
So just to be concise, what I’m asking, I’d appreciate it if you address what Seth has presented in terms of the feasibility.
Luis Salaveria: Thank you, Keli’i, and again, thank you, everybody, for the opportunity to talk about this very, very ambitious plan. And to start off, yes, it’s a very unique particular situation.
The last time I was in this role was in 2010, when I was the deputy of the Department of Budget and Finance, and back then we were facing a budget deficit of negative $200 million when we were coming in.
And now I come into the particular role, and there’s an ending balance of about $2 billion. And so the terminology “surplus” insinuates that there’s no need for that money. I like to use the term “ending balance” because there’s absolutely a significant amount of need that that money can be used for, whether it’s in government service, whether it’s providing the type of tax breaks that is needed for our residents, and bringing down to essentially the cost of living for everybody in the state of Hawaii.
So to answer the question on whether or not this can be afforded: Simply, yes.
In fact, I will go as far as to say that we can’t afford not to do it because really, what we’re sitting on right now, are unhealthy ending balances.
When you’re growing ending balances, if you own a business, and you see that you’re just sitting on cash, and all you’re doing is sitting on cash, you’re not putting that money to work, whether it’s in increasing government services or whether it’s providing tax relief.
It is not the intention of government to sit on cash. Because that really means that we’re not doing the public service that we should be doing, and that is being fiduciary responsible to the people of the state of Hawaii.
So that’s my very short answer on whether or not we can afford this plan or not.
Akina: Well, I appreciate your brevity. So I’ll use some of your 10 minutes and kind of follow up on that just a little bit. I’m not sure that I heard from you precisely how the Green Affordability Plan is going to pay for itself. For example, are the governor and the Legislature looking at tax hikes to pay for it, or are they thinking of the estimated surplus? What was the alternative word you use for surplus?
Salaveria: Ending balance.
Akina: The estimated ending balance would cover the cost?
Or are they perhaps thinking that a tax cut might pay for itself by generating greater economic activity as businesses put their money back into investment and the economy improves and so forth?
So can you kind of parse out exactly how that revenue will be generated to make this very ambitious plan pay for itself?
Salaveria: Sure. And again, in kind of keeping it relatively light, not going into, like, you know, the nitty-gritty of what the financial plan was like, if you look at the financial plan, the financial plan is a six-year projection that the state uses in expected general fund revenues. That is not a number that we come up with. That is a number that is provided to us by the Council on Revenues.
So when you look at that projected growth of the financial plan, when we first started and when we first came into the administration, we were expecting — even with the initial budget that was proposed — an ending balance for the current fiscal year of about $1.9 billion.
That was going to grow to $2.8 [billion], then $4.2 [billion], $5.8 [billion], $7.6 [billion], $10 [billion] and then $12.6 billion by the end of the financial plan.
Granted, we only budget in two-year cycles. That’s the way, you know, the Legislature operates and that’s the way the government funds it.
So we have an opportunity at this time and at this juncture to make these kind of adjustments into our tax structure and our tax code that can basically live on for as long as we want it to, you know?
There are structural changes that we’re making to the tax code, such as doing the inflationary index, which I think Seth really explained very easily. But then there are also credits — credits that, at some point in time, if we don’t need it, maybe it’s not necessary anymore, but if we do need it, we can continue to keep on going forward, you know?
There are several different, like, government financing principles that come to light when it comes to, you know, tax credits, subsidies and every forth. Everything starts off as a credit where it becomes essentially something that you’re trying to do to support or to incentivize a particular behavior in a particular business.
That credit or that incentive becomes a subsidy, and then, at some point in time, maybe that subsidy turns into an entitlement. We never want to get into a position where people feel that they’re continually entitled to a particular thing because what we want to do is really just lower the cost of living in the state of Hawaii.
If we can start doing that, and if we can start creating much more discretionary income amongst individuals, especially that ALICE community there, that’s the kind of economic activity, that’s the kind of expenditure and productivity that we want, in order to grow the economic pie in the state of Hawaii.
So as the plan currently exists right now, there is no better, more opportune, time to actually take a look at our current tax code and make these kinds of adjustments going forward.
So, because we budget on two-year cycles, every year that you delay looking at making these types of adjustments, there are other things that the state has to do. There are going to be other expenses that are going to keep on coming forward.
You know, we have collective bargaining adjustments that need to get factored in everything going forward. Whatever you do, when you’re looking at the financial plan over a six-year period, you’re thinking about all of the different things that you’re going to have to spend for — not just in this current year, but essentially in the next four years after the current budget cycle.
So what we want to do is, basically, take the opportunity while we have it right now, make the adjustments to the tax code, and get that statutorily included in our laws.
Akina: Thank you, Luis. Seth, you want to add to that?
Colby: I think it helps to provide some background to the story and the whole story is COVID.
Colby: So, prior to the pandemic, our … so tax revenues make up roughly 50% of our budget, right?
Akina: Yeah. Yes.
Colby: Right. So prior to the pandemic, we were collecting about $7.2 billion. This year, we’re projected to collect $9.8 [billion]. So it was a 30% — and we had a little dip — but there was a 30% increase in tax collections at the level of the state, right?.
So I feel like there’s a lot of, like, just general feeling, which I totally get, which is how … we don’t have enough money, like we have raised taxes, like, the money has to come from somewhere. But the pandemic really changed the fundamental aspect of why the budgetary thing.
And this is not unique to Hawaii. Every single state is dealing with how to deal with a huge budgetary surplus. And so that is why it’s a different game than it was prior to the pandemic.
And I think a lot of people — even the Legislature — a lot of people have not internalized how much extra money the states, and all states, are receiving as a result of the pandemic.
Akina: I think we’re going to want to ask you something about that later on. But let’s go back before we get too far away from what Luis said.
Seth, I’d like your input on this. Tax policy, as all economic policy has a psychological aspect to it. It affects human behavior. And some of the concerns people have expressed about this Green Affordability Plan is that it may be subject to something called “tax cliffs” or “benefit cliffs,” where people reach a certain threshold and then they’re incentivized to stop working, to work less, in order to enhance their bottom line receipt of funds.
Now, has that been factored into the tax plan for the Green Affordability Plan? And how would you address that?
Colby: So, at the very beginning when we, you know, this plan was designed in two weeks, and at the very beginning there were tax cliffs, but after thoughtful feedback from the UH economic professors and other people, we addressed those. So there are no tax cliffs in the plan anymore. So basically, the way you avoid a tax cliff is you have a gradual rollout, right?
So, you know, if you get $200 of tax credit when you make $50,000, we don’t want to take all $200 away from you if you make $50,001, right? So what we do is instead of getting the person who makes $50,001, we’ll give $199. So there are no tax cliffs in this plan.
Akina: I’d like to chat with you about that a little bit later on, and I appreciate the fact that you’re sending it to us to look at.
But, Luis, let me get back to you. In places where we have studied various tax credits, they’re oftentimes susceptible to fraud, or even to just confusion amongst individuals, so that they’re ignorant of the advantage that they can take and so forth. How would that be handled with the Green Affordability Plan?
Salaveria: You know, interestingly enough, when you do make such significant changes in tax policy and in the tax code, yes, you’re going to have instances where individuals will try to take advantage of it.
But 1) it shouldn’t preclude us from trying to make those changes anyway; the compliance and the enforcement of … or the enforcement and ensurance of compliance with the tax code is just something that just needs to happen, regardless whether or not you make changes or if you keep it the same.
But for us going forward, I think, you know, when we make these types of changes, what we need to do is we need to communicate it better to the general public. We want people to kind of understand, you know — even when we were kind of debating this thing, and Seth and I … and he’s been a consultant, he’s not giving himself enough credit for putting together the most comprehensive plan that the state has ever kind of embarked on in taxes, like, literally, in two weeks and stuff.
But how we communicate this out to the general public. How do we tell people like, 1) Do you want to wait till you actually file your taxes and just get a larger tax, you know, tax rebate? Or do you 2) want to increase your withholding so you get a larger paycheck every, you know, every time you get paid?
So I think, 1) fraud, I hate to say it, fraud’s going to happen when fraud’s going to happen. I mean, if somebody wants to rob your house, they’re going to try and rob your house.
But it shouldn’t stop us from trying to make the changes to the tax code.
But to get people to understand how these changes are, and, you know, it’s not a plug for TurboTax, but if you use TurboTax, these adjustments and these changes will probably already be in the program when you actually start filing your taxes next year.
So I think that, you know, that we gotta give people a little bit more credit and, one, we also have to be better at communicating how people can utilize these credits to ensure that they get a larger paycheck.
Akina: Thank you. Another concern — and I’ll direct this to Seth — is what’s going on in the economy. From a consumer point of view, we’re concerned about the cost of housing. We’re concerned about the Fed and the rising interest rates.
Bottom line, there are a lot of economic forecasters who are talking about the looming recession. And that’s not just going to affect us as consumers, it affects us as taxpayers, both businesses and individuals, so that that will affect the revenues of the state.
Seth, if I could ask you to use your crystal ball as an economist, tell us what to expect in the economy and how that will affect the affordability of the Green Affordability Plan.
Colby: Sure. OK. So the way economists think about the future is they think about the future in terms of probabilities, right? So, yeah, Korea might send a nuclear bomb over to us, but what’s the probability of that? And if it’s true, then why aren’t you guys taking money out of your 401ks and everything right now, right?
So we do expect there are things that we do not understand, that we’re in a very precarious time in terms of financial fragility, in terms of our banking system, in terms of inflationary period. We’re also seeing this huge boost in the … we can see a huge boost from artificial intelligence in terms of productivity. We just don’t know, right?
So what we as economists do is we put all those things down into probabilities, and then we sum those all up and we come up with a forecast. The consensus forecast of most economists is for a mild recession in the United States. How does that translate to Hawaii? We expect an even more mild recession here within Hawaii.
Why is that? One is because a lot of the industries that are being most severely impacted are relatively small and not big parts of the Hawaii economy. We are also, the return of foreign visitors is going to mitigate some of that impact. So that’s what we’re doing.
In terms how that affects affordability of the Green plan, I would defer to Luis on that because B&F [Budget and Finance] is in charge of doing stress tests.
Salaveria: Yeah, so to Seth’s point, we are constantly looking at the financial planning. We’re constantly looking at the ending balances. We’ve gone as far, and we were actually even projecting, you know, earlier when the Council on Revenues met in January, we thought that they were actually going to go lower because of the constitutional rebate that happened last year, which actually costs more than the tax plan right now.
That constitutional rebate in the financial plan actually cost $328 million. And if I’m not mistaken, the Green Affordability Plan in its first year only costs $312 [billion] or $315 [billion]. So we are constantly stress-testing the financial plan. The most recent Council on Revenues update did make some adjustments to, you know, the overall balance.
So now our overall balance — assuming everything that the governor in the Green Affordability Plan goes through, assuming a $500 million, you know, sock-away into the emergency budget reserve fund, assuming a billion dollars worth of additional funding for the rental housing trust fund and the dwelling-unit revolving fund in order to build affordable housing — we are still within the parameters of where the financial plan should be.
A structurally sound financial plan should be approximately — carryover-wise, when you look at hard reserves and your carryover balance — about 20% of your general fund revenue each year. So if you look at where we’re at right now, we should be probably carrying over, at any given point in time, $2 billion.
Right now we have $1 billion in the emergency budget and reserve fund. Gov. Green is proposing to put another $500 million into the emergency budget reserve fund, and then we can start moving, including all of the things and the Green Affordability Plan that we have right now, into an ending balance of around $500 million.
Then you get to having a very structurally sound and mindful financial plan for the state of Hawaii. And that’s what we’re striving for right now, Keli’i.
Akina: Well, Luis and Seth, thank you very much for the presentation. I think you’ve laid it out clearly where the governor’s plan is.
Akina: I’m sure many of you have questions, and I want to invite you to come up to this microphone over here, if you would, so that your questions can be recorded as part of the program.
And as you’re walking up, may I invite you, please, to cooperate as our speakers have, by being concise and direct. Please, no debates, no speeches, but questions, if you would just come straightforward and ask your question, introduce yourself and then ask your question, we’ll have time for everyone who can do that, and I appreciate it very much. Please introduce yourself and ask your question, Aloha.
Carl Choy: Carl Choy. So you talked about a financial plan, can you remind me how much-unfunded liability would be there in $30 billion?
Choy: So this financial plan doesn’t consider $30 billion of debt or unfunded liability?
Salaveria: The financial plan assumes that we are continuing to amortize the long-term liability of the state of Hawaii by making our annual required contributions. So just like a mortgage, so what happens is and …
Choy: But that’s not current, right? You guys are underfunded by like what, 30% to 35%?
Salaveria: We’re underfunded — but the ERS, the pension, the state’s pension, is basically, yeah, it’s a 65% funded ratio right now.
Choy: So even if you make your annual contributions like you’re supposed to, you’re still going to be 35% underfunded?
Salaveria: No, that is incorrect.
Choy: How are you going to catch up?
Salaveria: The current pension accumulation as well as what we are contributing in our annual required contributions includes a paydown of the unfunded liability. So what we do and what the unfunded … it’s a mortgage, essentially.
We are paying more than what is expected to just pay out. We’re paying the pension accumulation for the people that are currently receiving pensions. We’re also paying for the individuals that are currently employed and their vested interest that’s going forward. And we’re also paying down the unfunded liability portion that still needs to be made up.
And here’s the thing, like when it comes to the ERS, and even the EUTF, the EUTF back in 2010 had zero corpus. It had a zero corpus. We were a “pay go.” That means every retiree, it doesn’t matter, we were paying their pension, and we were not starting to basically put money aside so that when that individual retired, that the corpus of the EUTF would just pay for their benefit going forward.
Now we have about $6 billion in that corpus that started back in about 2014. And so what the state is trying to do and what the state is doing very, very well, is actually starting to pay down that unfunded liability.
But we can’t pay for it all at once. That would be a little silly actually. So what we got to do is we have agreed, and the rating agencies of the Standard & Poor’s, the Moody’s and the Fitches of the world, understand, and this is not unique to just Hawaii, this is every state. Because one, if you — and this is very long-winded answer, but this is something that I’ve been involved with very, very much — is that when you look at medical cost trends, right, you have to cover those medical costs for that retiree going forward.
So you need to start socking money away now. And that’s what we’re trying to do. We’re paying for the retirees that are there. We’re paying for the vested interest of an existing employee that’s not a retiree yet. And we’re also paying down the unfunded liability portion of that benefit.
So it is included in the plan. The paydown and the amortization of that debt is included in the financial plan.
Choy: Just one quick question for Seth. Can you explain the economic theory of spending more money … instead of reducing the cost of inflation and living?
Colby: OK. So a couple of things. We’re not spending more money, right? Either the state’s going to spend the money or you’re going to spend the money, right? So inflation is about creating money and the state does not have the ability to create money. That is the role of the federal government, the Federal Reserve. And because we are a balanced-budget state, we cannot create more dollars than exist.
So, like, I think it’s a really great question, but it’s a really confusing question because it’s one of the things that, like, there’s certain things that, like, as a state we need to focus on. And there’s another thing that the federal government’s going to focus on.
Inflation is like, it really is, you know, like, apart from just sending out like tons of checks to everybody and then going into debt, which we can’t do because we’re a balanced-budget state. It’s, like, inflation really is an issue for the state. That’s a federal issue.
Akina: Thank you. Just a quick follow-up on the earlier question on unfunded liabilities. If we actually calculate at Grassroots Institute unfunded liabilities beyond just the ERS and EUTF. There’s a huge amount of infrastructure and so forth, and an economic organization here in Hawaii looked at a figure of $80 to $100 billion.
But putting that aside, just a very quick question. Do you know how much would be … how much we have to pay each year in interest on the your lower [unintelligible 00:56:49] $32 [billlion], $35 billion in unfunded liability?
Salaveria: I’m glad I looked up this question earlier.
Akina: Just a quick response.
Salaveria: So the quick response. Debt service and what we pay for in, like, our bonds. Our bond payments are approximately $1.3 billion a year — that’s the interest that we pay on government bonds. But then we have fringe costs. And these are the pension accumulations, our EUTF. That amounts about $2.3 billion per year that we pay.
So, if you look — and these are general funds — so, if you look, if you’re making $10 billion a year in revenue of general funds, a third of that, over a third of that is literally going to fix cost. So your ability to be discretionary kind of starts to narrow when you start including all of the different other operational expenses that you’ve got to cover.
Akina: Thank you, Luis. We have another question here.
Rob Burns: Two questions. One is [unintelligible 00:57:45] though this information [unintelligible 00:57:48] in the last two weeks. We could have it during the [unintelligible 00:57:52] because it’s hard to see that way. So maybe next time you could bring some [unintelligible 00:57:56] Number two, there’s a —
Akina: Thank you. We’re responsible for that at Grassroot. That’s a good suggestion. Go ahead.
Burns: OK. Second of all, there’s some states in the Union that are in the black. It seems like all the blue states are in the red. A lot of the states that are in that red are not. So I was wondering, do you guys ever study the reasons why these states are in the situation they’re in?
Akina: Thank you. Good question.
Salaveria: I’m going to attempt to answer this question in a nonpartisan way. So if you look at the particular structures of other governmental budgets, and I’m going to use the example of unfunded liabilities, and our commitment to pay for a vested interest and a vested benefit.
By Constitution, and by the Supreme Court, we must pay them. There are other states out there that can change the retirement benefit of somebody that has already had a vested.
That actually ends up reducing, that fixes their balance sheet. They can go in and they can make adjustments and basically say, “You know what? We were paying you $2,000 a month, we’re going to only pay you $1,000 a month now going forward.”
That’s a wonderful … As a finance person, I would do that, but I am guided by the states and laws of the state of Hawaii, and I don’t have that at my disposal. So there are different triggers and levers that other states have that we don’t have here.
Akina: Thank you very much. Next question. Mark. Thank you.
Mark Monoscalco: Hi, my name is Mark Sokol and welcome. Thank you for coming today. I’d like to ask a question of both of you.
So I’m really confused and I don’t mean this to get back to you that it’s inappropriate or complicated. I’m OK with that for the answer. But I don’t understand how we can shut down the economy for 18 months and now we’re generating more revenue than before the pandemic.
Could you just give us a general overview of how we got into this situation?
Colby: Absolutely. So several things. We shut down one aspect of the economy that was very important. However, the federal government engaged in high levels of fiscal stimulus. So essentially, it said, “You don’t have to work for two-and-a-half months.” It gave a quarter’s worth of the country’s GDP back to the citizenry. So that really tide[d] us over.
And so what you saw through transfer payments is, incomes actually increased during the pandemic. And so our income tax was greatly offset by the GET. Now, that’s not to say our tax revenues didn’t go down, but they just didn’t go down as much. So it had a lot to do with the federal interventions.
Salaveria: Just to add on to Seth. I think during COVID and during that period of time, on average, the state usually brings in about $3 billion worth of federal transfer payments per year. So you figure during those three years, that’s about $9 billion that the state would have got; $22 billion worth of federal transfer payments came in during that period of time. More than double.
Colby: And also they provided explicit budgetary assistance to the states, which we never usually get.
Monoscalco: Are we depending on that to continue?
Salaveria: No, we’re not. No we’re not. Absolutely not.
Monoscalco: So now just our natural growth in revenue has exceeded all the stimulus money that was coming in from the federal government?
Salaveria: Yes. Sorry.
Colby: No, go ahead.
Salaveria: Sorry. There are a couple of things that did change, even prior to the pandemic. Prior to the pandemic, the state used to give the counties a distribution of the transient accommodation tax. Prior to the pandemic, the state removed that and gave the counties their own ability to increase the TAT. And now the state ended up covering that. And that ended up to a tune of about almost about $150 million more that the state was getting by making that particular change in the statute.
So there were different things that happened during that period of time. And now, we’re coming out of the pandemic. Tourism is kind of reaching pre-pandemic levels. And now you have this extra infusion of money that wasn’t there prior to the pandemic that’s going into the general fund. So yeah, there is growth that’s happening.
Akina: Thank you.
Monoscalco: I do have one question for you. You mentioned our beginning balance — ending balance — being a significant amount in cash and also the amount that we’ve saving for retirement funds. Where is that? Is that in like a Silicon Valley Bank account?
Salaveria: So the ERS and you know, I invite you to take a look at their web page and take a look at the way they do it. They have a very– and I am a trustee. Their investment strategy and their investment portfolio is extremely complex. Much more complex than my simple TD Ameritrade account that I do on my phone from time to time.
But their portfolio exists in many different types of asset classes. And it’s also developed in such a way in order to mitigate risks because the ERS’s, I guess, responsibility is for a 7% return on investment each year.
You know, as anybody that has their own investment portfolio, some years you could have 15, some years you could have two. But for them, because there’s a requirement for cash flow in order to pay for pension payments, they got to keep it in a very, very narrow band. And that’s what the portfolio is set up to.
But I don’t have the individual details, but I can tell you right now whatever it is, they are extremely protected against major shocks.
Monoscalco: Thank you.
Akina: Well, thank you very much. We’ve got about five minutes and I would like to fit everyone in. So let’s do a rapid-fire question and rapid-fire answer.
Mark Coleman: OK. Well, Mark’s question was basically mine too: Were’d all the money come from? But isn’t inflation part of that too, that higher inflation has pushed people to pay more taxes? And that’s one of them.
The second one is in general at the Grassroot Institute — I’m Mark Coleman with the Grassroot Institute — we tend to favor tax cuts instead of tax credits.
How did that fit into your equation? And on the subject of tax credits, do you guys have a list of how many tax credits there are? You know, kind of like all the GET exemptions or, you know, something like that. We know how many GET exemptions there are. Do you know how many tax credits there are? Doesn’t that get all a bit complicated when a simple tax cut would be a lot more simple?
Akina: Thank you, gentlemen.
Colby: Yeah, so two-thirds of the Green Affordability Plan is a tax cut and one-third are tax credits, right? So you issue tax credits because they’re much more … you can vary … they’re much more narrowly focused and you can target explicit sectors of the economy or sectors of the population, which was very important to the governor. However, two-thirds is raising the standard deduction, raising the personal exemption is the equivalent of a tax cut because you are lowering your taxable income for everybody.
Coleman: Thank you.
Akina: Thank you very much. Next question. And again, thank you very much for the brevity. Please.
Terry Chodosh: Hi, my name is Terry Chodosh.
Salaveria: Hi, Terry.
Chodosh: I’d like to ask the governor’s representatives here, what the governor’s stance is on recreational marijuana.
Akina: It’s up to you, gentlemen.
Colby: I am not appointed.
Salaveria: The governor’s stance on recreational marijuana is, he will sign whatever comes to his desk.
Chodosh: OK. Now, do you understand the economic ramifications of recreational marijuana in this state? And if you look at the state of Colorado, look at the economic ramifications and the physical injury ramifications that occurred when Colorado legalized recreational marijuana and that was 10 years ago. Have you looked at that?
Salaveria: There were definite considerations in terms of what would be the, I guess, costs associated with making …
Chodosh: Well, there’s hospital cost as well.
Salaveria: Oh, absolutely. I think that in terms of what’s happening throughout the country when it comes to the use of cannabis, that, you know, this is a wave that’s coming. It’s how the state is going to manage this particular wave as it comes here.
We already have medical marijuana – that exists – but I can tell you that the governor is very concerned when it comes to issues associated with societal costs associated with the use of cannabis.
Chodosh: You realize that the traffic accidents were over 150% more in Colorado? You realize hospitalizations was 109% more? Plus insurance rates went through the roof in Colorado.
Akina: I want to thank you for raising the issue, and by the way, Seth and Luis will be around to carry on that discussion. Thank you very much. A couple more questions and we’ll close.
Scott Power: My name is Scott Power. The question I have for you is, prior to the pandemic, unemployment was 2.9% in Hawaii. Today it’s not too far away from that, and yet we’ve got this big void in the workforce. Restaurants are closing, hotels are having a hard time.
Have you, as part of your caucus, looked at the incentives for keeping people and having people reenter the workforce? So either, people, they’re feeling left away or they’re here and they’ve removed themselves from the workforce courtesy of the situation we are in.
Akina: Thank you for your question. Either one.
Salaveria: You want to say something?
Colby: Yes. So we did not do an explicit analysis of labor participation and its impact on the physical [unintelligible 01:08:42].
Akina: Thank you. And one last question, then we’ll summarize after that.
Dave Politan: Thank you for coming.
Salaveria: Thank you.
Politan: My name is Dave Politan. You said that your course, you are ultimately at the state level fiscally constrained. Fair enough. The federal government obviously is not similarly constrained. They can print money and federal debt keeps exploding. And I have to believe that is a major reason for inflation.
And then if you look at the local level, a jurisdiction, one of your subordinate jurisdictions is spending somewhere between $10 [billion] and $12 billion on a rail to nowhere, and set aside the wisdom of that, it undoubtedly has its own set of inflationary pressure to try to hire a contractor.
My question, Luis, really for you is — I applaud the philosophy of GAP — the question is, do you think ultimately you’re pushing against the string?
Akina: Thank you very much.
Salaveria: That’s probably the hardest of all of the questions. If you look at where we are right now, and the Fed’s move, and I think the Fed met today actually, and they did a quarter-point increase. There’s so much pressure with regards to reducing inflation, in order to get to the Fed to its target rate of what, 2%, I think it was.
Salaveria: I forgot what that was, 2% target rate. But you’re now starting to see kind of the impacts of these interest rates, right, hikes are happening.
I mean, arguably a lot of people can say one of the reasons why Silicon Valley Bank, you know, kind of collapsed was because they were holding on to paper that was at a very, very low-interest rate. And now all of a sudden they’re sitting on cash and they don’t have enough. They didn’t have enough to manage the run that ended up happening to it.
So is there headwinds, or are there tailwinds, when it comes to what we’re trying to accomplish here in the state of Hawaii?
We have historically been, you know, kind of somewhat insulated from what happens in the continental U.S. There were times in our history where, when the U.S. was kind of going down, Asia kind of helped pick up the pace for it going forward. That was kind of historically how certain things have happened.
I’m not saying that that’s going to happen again in the future, but, you know … simple joke from an economist perspective. A lawyer, an engineer and an economist get stuck in a hole. Lawyer says, “I’ll get us out of here in a couple of days. I’m going to sue the guys who got it.” Engineer says, “You know what, give me a day. I’ll build us a ladder. I’ll get out of it.” Economist says, “I’ll get us out of here right now. Assume there’s a ladder.” That’s essentially what we’re trying to accomplish.
Akina: Very good. Let’s give a very big hand to Luis Salaveria and Seth Colby.
Akina: Thank you so much, gentlemen, for being here. Thank you, thank you, thank you. Please take our gratitude back to Gov. Green for allowing you to come and providing this transparency.
Everybody, I want you to know something. This was a little different than our usual presentation. We wanted to give you a glimpse of the working relationship that we have with our government. We believe that there has to be open communication.
We plan to provide Luis and Seth with our feedback in written form with our comments on today’s presentation. And we do it in the spirit of hoping that that will be helpful to our governor’s attempts to lead us in the state.
We will also make that available to you in our regular newsletter so you can read our write-up and analysis of today’s presentation, especially if you are signed up to subscribe, as 40,000 other people have done. If you haven’t done that, please definitely sign up today and at least fill the card out with your comments and so forth.
We believe in getting our research straight from the horse’s mouth. And I want you to really understand that we respect tremendously the fact that the governor and his staff were willing to come here today and put on the table exactly how they’re thinking and what they have in mind and so forth and be open to our feedback. I just appreciate that greatly.
Colby: Thank you.
Akina: And I think that together we can make Hawaii a better place.
Akina: Thank you. Thank you. On behalf of the Grassroot Institute, I invite you to stay around and experience like-minded fellowship with each other. And until next time, aloha.