Can Raising a Tax Lose Money?
One fundamental assumption that has been made over the years by our lawmakers is that if you enact a tax, money will be raised. What if that weren’t true? In late 2019, a pair of economists, Enrico Moretti and Daniel Wilson, published a paper titled “Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy.” In that paper, they followed the movement of 400 of the nation’s richest people (the “Forbes 400”) and came up with a mathematical model to predict the chances that a particular rich person would move out of state in response to either an enactment of or a hike in that state’s estate tax. Why concentrate on the wealthy? Only they are on the hook for the estate tax. Even in Hawai’i the estate tax doesn’t kick in unless the deceased person has amassed $5.49 million in wealth, so we are not talking about ordinary folks you see on the street. Then, they theorized, based on earlier research, that if one of these rich people moves, they will pay a lot less of the former home state’s other taxes, such as income tax and sales tax. In that way, the move will cost that state. They then tried to answer this question: “If X State adopts or increases an estate tax, will that state make money or lose money, and how much?” They tried to answer that question both with a targeted tax aimed at the ultra-wealthy (a so-called “billionaire’s tax”), and with a broader based estate tax. When they modeled the billionaire’s tax, they found that 48 states had an expected revenue gain. But two states could be expected to lose money: California and Hawai’i. “For Hawaii,” the study said, “cost-benefit ratio [of having a bigger estate tax would be] equal to 1.43. The expected present value of having an estate tax is ‑$73 million. The difference between Connecticut [which would benefit from an estate tax] and Hawaii is largely due to the difference in their personal income tax (PIT) rate. Hawaii’s PIT is higher than Connecticut’s. The higher PIT rate in Hawaii means a higher opportunity cost of foregoing billionaires’ income tax streams.” When they modeled the broader-based tax, assuming that the less ultrawealthy (people who had estates big enough to pay estate tax but who weren’t billionaires) were just as likely as the Fortune 400 to pack up and move in response to a tax hit, they found 42 states with an expected revenue gain. Eight states were expected to come up short. Of the states that don’t have an estate tax now, four were at risk: California, Idaho, Nebraska, and New Jersey. Of the states that do have an estate tax, four were at risk: Vermont, Oregon, Minnesota, and—you guessed it—Hawai’i. Although the study didn’t pin down exactly when a state would be at risk for losing money if adopting an estate tax, it observed that California, the state with the most revenue at risk, had the highest personal income top tax rate. Hawai’i has never been far behind on that metric. We were even seriously considering legislation last session (Senate Bill 56, Senate Draft 1) that would have pushed our top personal income tax rate way past California’s, and we earned national attention, perhaps national derision, for that bill. Over the years, this column, among others, has been accused of pandering to the wealthy and for being opposed to the “fundamental fairness“ that requires those with more to pay their fair share. We at the Foundation, however, are not trying to decide social policy. We’re trying to present the facts and the risks of unintended consequences. Our legislators are the ones making the hard policy choices. They should be making these choices with more information, not less.
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Have We Unwittingly Put the Brakes on HART?
Lately, the news about HART, the body governing Honolulu’s largest ever public works project, has been focused on one of the nine voting members. That member‘s term is coming to an end, and the news is focusing on Mayor Rick Blangiardi‘s choice to replace him. What you might not have seen is the difficulty the HART board is having making decisions. HART was created in 2016, when the county’s voters approved a City Charter amendment establishing it. City Charter section 17-104 provides for a ten-member board, consisting of nine voting members and one non-voting member. That section also incorporated section 13-103, which applied the rules governing other City boards and commissions to HART as well. One of the rules in 13-103 says: “The affirmative vote of a majority of the entire membership shall be necessary to take any action, and such action shall be made at a meeting open to the public.” But that language means whenever they take a vote, we assume that everybody who doesn’t vote “yes,” including people who can’t attend the meeting, are voting “no.“ With a ten-member board, that means we need six members to vote “yes” for anything to pass. Then, along came 2017. As part of the State‘s bailout of HART, the State added four more non-voting members to the HART board. Two would be appointed by the house and two more by the Senate. After the bill was signed into law and became Act 1 of the 2017 First Special Session, HART had a 14-member board. That means we now need eight members to vote “yes” for anything to pass. Another of the rules in section 13-103 of the Charter is that a “majority of the members shall constitute a quorum.” A quorum is the number of members needed to have a valid meeting. By the same logic, a quorum of HART was six members before the 2017 legislation, and eight members after it. Recall, however, that there are only nine voting members. Two of them are the City Director of Transportation Services and the State Director of Transportation, presumably very busy folks. If one of them can’t attend a meeting, a unanimous vote of the others is required to do anything. If two of them can’t attend, nothing can pass. “Obtaining nine votes,” one voting member testified in February, “has proven difficult for the Board to obtain quorum to hold a Board meeting and proven very difficult to obtain a decision on any matter in front of the Board.” It’s questionable whether the State, in putting four observers on the HART board, intended to change the voting dynamics drastically in this way. But, according to the City’s Corporation Counsel, that was the effect. (Lawmakers please note: One reason why you get as much public comment as you can on a bill you are considering is that some public commenters will see chain-reaction consequences like this one so the bill can be refined to weed out unintended consequences. Adding new material to bills at the eleventh hour, after the time has passed for public comment, can and does lead to problems.) Some bills in this past legislative session aimed to fix the problem — HB 1288 and SB 998. Neither survived this session, but one or the other might be reintroduced next year. A fix is needed to keep our HART board up and running. Hopefully there will be a reasonable chance of passage in the coming session once the pandemic and the damage it has done to our economy are not the all-consuming problems as they seemed to be in the 2020 and 2021 legislative sessions. The Time Tax
This week we reflect on a piece in “The Atlantic” that argues quite persuasively that your government not only taxes people by taking their money, but also imposes administrative burdens that waste countless precious hours of people’s time. “The issue,” the article says, “is not that modern life comes with paperwork hassles. The issue is that American benefit programs are, as a whole, difficult and sometimes impossible for everyday citizens to use. Our public policy is crafted from red tape, entangling millions of people who are struggling to find a job, failing to feed their kids, sliding into poverty, or managing a disabling health condition.” Our own recent struggles with the unemployment system here in Hawaii illustrate this phenomenon. Hawaii Public Radio did an October 2020 story on “Thousands still waiting action on unemployment claims,” One person profiled in the story described the processes of applying for unemployment benefits as a “full-time job.” Civil Beat’s Denby Fawcett told the story of one claimant who called the unemployment office 22 times only to be put on hold for an hour when the person who answered said she needed to consult with her supervisor. The Atlantic argues that some of this difficulty is by design. Gov. Ron DeSantis of Florida said as much: “Having studied how [the system] was internally constructed … it was, 'Let's put as many kind of pointless roadblocks along the way, so people just say, oh, the hell with it, I'm not going to do that,' …. It was definitely done in a way to lead to the least number of claims being paid out.” The unemployment office is not the only government agency imposing a time tax on their so-called customers. One of our articles in 2015 profiled our Department of Taxation. Tax is not a simple subject, but it nevertheless operates on a “you figure it out” model as well. When people call in for help, at that time there was a more than 50% chance that their call would not be answered, at all. In fiscal 2020, the Department’s call answer rate crept up to 82%, basically answering five out of six calls (irrespective of waiting time, which wasn’t discussed in the report). At the same time, published guidance by the Department remains scarce, so it is still difficult for taxpayers to search for information to resolve their own problems. No article on the time tax in Hawaii would be complete without mention of the obscene length of time that Native Hawaiian beneficiaries remain on the waitlist for lease awards of Hawaiian homestead land. Some have been on the waitlist for decades and some have died on the waitlist. Kalima v. State, a 2020 decision by the Hawaii Supreme Court, decided that the State breached trust obligations and needed to pay damages to those on the waitlist. Hopefully this case will lead to some mitigation of the time tax. Nationally, the Atlantic argues, the time tax is regressive. It falls most heavily on the poor, the less educated, the ethnic minorities. It might be imposed unwittingly. Legislatures pass laws that are carefully drawn to benefit the “right” people, such as those hit by the pandemic. Agencies implementing the laws want to weed out the fraudsters and the liars, and those otherwise not worthy of the benefits. As a result, claimants, assuming they find out about the benefit at all, face an uphill battle in applying for it between navigating through complex qualification requirements and trying to get the application through an agency that is more focused on having a claimant run the gauntlet than in cooperating to get that claimant the benefits allowed by law. Here in Hawaii, we can and should do better. We need benefits laws that are easy to understand and make sense of. We need agencies that execute the laws to educate the public clearly and thoroughly on what is required to participate. Our agencies should be reasonably responsive to the public. We the taxpayers are not just pigs clamoring around the feeding trough and shouldn’t be treated as such. Overall, lawmakers need to be aware of the time tax and what it does to their constituents. Once they do, maybe they can help make the system better. |
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