WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of April 8, 2018 Can Government Avoid Its Responsibilities With LLCs? By Tom Yamachika, President Do you recognize any of these names: Hiʻilei Aloha LLC, Hiʻipaka LLC, and Hoʻokele Pono LLC? For one thing, all of them have “LLC” in their names. LLC is an abbreviation for Limited Liability Company. A LLC is a legal “person,” something like a corporation but much easier to create and maintain. I could go to our Department of Commerce and Consumer Affairs today, give them a two-page form, and have a newly created LLC in my hands before I left the building. It’s much less effort to create than a kid, and it doesn’t need to be fed every day. The LLCs that we are talking about today are run by “managers,” which is one of the ways LLCs can be managed. Their managers are Kamana’opono Crabbe, Lisa Victor, and David Laeha. These three individuals are the chief executive, chief operating, and chief financial officers, respectively, of the Office of Hawaiian Affairs (OHA). Obviously, the LLCs are related to OHA, and indeed their financial results are included within OHA’s published financial statements. And these LLCs are not financially insignificant. Hi’ipaka LLC was given sole title to the land containing Waimea Valley on Oahu, some 1,875 acres. Now, OHA was born out of the 1978 Constitutional Convention. It's a semi-autonomous department with the State of Hawaii that was established by the Hawaii Constitution and chapter 10 of the Hawaii Revised Statutes. It's a $600 million trust that provides millions in grants every year. It has a trust obligation to help the Native Hawaiian community and advocate on their behalf especially when it comes to health, education, culture, land, governance and economic self-sufficiency. Recently, these LLCs were in the center of controversy. Some members of the public wanted to obtain information about the LLCs’ dealings. The LLC’s attorneys told them to go take a hike, because the laws requiring disclosure of state agency information to the public don’t apply to the LLCs, at least in those attorneys’ minds. On January 31, OHA’s Committee on Resource Management, consisting of publicly elected Trustees, unanimously moved to order its LLC managers to provide the LLCs’ check registers. The full Board of Trustees confirmed the committee’s action on February 7. As of March 7, Free Hawaii TV reported that the LLC documents still had not been turned over. Meaning that someone has been thumbing his nose at the Board of Trustees. Isn’t that a great trick? Suppose you were the head of a state agency that was created by the state constitution, and your agency held title to some land. So you create a LLC with you and your top lieutenants as managers, and you drop some money and some land – like a whole ahupua’a – into the LLC. Then you can thumb your nose at state procurement law, state open records law, and other requirements for state agencies by simply noting that an LLC isn’t a state agency. You can spend money when you want and where you want, and you don’t even have to listen to any of those people in the State Capitol, not even the ones who gave you your job, because they aren’t managers of the LLC. That’s even better than a special fund! My humble reaction? OH MY GOD, YOU MUST’VE FALLEN OFF THE DEEP END! HOW STUPID DO YOU THINK PEOPLE ARE? YOU’D BETTER STOP THIS INSANITY NOW, OR YOU WILL BE IN DEEP DOO-DOO! CAN YOU SAY, “ANKLE SHACKLES”? WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of March 11, 2018 Groundhog Day In The Hawaii Senate By Tom Yamachika, President You may remember Groundhog Day, the 1993 film starring Bill Murray. In it, Murray played a Pittsburgh TV weatherman who, during an assignment covering the annual Groundhog Day event in Punxsutawney, PA, found himself caught in a time loop, repeating the same day again and again. On February 28, I was in a hearing in the Senate money committee, testifying on a bill. The bill sought to amend what those in the real estate industry know as “HARPTA,” a law that requires people who buy Hawaii real estate from a nonresident seller to withhold 5% of the gross purchase price and pay it over to the Department of Taxation, as a way of making sure that the seller’s capital gains tax gets paid. The bill, SB 508, would raise the withholding rate from 5% to 9%. “This feels like Groundhog Day,” I said. “It wasn’t that long ago that I was before this same committee testifying on a very similar bill on the very same tax provision, seeking to do the very same thing.” It was true. On January 29th, the same Senate committee held a hearing on SB 2506, which also proposed to raise the HARPTA withholding rate from 5% to 9%. At the conclusion of that day’s hearing, the Committee passed the bill out with some amendments; the bill is now in the House. “At that time, Senators,” I continued, “I said that the withholding rate in the bill was excessive because the capital gains tax rate for individuals is 7.25%, and for corporations it’s 4%. Withholding isn’t a tax, it’s just a way of making sure that the tax gets paid. So it’s valid only if the withholding amount is a reasonable estimate of the tax. At that time the Committee agreed with me and passed the bill out with a withholding rate of 7.25%.” “But that was before we got the Governor’s Message telling us we have a $50 million hole we have to fill,” the Chair said. (We discussed the Governor’s Message last week.) “The Department of Taxation is saying this bill will generate $15.6 million for fiscal year 2019 and $4.6 million for each fiscal year thereafter.” (Indeed, these revenue projections are memorialized in the committee report.) But wait a minute. Withholding isn’t tax. A huge revenue gain like that means either that (1) the withheld amount is being used to pay income tax that otherwise wouldn’t be paid, or (2) it’s being intercepted to pay other kinds of taxes, such as general excise and transient accommodations taxes on rental income that is coming from the property, that weren’t getting paid and were brought to light when the property got sold. If the revenue gain goes up even when the withholding rate is higher than the income tax rate, it means the problem isn’t income tax; it’s the GET and TAT that aren’t being paid. If that’s the real problem, this bill isn’t the right solution. The solution needs to focus on the GET and TAT, which need to be paid on an ongoing basis rather than caught by chance in the end when the property is sold. So, how about imposing a withholding requirement on property managers or rental pool operators? It may be a bit of extra paperwork, but it may be better than requiring the rest of us to pay higher and more burdensome taxes to make up for the scofflaws, the blissfully ignorant, and others who owe the GET and TAT but aren’t paying it. WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of February 18, 2018 Trump Tax In Hawaii By Tom Yamachika, President One of the more visible tax issues that our lawmakers will be thinking about this session is how to adapt the new federal tax law changes, sometimes called the Tax Cuts and Jobs Act and what we have been calling Trump Tax, to Hawaii. Each year, our Department of Taxation is required to consider the federal tax changes that have taken effect during the prior year, and then present a bill to the legislature containing its recommendations on conforming the state tax law to the federal code. Why do we conform to the federal code in the first place? “It is the intent of this chapter,” our income tax law says, “in addition to the essential purpose of raising revenue, to conform the income tax law of the State as closely as may be with the Internal Revenue Code in order to simplify the filing of returns and minimize the taxpayer’s burdens in complying with the income tax law.” This language was enacted in 1957 and has stayed the same for the last sixty years. We aren’t the only state to conform to the code. Most states do, as shown on this map from the national Tax Foundation: Against this backdrop, our Department of Taxation’s recommendation for conformity was: “Let’s not do it.” You like the mortgage interest deduction and you don’t want to see it go away? It won’t. Perturbed by limits on the deduction for state and local taxes? Don’t be, because we won’t adopt the limit. You like your miscellaneous itemized deductions? You can still take them! The only small difference is that you can take them for Hawaii income tax only. Is this what we want to do? Turn back the clock sixty years? You might remember the Tax Reform Act of 1986, which, like Trump Tax, took away many special deductions in favor of a simpler, broader tax calculation with a lower rate. In 1987, Hawaii faced the same choice. To conform or not to conform, that was the question. But instead of turning our back on conformity, we embraced it. We adopted the Tax Reform Act changes and dropped our individual tax rates. As a result, most of us are spared the pain of doing tax calculations a second time for state-specific issues and of keeping the records and audit trails necessary to support the numbers that we put into those tax calculations. Shouldn’t we be considering doing the same thing this time around as well? |
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