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​To view the archives of the Tax Foundation of Hawaii's commentary click here. ​​​​​​​


Weekly Commentary

For the Week of March 17, 2019

Blank the Amount, Defect the Date?
By Tom Yamachika, President
 
If you’re following bills as they move through our legislature, there are a couple of practices that we need you to know about. Often, committee chairs will refer to one or both of these practices when they move bills forward.

Each bill must have an effective date so that we know when it starts doing what it is supposed to if it’s signed into law.  Typically, income tax bills become effective for tax years beginning after a certain date.  Excise tax bills usually become effective on July 1st to coincide with the start of the State’s fiscal year.  “Defect the date” refers to setting the effective date very far in the future, such as July 1, 2050, so the bill would have no effect if enacted into law in that form.  A bill with such an effective date is still alive, but the legislators are not comfortable enough with it to let it pass in that form.  Instead, they are willing to let the bill survive for now “so that the discussion can continue,” but they want to take a look at it again, perhaps in conference committee, before deciding whether to send the bill to the Governor’s desk.

“Blank the amount” is a similar technique that can be used whenever a bill has a number in it.  The technique is often used on an appropriation bill that sets aside a certain amount of money to do what the bill proponents want.  It can also be used to earmark tax revenues, as is done with SB 1474 Senate Draft 2 that proposes an increase in the GET.  The bill now specifies that “__ per cent or $ _____, whichever is greater, of the revenues shall be deposited into a special account in the general fund for appropriation to and expenditure for operations of the department of education.”  A similar clause is provided for operations of the University of Hawaii.

Obviously, bills with blank amounts in them won’t have much of an effect if they are enacted in that form, even if they have an effective date that is not defective.  (We actually enacted such a bill in 1999.  Act 306 of 1999 enacted credits for the construction or renovation of a “qualified resort facility” and a “qualified general facility.”  The credit amounts were percentages of the capitalized costs but were left blank.  The Department then refused to allow any credit under these circumstances, as it explained in Department of Taxation Announcement No. 99-27.) 

Bills with blank amounts perhaps serve the same purpose as bills with defective effective dates, but the blank amounts are quite a bit more problematic.  First, it’s easy to imagine that what goes in the blank will have a difference in our lawmakers’ willingness to vote for the bill.  A lawmaker who might be willing to stomach an increase in the base GET rate from 4% to 4.5%, for example, might be outraged enough to hit the “No” button if the bill’s proponents wanted to fill in the blank with 7%.  Next, the Department of Taxation normally calculates the revenue impact of a tax or credit bill, because that information is important to lawmakers.  If such a bill has a blank amount in it, it would be easy for the Department economists to throw up their hands and say, “We have no idea!  Obviously, it would depend on what you guys put in the blank.”

It is common for the defective dates to be fixed, and for the blank amounts to be filled in, when a bill pops out of conference committee.  At that point, of course, the deal is done and there is no opportunity for public hearings or testimony.  The public can still weigh in on the process by contacting individual legislators in hopes of swaying their votes on the floor, but for many of us that seems to be a waste of effort.  Can the system be improved?  We hope so!

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 10, 2019

Can’t You Spare Half a Penny for Education?
By Tom Yamachika, President
 
“Friends!  Romans!  Countrymen!  We desperately need to lift our public schools and our namesake university into the 21st Century.  Senate Bill 1474 will do this by a teensy little increase of half a percent to our general excise tax (“GET”), and by establishing two special funds for the Department of Education and the University of Hawaii that will give a dedicated funding source for these fine departments charged with the heavy responsibility of educating our students.  Isn’t that a small price to ask for the future of our keiki?”

That speech was made up, but the bill was not.  The speech is a summary of what many of the bill’s supporters are testifying in support of it.  As of this writing, the bill is very much alive and headed over from the Senate to the House of Representatives.

There’s no mistaking that we have problems in our school system.  When school officials are reduced to going to their local neighborhood boards to beg for spare change to buy pencils when the overall budget of the Department of Education is in the billions of dollars, something is seriously wrong with the system we now have.  Why is it that the multiple management layers that stand between the appropriated king’s ransom and the classrooms allow so little to filter through?  And why aren’t we making the effort to pull down available federal funds, as we have written about before?  Shouldn’t we be trying to address these problems before putting an even heavier monkey on the backs of our working families?  (And, make no mistake, this monkey weighs more heavily on those least able to afford it.  We and others have written on several occasions that the GET is regressive, meaning that those with the least ability to pay are hurt the most.)

Can the life of our teachers and professors be improved with a “dedicated funding source”?  That argument is a smelly red herring.  As we said during the debate over the failed constitutional amendment to surcharge real property taxes, our educational institutions already receive a ton of general fund money.  Adding a special fund won’t and can’t prevent either this or a future legislature from redirecting those general fund moneys to other pressing needs.  Floods on Kauai?  Lava devastation on the Big Island?  Money for relief from those natural disasters has to come from somewhere.  And then there are the other problems like cost of living, the homeless, invasive species, and the list goes on.  Big, fat special funds would make oversight of how the money is spent tougher and would lessen accountability even more.

And, as we wrote about before, for more than twenty years our legislature shoveled $90 million a year into an “educational facilities special fund.”  That fund was in existence between 1990 and 2013.  At the beginning of this year, DOE’s maintenance backlog was found to be a whopping $868 million, while that of UH wasn’t far behind with $722 million.  Did the backlog swell to that level in just the last 5-6 years?  If not, let’s stop thinking that a special fund will be a cure-all.

Instead, what we really need to do is fix the inefficiency – whatever is causing the “trickle-out economics” that causes the staggering sums our legislature throws at our educational institutions to be reduced to peanuts by the time it reaches the classrooms.  This fix will not be easy.  There will be pain.  Those whose actions have caused or perpetuated these disasters deserve some head-rolling, and hopefully some of that will happen.

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 3, 2019

Beware of Tax Software?
By Tom Yamachika, President
 
Well, we’re in the thick of tax season!  It’s that time of year when individuals, gritting and gnashing their teeth, scour through their financial records and begin the arduous process of completing their 2018 federal and state tax returns.

Here are some thoughts to keep in mind when filling out your Hawaii return.  Do not assume that specialized computer tax preparation software services (you know which ones they are) are going to pick up every nuance of Hawaii tax law, especially after a major federal change.  They are usually pretty good at coming to the right answer eventually, but in the first one or two years you should be especially careful, because the reality is that Hawaii-specific changes are not that high on their priority list as compared to those in other, more populous states.

First, watch out for the state and local tax deduction.  Normally, state income tax and property tax are deductible.  The new federal tax law says that no more than $10,000 in state and local taxes are deductible.  It doesn’t take much to get to that number in Hawaii, so many of us will find that our state tax deduction is capped at the $10,000.  The cap does not apply for state tax purposes, so if your tax software cuts you off at the same amount on your state return, you need to find a way of getting your deduction for the extra dollars for state purposes.

Next, if you have a mortgage and/or home equity loan, the federal rules changed so that the deductible mortgage interest may be limited, and the HELOC interest may be disallowed entirely.  These new caps do not apply for Hawaii tax purposes, so, just as with the state and local tax deduction it may be worth your while to make sure that your mortgage interest deduction is being handled correctly.

[Are you an employer who saw lots of changes in the amount you can deduct from business income?  For example, the new federal law doesn’t allow a deduction for parking benefits, it halves the amount you can deduct for food and drinks purchased for the office, and it completely disallows any deduction for business entertainment in 2018.  Hawaii did pick up all those changes, so there will be no new break on the Hawaii return for those items.  (Corrected, see below.  3/5/19)]

There’s some good news and bad news if you own a small business, are a partner in a partnership, are a shareholder in a S corporation, or get dividends from a real estate investment trust.  The good news is that you get a new federal deduction, which tax practitioners call the “Section 199A deduction,” that is intended to give a tax break to individuals who conduct business that gets taxed on their individual tax forms.  The bad news is that Hawaii didn’t adopt it, so don’t expect to get a benefit of that deduction on your Hawaii income tax return.

Also, if you have claimed lots of itemized deductions, the federal return will allow you to add them up, within the limits previously described.  On the Hawaii return, if adjusted gross income is above a certain amount then a pre-TrumpTax law called the “Pease limitation” kicks in and eats away at your itemized deductions.  As a result, the total itemized deductions that you are allowed to deduct in calculating taxable income may be somewhat less than the sum of the various categories of your itemized deductions.

And even if you do use a professional preparer, make sure to go over your draft return carefully before you sign your name to the final version.  Make sure that these law changes are included.  And good luck with your tax season!

Correction 3/5/19:
 
Dear Readers,
 
In the Foundation's latest weekly commentary, "Beware of Tax Software?", we screwed up!  When we were talking about the Trump Tax business law changes, we should have said this:
 
Are you an employer who saw lots of changes in the amount you can deduct from business income?  For example, the new federal law doesn’t allow a deduction for parking benefits, it halves the amount you can deduct for food and drinks purchased for the office, and it completely disallows any deduction for business entertainment in 2018.  Hawaii picked up many business tax changes, but it didn't pick up these.  So, there will still be a break on the Hawaii return for those items.
 
Our thanks go to several expert readers who swiftly called me out on this!
 The Foundation regrets the inconvenience.