An Expensive Charter Crisis on Maui by Tom Yamachika 
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Maui has figured out a way to bleed cash from its budget very quickly.  It’s called a “Charter Crisis.”  It pits one part of government against another one.  Lawyers then are needed to represent one or both warring parties, and when those lawyers get paid, there’s a good chance that taxpayers will end up footing the bill.

A case in the U.S. Supreme Court called County of Maui, Hawaii v. Hawaii Wildlife Fund, No. 18-260, started as a 2012 lawsuit claiming that Maui County was violating the federal Clean Water Act because it was injecting treated wastewater into the ground, and that water eventually found its way to the ocean and damaged the reefs.  After the Honolulu federal court rendered certain key rulings against the County, the parties settled the case but allowed for the County to appeal the rulings to higher federal courts.  The Ninth Circuit Court of Appeals denied the County’s appeal in February 2018.  The County sought higher review – and the Supreme Court decided to take the case.  It heard oral argument on November 6th.


Apparently fearful that the conservative-leaning Court could smack down the Ninth Circuit’s liberal-leaning ruling and create national precedent in doing so, the plaintiffs in the lawsuit went back to Maui County Council with a new settlement proposal that would require the County to end the litigation.  The Council passed Resolution 19-158 to do just that, by a 5-4 vote.  It then asked Mayor Victorino to sign off on the settlement.  He refused, arguing, among other things, that it could open up cesspool owners to needing an EPA permit.


The Mayor’s Office is backed up by an analysis from Corporation Counsel saying that settlement of this case requires approval by both the Council and the Mayor.  The Council’s legislative counsel, however, concludes otherwise – that the Council can settle the matter on its own.


On October 28, a lawsuit in Maui Circuit Court was filed (Second Circuit Civil No. 19-1012) against Mayor Victorino and Corporation Counsel Lutey.  The plaintiffs included State Rep. Angus McKelvey, the nonprofit Maui Tomorrow Foundation, and four other individuals.  That suit essentially asks the Maui Circuit Court to sort out who needs to sign the settlement agreement, and to block Corporation Counsel from participating in the fight because she is supposed to represent both the Mayor and the Council.


What a mess!  And now, here come the lawyers.  We have the Corporation Counsel, who perhaps works for the Mayor.  We have the legislative counsel, who works for the Council.  We have attorneys from Earthjustice who represent the plaintiffs who brought the 2012 lawsuit and are now trying to settle it.  We have attorneys representing Rep. McKelvey and other diverse individuals (and one nonprofit) who are trying to force the state court to rule on the power issue.  (It’s unclear who is paying for them.)  To respond to that suit, both the Mayor and the Council might need to hire special counsel (more lawyers).


Who’s going to pay all these attorneys?  They don’t work for free.  Most of the parties involved are public officials, and their representation would need to be paid for with taxpayer dollars.  None of these expenses were foreseeable when the budget for the 2019-20 fiscal year was being worked out.
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Good luck paying for other stuff!

The Parable of the Two Horses! by Tom Yamachika | 
The Hawaii State Tax Watch Doggie at long last has made his son put down his smartphone.

Son:  Dad, I’m a little old for bedtime stories.


Doggie:  Hush and listen!  And don’t fall asleep on me, darn it!


Two horses that were sent to different towns, Harburg and Tarburg.  The folks in the different towns needed the horse to pull a wagon to the other town and back.


In Harburg, they were worried about whether the horse would go in the right direction.  So they put up obstacles and pitfalls in various places along the way to Tarburg.  Some of the pitfalls were easy to see and were in an area marked as being not the way to go.  Some of the pitfalls were harder to see and were in an area clear of obstacles.  In Tarburg, they put up some signs but mostly let the horse figure out the best way to reach Harburg.


In Harburg, they were a little worried about whether the horse would eat too much food.  So they took away food from the horse.  They didn’t do that in Tarburg.


In both Harburg and Tarburg, they rewarded their horse when it did something good.  They gave it some carrots and apples.  But in Harburg they worried about how much the carrots and apples cost, so they stopped giving their horse treats even though it did lots of good things.


In both Harburg and Tarburg they loaded the horse’s wagon with items that were going to the other town.  But in Harburg they were worried that there weren’t enough people making a living off the horse’s work, so they made a couple of extra people ride on the wagon that the horse was pulling.


So which horse do you think finished pulling the wagon first?


Son:  That’s lame.  The Tarburg horse would win.


Doggie:  The horse represents our businesses.  Our government needs money to run, and tax revenue comes from business profits.  So, the horse pulling the wagon is providing the resources necessary for government.  And for the rest of society, for that matter.


Son:  Okay, the obstacles must be regulations, but what are the pitfalls?


Doggie:  Penalties, especially retroactive ones.  If the rules are communicated clearly, penalties are fine.  Those are the pitfalls in the marked areas.  Other times, if it’s hard to see what conduct is expected of a business, fines and penalties are more difficult to justify.


Son:  How does Harburg starve their horse?


Doggie:  By taxing it, and then by maintaining an environment where it is hard to find workers.  Workers are one kind of food for a business.  If the government is hard on workers, they will move to another place and they won’t be available to work.


Son:  The carrots and apples are incentives and subsidies?


Doggie:  Right you are.  What about the extra people on the cart?
Son:  Unions?


Doggie:  Not quite.  They can be any additional requirements that are imposed on employers.  Minimum wage laws, mandatory benefits, compulsory nap breaks, …
Son:  Nap breaks?  You’re kidding me.


Doggie:  There was indeed a bill to mandate nap breaks some time ago.  It didn’t pass.
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Son:  Dad – I see what you’re getting at, but your delivery needs work.  Don’t quit your day job, okay?

Saving the Legislature From Itself!by Tom Yamachika

This week we look at the State Auditor’s recent follow-up report, Report No. 19-14, on the Motion Picture, Digital Media, and Film Production income tax credit.  It notes that when the Auditor’s office previously took up the issue, in Report No. 16-08, the Auditor took the Department of Taxation to task for allowing out-of-state production related expenses to qualify for the credit, despite the “clear language and intent” of the statute.  The Auditor told the Department to change its interpretation of the law, but it didn’t, so the current report lambasts the Department for its supposed failure.

​I am with the Department on this one. Here’s why.​

Executive branch agencies have a complicated responsibility. They are there to enforce the laws that the legislature passes, assuming those laws are valid.  In theory, agencies aren’t supposed to make judgments on the validity of laws, because that’s what the courts are supposed to do, but agencies do have a lot of experience with constitutional requirements that apply to their subject area.  In that position, agencies can sometimes save the law and legislature from themselves.


In the 1990s, for example, a constitutional crisis of sorts happened with states across the country. Most states with an income tax, including Hawaii, adopted the federal “dividend received deduction.”  The federal law does not allow the deduction for dividends from foreign companies.  Kraft General Foods sued the state of Iowa for enforcing that restriction in their state code because the U.S. Constitution says that states aren’t supposed to discriminate against foreign countries or other states.  (It’s perfectly fine for the federal government to discriminate.)  The U.S. Supreme Court in Kraft General Foods, Inc. v. Iowa Department of Revenue and Finance, 505 U.S. 71 (1992), upheld Kraft’s position and cast a cloud over the validity of many states’ income tax laws, including ours.  Our Department reacted by publishing Announcement 98-5 and Tax Information Release 99-2 saying that it would allow taxpayers to take the deduction for out-of-state dividends even though our code didn’t provide for it.   Doing that virtually eliminated the possibility of taxpayers suing for damages because their constitutional rights had been violated.


The same principle is at work in the production credit.  Companies who shoot productions here in Hawaii are eligible for a credit based on expenses necessary to their production on which Hawaii tax (such as net income tax or GET) was paid.  If the production needs some good or service that we don’t have locally, the production can buy it elsewhere and bring it in, and if it does it’s subject to a Hawaii tax called the Use Tax, which for legal and constitutional reasons is considered a part of the GET. (It’s even reported on the same tax form.)  If we grant a credit for an in-state purchase but deny it for an out-of-state purchase, we’re discriminating against interstate or foreign commerce.  The U.S. Constitution says states can’t do that.


So, just as the Department administered the dividends received deduction a bit differently from the text and the apparent intent of the law in order to save it from constitutional problems, it looks like the Department is allowing out-of-state purchases to qualify even if the statute text doesn’t provide for it and the allowance goes against the “clear intent” of the provision, in order to save the Legislature from itself once again.


Does the Department have the power to do that?  Technically it doesn’t.  But if there is no one hurt by the law as the Department administers it, there will be no court case, and the intent of the Constitution – as opposed to the intent of the law violating it – will have been realized.