Most of you have heard by now of the massive tax cuts just signed into law by Governor Green.

At the press conference held at the signing ceremony, some very good journalists asked him: “With such massive cuts, are you going to be able to maintain public employee salaries and social services?“

“Yes,” he said.  He said that there is now, government-wide, about a 30% vacancy rate in the number of authorized positions. He said that the departments are going to do a “deep dive” into why these positions are vacant. If they’ve been vacant for four years in a row, for example, it would be presumed that the department really doesn’t need those positions.  If they did, they’d need to tell the Governor why; if it turns out that a particular position is needed but can’t be filled because the private sector pays a lot better, for example, then they would consider paying more money for that position to be competitive for the talent the department needs.

Adding to the problem, although perhaps not discussed at the press conference, is a very arcane budgeting practice that we wrote about in 2017.  Apparently, departments are not allowed to budget for things like vacation pay and paid sick time, although such expenses are incurred whenever you have a work force. Instead, the departments are supposed to pay for such things out of the money that is allocated for the positions that are vacant.

We, for one, can’t see any good reason why vacancies have to be used in this manner.  At the very least, it seems deceptive to taxpayers, labor unions representing the employees, and others interested in the budgeting.

Anyway, back to the deep dive the Governor spoke of.  Looking at the budget in that way seems a little backwards. In the best of all worlds, the departments do their deep dives first and come up with a number by which their budget can be cut. Then you add all of the numbers from the departments, and you know how much you can cut taxes.

But this is not the best of all worlds. Human nature being what it is, if the so-called deep dive was done first, no sane department head would voluntarily offer up their department to the chopping block.  Instead, we would expect the department heads either to say that they really need everything they now have.  Or, if they are a bit more devious, they would offer up a ton of rank-and-file positions (as opposed to civil service exempt positions in management), which would cause the government union leaders to go ballistic and, maybe, force the department to keep the positions.

So, instead of doing this charade, we do the big tax cut first. Then the department heads have to scramble to justify their piece of the much lower pie. Is it an exercise in cruelty?  We don’t think it has to be. If anything, the resulting chaos will lead to departments being much more transparent about what they are spending and why. For the bigger departments, such as Education, Health, and Human Services for example, the process may cause a lot of pain. But that pain results from the opacity of the budget as it exists today. We’ve written before about the Department of Education.

Governor, we wish you the best of luck on this project to right-size our government. Somebody has to do it. We now hope that you can get it done.

With a few strokes of the pen, Governor Green turned Senate Bill 1035 into Act 47 of the 2024 Legislature. It marks an end in a multi-year journey for the many health care providers in the Hawaii Provider Shortage Crisis Task Force who were trying to find some way out of the General Excise Tax which, they said, was bludgeoning physician practices to death here in Hawaii.  The Act gives them a significant exemption, for payments from Medicare, Medicaid, and TRICARE, beginning on January 1, 2026.

Here is some of the back story of this bill that few people have heard about.

One of the things we at the Tax Foundation of Hawaii do, but don’t publicize very well, is that we help people who want some kind of tax change.  We educate them about the legislative process.  If they have concrete ideas for tax change, we’re happy to draft a bill to accomplish that change.  We worked with Dr. Scott Grosskreutz of the Task Force to draft the bill that eventually became SB 1035.

Just because we draft a bill, however, doesn’t mean we at the Tax Foundation of Hawaii support it.  We draft bills because we prefer to have legislators debate a bill on its merits, as opposed to getting distracted with technical issues that often come up when a bill is drafted by someone with too little legislative experience or too little experience with tax bills.  The Foundation submits “comments,” neither supporting nor opposing testimony, on every bill that we follow, including on those that we draft.

We told the Task Force this, just as we tell everybody else that we help.

When SB 1035 was heard in the Senate Committee on Health and Human Services, its first committee, in February 2023, Senator Joy San Buenaventura from Puna, who chairs the committee, asked us which, of the half dozen bills before the committee that sought to provide GET relief to doctors, would be most likely to clear Ways & Means.  I pointed to SB 1035 and the Senator had her committee pass it out (although the Senator before the hearing appeared to like another bill, SB 761).  To me, some of the other bills had technical issues and some were quite a bit broader, meaning greater revenue loss and a bigger headache for the money committees.

The bill did indeed go to Ways & Means and Consumer Protection, passed out, and crossed over to the House.  The House Health & Homelessness and Economic Development Committees passed it, but the bill then stalled in House Finance.

This year, another bill that would have granted a GET exemption to primary care practices (HB 1675) was moving through the system, but we had concerns that no one was coming up with an adequate definition of primary care.  The bill foundered and things were looking bleak.  Somehow, however, House Finance was persuaded to resurrect SB 1035.  It then went to Conference Committee, and it came up with a version that both houses then passed.

SB 1035 was the best choice at the moment, and as it moved further along in the process, more and more support coalesced around it, leading to the bill actually crossing the finish line.  I, for one, am glad to see that it has become law.  Hopefully, it will help to cure us from the health care crisis that our state has fallen into.

One pair of bills being pushed very heavily in this past legislative session was House Bill 2686/Senate Bill 3234, relating to the stabilization of property insurance.  The bill was introduced because it appears that the property insurance carriers are starting to look at Hawaii as a high-risk place, like Florida and California.  Premiums are rising at astronomical rates, assuming that insurance is available at all.

Neither bill made it through to the end of the legislative process, but our governor has said that the issue is important enough so that he is creating a Climate Advisory Team to study the issue and bring recommendations to next year‘s legislature.  One of the first projects the Governor is giving the Team is to “recommend steps to create a durable fund to mitigate the impacts of dynamic climate change and to develop a fair and comprehensive structure to resolve claims related to future disasters. This is necessary to stabilize the insurance market and defray the financial burdens arising from the increased impacts of climate change.”

Those bills would have created a fund that would cover some of the risks incident to writing certain kinds of property insurance.  To fund it, the bills would have jacked up transient accommodations taxes on transient vacation rentals, conveyance taxes, and perhaps other taxes, by undetermined amounts.  Presumably, the recommendation from the Climate Advisory Team will be along similar lines.

Let’s think for a moment about what was really being proposed here.

Insurance is a means to spread out the risk of large costs, such as the damage from a hurricane or tsunami, over a large pool of people so each person pays only a little bit and the money collected is available to cover some of the costs if the catastrophe insured against actually comes to pass.  Because insurers typically buy reinsurance, the pool of people over which the risk is spread is often global and not just simply from within the State.

Taxation is a means to spread out the cost of government among all the citizens who are subject to that government.  One of the things government can and does do is set money aside for catastrophes or emergencies. To that extent, it behaves the same way as insurance, but it distributes the cost over a different set of people.  That set can vary depending on what kind of tax is used, but usually consists of mostly residents (with some, perhaps, being exported to tourists).

When government uses its taxing power to create a fund making insurance more affordable, that power perhaps can be justified if the thing that’s being insured against is something everybody’s in danger of. Creating a hurricane relief fund, as was done years ago after Hurricane Iniki, is justifiable for that reason.

The bills, however, also proposed to set up a fund to pay for volcanic damage if houses are built in certain zones that are relatively close to the volcano.  If someone builds in one of those zones, Madame Pele speaks, and hot lava rolls over the house, then the fund helps pay for the loss.

That one is a little tougher to understand and support. A property owner decides to build a house close to a volcano, is warned of the risk, but builds anyway because the property is cheaper there. If that is their decision, then why do the rest of us taxpayers, who live nowhere near the volcano, have to be on the hook for lava damage?

Finally, many of the complaints of astronomically high insurance rates come from condo owners where the risk can be traced to no or inadequate maintenance done in prior years. The bills don’t propose to foist that kind of risk upon taxpayers, which seems to be the right decision.

We hope that the Team’s recommendations, and further legislative proposals to stabilize property insurance, would limit taxation proposals to those shoring up the kind of risks that we all bear.