After going through the hundreds of bills introduced in the 2020 Legislature, a few themes appear to be emerging.

One of them is that there are a plethora of requests for “special funds.”  Special funds are pots of money that exist for a specific purpose, and largely bypass the legislative appropriation process.  The existence of hundreds of these special funds has often confounded those who seek answers to simple questions like “How much money does the State have?”

This year, for example, bills have been introduced to establish:

• A cigarette litter abatement special fund (SB 2301) which would be funded by a new cigarette litter abatement tax;
• A wildlife conservation special fund (HB 1675, SB 2509) which would be funded by a barrel tax increase;
• A solid waste management research and development special fund (HB 1684) which would be funded by diverting 1% of ALL general state revenues;
• A climate change countermeasures special fund (HB 1686) which would be funded by 1% of all insurance company assessments;
• A clean vehicle special fund (HB 2493, SB 3022) which would be funded by a surcharge of up to 75% on GET on sales of gasoline powered vehicles;
• A “Blue Lives Matter” special fund (HB 2728) to benefit law enforcement officers, which would be funded by a new tax on overseas arrivals and departures; and, last but not least,
• A quality education special fund (HB 2144) which would be funded by hefty increases in the individual and corporate income taxes. 

There are many others.  A number of these measures involve tax increases or revenue diversion (which probably would lead to tax increases after the agency or agencies whose revenue was diverted figures it out and screams bloody murder).

Our Legislature is supposed to be the steward of all state moneys, but special funds make it very easy to lose track of where the money is and how it is being spent.  Departments are supposed to tell the Legislature if they have special funds and how much is in them, but they don’t always.  Recently, in Report No. 20-01, the State Auditor took DBEDT to task for failing to report $6.5 million in non-general fund moneys.  DBEDT’s response?  Just that they’ll “take corrective action.”  Not even a “Whoops!  We screwed up and promise to do better next time!”  This followed closely on the heels of Report No. 19-16, where the Auditor found that $1.04 million in non-general fund moneys administered by the Attorney General wasn’t reported.  That department responded that they “shall establish procedures to assure required reports are issued.”  Is it any wonder that it’s getting harder and harder to follow the money and rein in government spending?

Another tactic that appears to be gaining traction among special fund supporters is “scope creep.”  It involves expanding the scope of what the special fund moneys may be spent on.  If special fund moneys can be spent on more and more things, then there tends to be more spending, and then the funds need to be fed more and more to stay afloat.  Then who is going to do the feeding?  Probably we, the taxpayers.

The moral of the story is that special funds are often used to obfuscate and confuse, to put a smokescreen between those who spend the money and those who are charged with making sure the money is well spent.  Let’s do all of ourselves a favor and get rid of the special funds we don’t really need, and make sure that the operations of the ones we do need are transparent and accountable.

On January 8, OHA Trustee Brandon Kalei’ana Lee wrote an op-ed in the Star-Advertiser entitled “OHA has right to attorney-client privilege.”  In that article, Lee was reacting to State Auditor Les Kondo’s insistence that the OHA trustees turn over unredacted executive session minutes that apparently contain legal advice given by their hired counsel.  He contended that “it is clear that such communications are clearly protected as part of the OHA board’s attorney-client privilege as a matter of longstanding U.S. Supreme Court constitutional law,” and turned the matter into an indigenous peoples issue:  “Why is it when Native Hawaiians seek the same rights and protections to which everyone else is entitled, they are called protesters, are deemed uncooperative, or are accused of hiding something?”

This deserves an answer.

The answer starts with Hawaii Revised Statutes section 23-5(a):  “The auditor may examine and inspect all accounts, books, records, files, papers, and documents and all financial affairs of every department, office, agency, and political subdivision…”

Section 23-1 defines “departments, offices, and agencies” to mean “all executive departments, boards, commissions, bureaus, offices, agencies, and all independent commissions and other establishments of the state government (excepting the legislature) and all quasi-public institutions and all courts which are supported in whole or in part by, or which handle state or public funds.”

So, if you are a department, office, or agency, and you handle public funds, then the auditor gets to see all, and I repeat “all,” accounts, books, records, files, papers, and documents.  In other words, if you are handling public money then it’s the auditor’s prerogative to see what is going on with it.

The attorney-client privilege protects confidential communications between an attorney and a client and protects against disclosure of those communications to a third party.  It doesn’t prohibit disclosure to someone who is not a third party.  Suppose I was the store manager of the Pa’ia branch of Tomco, a national retail store chain, and I consulted with an attorney on store business, receiving a memo from her as a result.  If Tomco’s San Diego-based regional finance manager wanted to see the memo, he has the right to see it regardless of my wishes, and the attorney-client privilege would not stand in the way.  It would be a different story, however, if I hired the attorney myself and did not pay her with Tomco money.

The flaw with Trustee Lee’s reasoning is that he has a myopic perception of the “client.”  We the People, speaking through the Hawaii Constitution, created OHA (article XII, section 5), the Office of the Auditor (article VII, section 10), and the rest of state government.  No government official, not even an elected one like Trustee Lee, has the authority to create a fiefdom unaccountable to the rest of government, or to the people of Hawaii who put that government in place.  The same result, by the way, applies when public moneys and assets are dropped into a limited liability company owned by the agency.  The limited liability company thus created is still a part of government and, as we found out from the courts recently, is subject to our Uniform Information Practices Act and other open records laws.

This is not an indigenous peoples issue.  The same result would apply to any other agency.  Our state constitution says that the auditor will “conduct post-audits of the transactions, accounts, programs and performance of all departments, offices and agencies of the State.’  That’s what the auditor is doing.  There are consequences for getting in the auditor’s way, and, barring a last-minute attitude adjustment, we will soon find out what they are.

Following a major U.S. Supreme Court decision in 2018 (South Dakota v. Wayfair), many States, including ours, enacted “economic nexus” legislation, which means that we consider any business that transacts $100,000 or more in Hawaii sales or 200 or more Hawaii transactions to be subject to Hawaii tax laws, and we require such a business to comply with the law by registering and paying tax.  That legislation went into effect July 1, 2018.

Last year, our legislature followed up by enacting “market facilitator” legislation, meaning that a market facilitator such as Amazon (for Amazon Marketplace) would be required to pay our general excise tax (“GET”) for the Hawaii transactions that it facilitates.  That legislation took effect on Jan. 1, 2020.

After this one-two punch, many more businesses that sell to Hawaii customers are going to find themselves with Hawaii tax obligations.

That circumstance creates corresponding opportunities for Hawaii individuals and businesses.

All states with sales tax or similar taxes, including Hawaii, impose a “Use Tax.”  It’s designed to protect local businesses.  If a local customer has a choice between buying local and buying from an online seller, and the online seller is not obligated to pay our GET, then the online seller has an advantage because the local seller must pay the tax and the online seller doesn’t have to.  The Use Tax Law compensates for this by saying that if you as the local customer buy from the online seller (or any seller who is not obligated to pay our GET), then you are required to pay an amount comparable to the avoided GET.  Most individuals don’t know about this tax, but many businesses do because the Department of Taxation will scrutinize large business purchases for this tax if the business is under audit.

If you are buying from a business that must pay our GET (whether or not it actually is paying), then you don’t have to pay Use Tax on purchases from that business.  The trouble is that it’s not always obvious who is obligated to pay, and the facts could change over time.  A 1988 Hawaii Supreme Court case involving a large auto dealership highlighted the problem.  It paid Use Tax on purchases of motor vehicles for many years, thinking that the car manufacturer wasn’t obligated to pay GET.  It was indeed paying – from 1969 to 1982 – but didn’t publicize the fact.  The tax was 0.5% only, but over the several years and with the large purchases the dealership made, the Department collected over a million dollars extra because it was being paid by both the manufacturer and the dealership.  Too bad, so sad, the court ruled, because the statute of limitations says you can only get the most recent three years refunded.

A Hawaii buyer can never really know whether its vendor pays GET because of tax return confidentiality rules, but it can take these steps:

• If the invoice shows the seller with a Hawaii address, don’t pay Use Tax.
• If the invoice shows Hawaii GET, don’t pay Use Tax.
• If the seller has an active Hawaii GET registration number (which can be searched for on the Department’s website) don’t pay Use Tax.
• If the buyer knows that the seller has a GET payment obligation, for example if it purchased $100,000 or more of merchandise (meaning that the seller had $100,000 in sales), then don’t pay Use Tax.

Taking these steps will allow most local buyers to avoid paying unnecessary Use Tax and will prevent the Department from doubling up on you.  As buyers, we need to be vigilant and not be paying more taxes than we must.

Happy New Year!  It’s now 2020 and talk already has begun about raising our minimum wage.  $10.10 an hour is not a living wage, some say, so we should be hoisting our minimum wage to say $15 or $17, which some say is the minimum required to make ends meet here in Hawaii assuming you are working 40 hours a week.  Shame on the big bad employer lobbies, they say, for they are intending to confuse the issue and distract from the real problems at hand.  There also seems to be an unsaid undercurrent of “Sure those fat, greedy employers can pay it, so sock it to them!”

But have we ever thought about what a minimum wage law actually does?

Our minimum wage law, HRS section 387-2, specifies that “every employer shall pay to each employee employed by the employer, wages at the rate of not less than” a certain specified dollar amount.  If the employer doesn’t, HRS section 387-12 specifies consequences of fines, imprisonment, restitution of the minimum wage to the affected employee, and other things.  Our minimum wage law is typical of those used in many states.

In other words, a minimum wage law is a prohibition on employment.  You can’t hire someone if the worker gets less than the minimum wage.

Under a minimum wage law, it doesn’t matter what the employee wants.

Under a minimum wage law, it doesn’t matter what skills the employee has or doesn’t have.  Are we willing to say, as a society, that someone with zero skills but who is willing to work 40 hours at something – a plantation worker comes to mind – is entitled to be paid enough to make ends meet here?  If so, then why did many of us bust our butts trying to acquire marketable skills?  Was it so the government could tax away most or all of what we make above subsistence salary?

Under a minimum wage law, it doesn’t matter what other costs the employer is being required to pay, even if those costs are on the employee’s behalf, either because of other government mandates or because of market competition.  For example, employers are subject to tons of other requirements, such as providing workers with prepaid health care, workers’ compensation, and temporary disability insurance.

And then, workers’ pay is subjected to taxes, including state income tax when the worker earns it and general excise tax when the worker spends it.  Income tax applies even to those earning minuscule amounts of income, and general excise tax applies even when the buyer has no income at all. 

The fix has traditionally been to focus on increasing the “living wage”, while the reasons for an ever-increasing  “living wage” has been a second tier topic of discussion.

If the government requires that certain workers be paid higher wages, then businesses adjust for the added costs, such as by reducing hiring, cutting employee work hours, reducing benefits, charging higher prices, laying people off, or perhaps by throwing in the towel and closing shop.  Some folks think that companies can simply absorb the costs of minimum wage increases (or other cost increases) through reduced profits.  That rarely happens, especially if their market competition is willing to make the other adjustments just mentioned.

Instead of mindlessly jacking up the minimum wage to a “living wage” without knowing what a “living wage” is paying for, why don’t we get rid of some of the obstacles to making a living in Hawaii such as a tax system that grinds the poor deeper into poverty, and other employer mandates that further skew the labor market?

It wasn’t long ago that, in response to numerous complaints of students sweltering in their classrooms, Governor Ige proclaimed that he would commit $100 million to cool 1,000 classrooms.  At the end of the 2016 legislative session, he signed Act 47 of 2016 appropriating the funds to the Department of Education (DOE), and in 2018 he trumpeted this accomplishment during his re-election campaign.

As KHON2 reported in November, the $100 million covered only about one-tenth of public school classrooms in Hawaii.  Those classrooms received solar powered systems costing an average of $40,000 per classroom.  Fast forward a little, and we see that some schools that received the units found that they either have started breaking down or will only work for a short time every day. 

KITV, in a more recent newscast this year, reported that one school, Niu Valley Middle School in east Honolulu, reported more than 300 heat-related visits to the school nurse’s office over the course of four months (August through November).  That’s between 3 and 4 kids per school day needing medical attention.  Ouch.

One teacher, writing about his experience on the “Cool Our Keiki” Facebook group, said that his school administration tried to fix the situation.  “The DOE brought in a team of state workers to evaluat[e], and their recommendation? Wait for a sunny day so the batteries can charge.”  In the six weeks that followed, he reports, there were plenty of sunny days but the air conditioners in his classroom and his neighbor’s classroom still don’t work.

Not only that, air conditioning upgrades may make matters worse at times.  When some companies install the upgrades, they fix the windows so they can’t be opened, as KHON2 reported.  If the unit fails for whatever reason, using the trade winds is no longer an option.

Why solar powered air conditioning?  Because the DOE is under a mandate to have net zero electrical consumption to meet Hawaii green energy goals.

Is there a way out of this mess?  The DOE thinks so, as it has rolled out a “School Directed A/C” program that allows basic, affordable window units if the DOE staff verities that the school’s electrical system can handle the extra load.  It turns out that the DOE recently completed a large project to replace 700,000 light bulbs at Oahu schools with more efficient LED bulbs, reducing electric usage and creating the capacity to install air conditioning while still being “net zero.”

In a press release, DOE’s assistant superintendent for facilities and operations describes the window units:  “These are less complex units from installation to maintenance, where we’re not having to tear down walls or install solar panels or battery systems. It will be easier for our schools to maintain these units rather than having to contract out for maintenance service,” she said.

“Things can be done much, much cheaper,” KHON2 quotes HSTA President Corey Rosenlee as saying. “You can probably do a classroom for $2,000 where before it cost $100,000. If a wall unit falls apart after 10 years, then you can replace it. It’s easy to look back now and say we should have done this 5 years ago.”

Okay, so where does that leave us?  We spent a massive amount of money on our schools a few years ago and have gotten questionable results.  We have since identified a much cheaper and more efficient path toward addressing the health and safety issue that still plagues our keiki.  Educators, are there lessons to be learned from all of this?  If so, tell your administrators!  Let’s learn from this debacle and use our public money more efficiently next time.