A recent, eagerly awaited independent financial review of the Office of Hawaiian Affairs (OHA) has been in the news lately.  The review, conducted by the California-based accounting firm CliftonLarsenAllen (“CLA”), made several observations and recommendations, including the flagging of 32 transactions, representing $7.8 million, as potentially fraudulent, wasteful, or abusive.

Indeed, of the 185 transactions the firm reviewed, it had audit observations, meaning that “the results of testing revealed occurrences of noncompliance with statutory requirements and/or internal policies” or “that revealed indicators or red flags of waste, fraud, or abuse,” in 85% of them.  The transactions reviewed were not random but were those that the firm suspected would have a greater chance of irregularities.

OHA’s chair of the Board of Trustees and chair of its Resource Management Committee issued a statement pointing out that the report “did not identify actual instances of fraud, waste or abuse.” 

Sure.  That wasn’t CLA’s job.  They’re auditors, not prosecutors, judges, or juries.  What they did observe in many instances, however, was very troubling.

Page 94 of the report, for example, mentioned a contract with Absolute Plus Advisors under which OHA paid $181,499.  It was supposed to be a contract for the vendor to provide the Trustees with quarterly reports on OHA’s Trust Fund and on its Trust Funds Advisor, sort of like having the vendor keep an eye on the firm who was keeping an eye on OHA’s money.  OHA had the contract but had no documentation either of competitive bidding for the contract as required by law, or of any deliverables under the contract.  So, the money was spent, but it wasn’t clear if OHA got anything it paid for.

Page 117 of the report described a contract with Mid-Continent Research for Education and Learning to provide consulting services.  The contract was signed for an amount just short of $100,000 but was amended to increase the contract price to $349,527.  Procurement documents such as bid evaluations were nowhere to be found; nor could OHA staff find any of the deliverables related to this contract.  So, about $350,000 went out the door and OHA might not have gotten anything in return.

Trustee Keli’I Akina (who, by the way, should be commended rather than pilloried for his role in getting this financial review done) put together and published a digest of the CLA report called “Red Flags: An Analysis of the Independent Audit of OHA and its [Limited Liability Companies].”  The digest includes descriptions of these financial anomalies and many others.

Yes, the reports describe the smoke, but not the fire.  They don’t accuse anyone of committing fraud or other wrongdoing.  There may be instances of ineptitude or mismanagement, which would be deplorable but not criminal, or grand theft, which would carry more severe consequences.

So, we need to seriously consider going to the next step.

OHA would be prudent to consider taking this report to the law enforcement authorities who would be able to investigate whether any of the conduct described in the report rises to the level of criminal conduct, such as fraud, theft, or bribery.  OHA, you may remember, is a state agency and is funded with taxpayer money from all of us.  All of us get to vote in (or vote out) OHA trustees.  Thus, crimes against OHA are crimes not just against the Native Hawaiian beneficiaries but are crimes against all of us.  If it is determined that crimes were committed, the perpetrators need to be brought to justice.

Recently, the website howmuch.net, a financial literacy website with interesting visualizations about various financial topics, came out with a comparison called, “This is How Long You Need to Work to Live Comfortably in Every State.”

Those folks tried to calculate, for each state, the annual wage required to live comfortably, by earner, and the number of hours per week that an earner would need to work to earn it.  “Hawaii is the single most difficult state for workers to get ahead,” they said, “requiring $96.1K to enjoy a comfortable life and 91-hour workweeks to get there.”

Huh?!  A 91-hour workweek doesn’t sound like a comfortable life at all!

The second-highest jurisdiction where it costs the most to enjoy a comfortable living is Washington, DC, where it costs $78,310 and would require a 44-hour workweek to earn it.  The number of hours in DC is much lower because people there, on average, make lots more per hour.

The next five places went to California, Oregon, New York, Massachusetts, and Maryland, with costs in the $60K range and workweeks between 51 and 63 hours.

Which means that we are way out of line compared to other states.

How did howmuch.net come to that conclusion?  They said that they figured out the median wage for workers in 2018 in each state from the Bureau of Labor Statistics, and then used numbers from the BLS to calculate average annual consumer expenditures.  They added 20% to each state’s average to represent comfortable living.  Then, they divided that figure by the number of earners in an average household and obtained the annual expenditure per earner.  That amount was adjusted to each state’s cost of living using data from the Missouri Economic Research and Information Center (MERIC, which is part of Missouri’s state government and seems to be their counterpart of Hawaii DBEDT’s Research and Economic Analysis Division or READ).  The result was divided by the median wage, giving the number of hours needed to make that wage.

According to MERIC, Hawaii’s cost of living was 201.3 percent of, or double, the national average, with the primary problem being housing costs that punched in at a staggering 347.1 percent of the national average.  Our grocery costs were at 160.8, utilities at 185.2, transportation at 135.7, and health care at 120.3 percent of the national average respectively, earning us 52nd place, namely dead last, out of 50 states plus Washington DC and Puerto Rico.  The next most expensive cost-of-living jurisdictions were DC with 164, California with 140, Oregon with 137, and New York with 135 percent of the national average.

Although we might be able to quibble with some of the pieces of the methodology, like why they chose a 20% bump to represent a “comfortable life,” the underlying message of the study echoes what we have seen several times before regarding Hawaii’s cost of living in general and housing cost in particular.  You may also have noticed that our residents have been heading for the exits over the last few years (at least).  If this keeps up, who is going to be left to pay for government?

Lawmakers take note!  If you are seriously interested in making our State a better place to live and work, please make it a priority to do something to calm our raging cost of living, especially the cost of housing.  Who can possibly work 91 hours a week to have a comfortable life?  Or 76 hours a week (taking away the 20% bump) to have an average, uncomfortable life? 

Piling on, for those of you who aren’t football fans, happens when a player or group of players jump on top of a runner who already has been tackled, just to make sure the runner is not going anywhere.  The tackling team can get no advantage from piling on, and injuries can and often do result from the pile-up, so piling on is against the rules at nearly every level of competition.

The Honolulu City Council considered on Dec. 4, and passed, a bill (Bill 55) that would drastically hoist the real property tax rate on owners of bed and breakfast homes.  The bill is now on Mayor Caldwell’s desk for consideration.  We have received quite a few inquiries about this bill.

The bill would classify bed and breakfast homes and other transient vacation rental units as “hotel and resort” for property tax purposes.  Most homes are classified as “residential” which is taxed at $3.50 per $1,000 of net taxable value.  The “hotel and resort” classification is taxed at $13.90, nearly four times as much. 

The bill, furthermore, appears to apply the classification for the whole year, and it doesn’t seem to matter how much of the year the unit was actually rented.

For a home valued at $750,000, then, renting out a room or two for part of the year could cost the host family an additional $7,800 or so in property tax for the year (750 x (13.90-3.50) = 7800.)  That’s $650 a month whether the unit is rented or not, which could be a very tough nut to crack.  Many of the testifiers on the bill have bemoaned this consequence.

And let’s not forget Bill 89 of 2018, now known as Ordinance 2019-18, which we have written about before.  It is now illegal to operate a transient rental unit, or a bed and breakfast home, unless you have a “nonconforming use certificate” that grandfathers you in or you are in a resort zoned area.  (Bill 55 doesn’t affect the tax classification of such grandfathered properties.)  If you are running a bed and breakfast home and you are not in one of these grandfathered categories, you need to be registered or face the possibility of being slapped with massive fines (up to $10,000 per day).  And registration won’t even be available to anyone until at least October 2020 while the City gets its act together.  But, of course, there is no exception to the registration requirement for “the City needs to get its act together,” so if you are running such a business you need to shut down.

All these consequences are set to befall homeowners who live on their property (this is one of the requirements of a bed and breakfast home) and try to earn a little extra money to make ends meet, at least according to the testimony on file. 

Maybe instead of trying to make life intolerable for those homeowners trying to conduct a legal business, they should be going after the scofflaws.  Whether or not this bill becomes law, there will be folks who will choose to operate under the radar.  They won’t pay transient accommodations taxes.  They won’t pay GET.  They probably won’t even tell the authorities that they are conducting this business.  Honolulu City Council, what are we doing to catch these bad actors and bring them to justice?

Instead, the Council is doggedly pushing ahead with this bill. 

Fweeeee!  Penalty flag!  “You chumps really piled on there.  Well, that’s going to cost you fifteen yards!”

(It’s the Hawaii State Tax Watch Doggie in a referee’s uniform?  And how did he manage to blow that whistle?)

A recent op-ed column in Real Clear Politics by Scott Hodge, president of the national Tax Foundation (not related to the Tax Foundation of Hawaii although the names are similar) brought up some interesting ideas, spurred by the announced plans of Democratic presidential candidates Elizabeth Warren and Bernie Sanders to enact a tax on wealth.

Sen. Warren’s wealth tax would tax 2% of every dollar of net worth above $50 million, or 3% for every dollar above $1 billion.  Sen. Sanders would levy 1% on net worth above $32 million, and the percentage would progress with greater wealth until it reaches 8%, which would apply to net worth above $10 billion.

With a state legislative session upcoming and lawmakers hungry for more revenue, a wealth tax may come up for debate locally as well.

So why a tax on wealth?

The tax system is supposed to be a means of distributing the cost of government among the governed.  In this country the primary means of doing that is our income tax system.  If you earn money, you pay back some of it as tax.  The system is progressive, which means that if you earn more money, you pay proportionately more tax.

Wealth is what remains after someone has earned money and the income tax system has taken some of it away.  A wealth tax system, then, would be a second tax on the same earnings.  Because our income tax system already distributes the cost of government, there must be a different rationale for a wealth tax.

The rationale:  Wealth is a sin.

In our tax system here in Hawaii and in most states, we impose a tax on socially undesirable things in order to motivate people to use less of them.  Examples of these “sin taxes” are taxes on fossil fuel, tobacco products, and liquor.  The theory behind these levies is that the targeted behavior causes the government to spend more money to deal with the behavior, so the perpetrators of the behavior should pay for those extra costs.  The English economist Arthur Pigou developed many of the key ideas behind the economic theory, and sin taxes are sometimes called “Pigovian taxes.”

Do the wealthy cause government to spend money to deal with them, so that it is fair to ask them to pay for those extra services?  Maybe certain of them have eccentricities that are tough to deal with – Japanese property tycoon Genshiro Kawamoto comes to mind – but there is no common thread linking wealth with social ills as there is, for example, with fossil fuels and air pollution. 

Is being wealthy socially undesirable?  It probably depends on who you ask and the context of the question.  Political ideology weighs heavily here – for example, Sen. Sanders once said that he did not believe billionaires should exist in the United States.  He is an avowed socialist.  Here in Hawaii, much of the political rhetoric over the past few years has focused on the wealthy and their impact on the housing market.  They buy here but they don’t live here, creating fewer opportunities for the locals to own a piece of the rock.  That theme emerged often in the debates over the proposed constitutional amendment to surcharge real property tax for K-12 education.

Then, there is the issue of whether the cure would cause more harm than the alleged disease.  Lawrence Summers, a former Treasury Secretary, argued in an article published in the Boston Globe that wealth taxes would sap innovation by putting new burdens on start-up businesses, “undermine business confidence, reduce investment, degrade economic efficiency and punish success in ways unlikely to be good for the country.”

We should be very careful to evaluate the potential consequences of a tax on wealth before we create and feed such a beast here in Hawaii.