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.

Son:  Dad – I see what you’re getting at, but your delivery needs work.  Don’t quit your day job, okay?

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.

In the news recently was a story about business and licensing fees actually going down. 

These fees were imposed by the Department of Commerce and Consumer Affairs (DCCA).  The money from those fees was funneled to special funds that were supposed to assist with the costs of regulating the industries to which they pertained, namely financial institutions, the cable industry and condominiums.

However, the balances in those funds trended upward, meaning that DCCA was raking in more money than it spent on the industries in question.

This past legislative session, our House of Representatives implemented a slightly different budgeting process.  Instead of having all budgets from all departments funneled through just one legislative committee, the work was essentially split up among several committees, each of which could take a closer look at the department(s) to which it had been assigned.

DCCA fell under the watchful eyes of the House Intrastate Commerce Committee, chaired by Rep. Takashi Ohno.  That committee found that a number of funds under DCCA control had ballooning balances, as written up in House Standing Committee Report No. 653.  It observed that the contractors recovery fund had an unencumbered cash balance of $922,593; the contractors education fund, $560,524; the real estate recovery fund, $870,665; the real estate education fund, $786,881; and the condominium education fund, $2,184,889.  In contrast, the largest payout over multiple years from the contractors recovery fund was $170,893; the contractors education fund, $5,105; the real estate recovery fund, $131,799; the real estate education fund, $602,099; and the condominium education fund, $607,819.  The bill to which the report pertained ultimately didn’t pass, but the additional scrutiny motivated DCCA to work with the House to re-examine the fees over the summer.

As a result, DCCA agreed to the following actions:

It stopped collection of fees that were to go to the mortgage loan recovery fund (see Hawaii Revised Statutes sec. 454F-41) because that fund had swelled to $1.8 million and little, if any, of the fund had been spent.

It stopped collecting the $5 biennium fee from condominium unit owners that was to go the Condominium Education Trust Fund (see HRS sec. 514B-72) because the balance in that fund climbed from $785,062 in fiscal 2015 to $2.5 million in fiscal 2018.

DCCA also reduced annual assessments charged to financial institutions and franchise fees charged to cable television operators. 

It told the Star-Advertiser that it would continue to monitor the funds to ensure that consumers would not be negatively impacted.

Rep. Ohno called the reductions a great first step.  He is still concerned about other special funds fed by fees from contractors and real estate agents.

Congratulations are due to the House of Representatives and the DCCA!  This is an example of how legislative oversight of state agencies is supposed to work.  Hopefully, once our government officials see more instances of this process playing out to the benefit of the business community and their customers, they will be more sensitive to overcollection of those hard-earned taxpayer dollars.

The next order of business is getting a handle on overspending.

Once upon a time, there was a big bank called Bank of America.  It wanted to try doing business in Hawaii, since it was already in many of the other western states, so it reached a deal to buy Honolulu Federal (do you remember HonFed?) and took over all of their branches in Hawaii.  This was in 1992. 

In 1993-94, Bank of America tried to expand its presence in Hawaii by buying Liberty Bank.  At the time, Na Po‘e Kokua, supposedly an organization established to assist native Hawaiians with housing and related matters, formed the Hawaii Fair Lending Coalition (HFLC) and objected to the acquisition, saying that the bank was violating federal laws by failing to lend to Native Hawaiians on homestead land although the federal government had a program, under section 247 of the National Housing Act (12 U.S.C. section 1715z–12), under which such loans would be insured by the Federal Housing Administration.  Bank of America apparently pledged to make $150 million of FHA-247 loans available to the Native Hawaiian borrowers as a result.

A few years later, in 1997, Bank of America exited our state, making a deal with American Savings Bank, a subsidiary of HEI, to buy the Bank of America branches.

In 2004, Bank of America applied to buy FleetBoston in a $47 billion deal, and the HFLC sued to block the transaction, complaining that Bank of America had not delivered on the $150 million loan commitment.  The suit in U.S. District Court here, Haili v. Greenspan, Case No. 04-CV-00089, was ultimately dismissed for lack of jurisdiction; the court concluded it didn’t have the authority to order the federal government to disapprove the proposed bank merger.

Between 2003 and 2007, according to testimony offered to the Senate Committee on Hawaiian Affairs this year, extensive discussions took place between DHHL and the bank, resulting in what are claimed to be agreed changes to the commitment, a list of loans, grants, and investments totaling over $150 million leading Bank of America to argue that the commitment had been met.  A letter of October 3, 2007 from the Deputy Chair of the Hawaiian Homes Commission states, “The statement of BoA contributions toward fulfillment of its commitment appear to be in order.  The Department of Hawaiian Home Lands (DHHL) is therefore pleased to formally acknowledge that the $150,000,000 commitment has been met by Bank of America.”

In 2012, HFLC again raised its hand against a proposed merger by Bank of America.  That prompted the Office of the Comptroller of the Currency, in CRA Decision 154 (2012), to write that the record “was not entirely clear” as to whether the $150 million commitment was ordered by the Office of Thrift Supervision as a condition of the Liberty Bank merger, but that if there were indeed conditions they disappeared in 1995.  The OCC approved the merger anyway.

It is now 2019.  The HFLC (or perhaps the activists behind it) still hasn’t given up.  It pointed to a May 2012 letter from the then-chairman of the Hawaiian Homes Commission saying that the 2007 letter was unauthorized, and it persuaded Governor Ige to send a letter to Bank of America offering to host negotiations to “reach a fair and final settlement.”  In the meantime, the Hawaii Senate (SR 32) and the four County Councils have each passed resolutions, supposedly in support of the Governor’s efforts.

What we now have is a real mess.  A lot happened between 1993 and 2007.  DHHL says the bank lived up to what it agreed to, and both the courts and OCC are not willing to say that the commitment was legally enforceable.  DHHL reentered the fray in 2012 to call into question what happened in 2007, and the wounds are being reopened this year, 2019. 

We need this to stop.  Our government gave Bank of America an official communication in 2007 saying that the controversy was pau.  Anyone who received such a communication would have assumed that it was valid (in law, the concept is called “apparent authority”).  Which means we gave them our word.  Why are we talking about a “fair and final settlement” in 2019 if we gave one to the bank in 2007?  If we don’t want the rest of the world to treat us like lawless savages, we must respect the rule of law and stand by the promises we have made, and not toss both aside years or decades later.