Every so often, the news reports on people who deny the legitimacy of the government we have here in Hawaii. “We’re not subject to those laws,” they say, “so we don’t have to follow rules or pay taxes.”  It pains me to read stories of people who lost their homes after being told that they didn’t have to pay back their mortgages because the laws under which they were made were invalid  in Hawaii.

It’s true that the path from Kingdom of Hawaii to Territory of Hawaii was peppered with events that were morally questionable…of course depending on your morality.  Some people value strength—“Might makes right!”  Some have ideas of a moral objective, and the path to get there isn’t important—“The ends justified the means.”

What is legitimacy?  I’ll start with the first clause of the first article of the Hawaii Constitution:  “All political power of this State is inherent in the people and the responsibility for the exercise thereof rests with the people.  All government is founded on this authority.”  That sounds a lot like “The will of the people shall be the basis of the authority of government,” Article 21(3) of the United Nations’ 1948 Universal Declaration of Human Rights, or “Governments are instituted among Men, deriving their just powers from the consent of the governed,” from the 1776 document that the United States celebrates this month.  So I propose that legitimacy of a government comes from the consent of those governed.

There are, of course, those in the “Haole go home!” camp who may say that the only voices who matter in Hawaii government are those of the kanaka maoli, perhaps meaning “any descendant of not less than one-half part of the blood of the races inhabiting the Hawaiian Islands previous to 1778,” as section 201 of the Hawaiian Homes Commission Act defines “Native Hawaiian.”  Are we talking about a favored race here?  They are entitled to their opinions, but they appear to be in the minority.

In 1959, the U.S. Congress passed our Admission Act.  One unusual thing about this act was that it wasn’t a declaration like most laws are.  Rather, it was an offer.  If the people of Hawaii, at a referendum election, accepted statehood, then the United States of America would welcome us in.  That’s what section 7 of the Admission Act says. The Act specified three questions to be put before the voters, and if any one of them were not approved by a majority of the voters the Admission Act would have no effect.

On each of the three ballot questions, more than 132,000 people voted in favor while fewer than 8,000 voted against.  There were 155,000 registered voters then, and the voter turnout was the largest we have ever had.  When we became a state, sirens blared, horns honked, bells rang, fireworks were launched, and there was literally dancing in the streets.

We accepted statehood and all that came with it, including submission to the federal government of the United States.  We accepted it even though our history with the United States included an unprovoked attack on the Queen of Hawaii, Japanese internment, and sixty years of being an “insular possession” (a second-class status that no one should have to endure for that long).  The acceptance was not unanimous, but it was decisive.  It was a clear expression of the will of the people.  That’s why I conclude that our government is legitimate.

In no organized society can everyone do what they want, when they want, and where they want all the time.  We have a set of rules that all of us must follow.  We can’t just walk into a random person’s property and pick their mango tree bare because we happened to be hungry.  We can’t expect to borrow money from a bank and then forget about repaying it.  We can’t just accept the benefits of government and force the rest of us who pay taxes to pay more to make up for those who refuse to pony up.  Those who have a different opinion can have it, but acting upon it may land them in the hoosegow.  Instead of having that happen, let’s work together, even with our differing opinions, to make the best out of our civilized society.

The Hawaii State Tax Watch Doggie is discussing a new Honolulu property tax proposal with his wife, the consummate researcher.

Q.  I thought we had enough problems trying to tax the usage of real property.  Now the City and County wants to tax people who don’t use their real property!

A.  Do you mean the mayor’s proposed tax on unoccupied homes?  The city of Vancouver in Canada imposes a “vacancy fee” on homes that are neither occupied nor rented.  The tax there is 1% of the property’s assessed taxable value.  The mayor’s proposal is based on that.

Q:  You researched that already?  How did you know I was thinking about it?

A:  You’ve been snarling and growling about it for the past week.

Q:  Oh.  Hmm…so how does the city figure out if a home is vacant?

A:  In Vancouver, questionnaires are sent to all property owners.  These can be filled out either on paper or online.  If a property hasn’t been occupied by the owner, the questionnaire then asks if it’s been rented or occupied by others, and if so, what are the names of the renters or occupiers; if the property has been undergoing renovation that makes occupancy impossible, and if so, what’s the building permit number; if the owners have been hospitalized or are in a long-term care facility, and if so, what’s the name of the facility; and if the owners can’t occupy the property because of a court order, and if so, what’s the case number.

Q:  What’s to stop people from lying on their declarations to avoid the tax?

A:  False declarations are perjury.  Vancouver also provides for fines of up to $10,000 per day, in addition to payment of the tax, for a false declaration.

Q:  The mayor says that the vacancy tax will result in more housing units being put on the market for rental, and additional monies collected that would help fund programs to help the homeless.  What do you think about that?

A:  In Vancouver, a news article from the Canadian Broadcasting Corporation noted that there was little change in the number of vacant homes, but the tax produced more money than expected.

Q:  So, is that why Civil Beat’s recent editorial proposed a vacant home fee of 5% or 10% rather than the 1% that Vancouver is using?

A:  They said that the “idea is sound, the amount woefully inadequate.  A 5% or 10% vacancy tax would be more appropriate. That still might not be enough to change the behavior of many absentee landowners, but at least it would generate a sizable sum of revenue that could be dedicated to building affordable housing elsewhere.”

Q:  The 1% was selected to be at about the difference between commercial and residential rates.  In Honolulu, Residential A owners pay $4.50 per $1,000 of the first $1 million of value.  Commercial property owners pay $12.40.  One percent corresponds to $10 per $1,000.

A:  If the vacant homes tax ends up to be 4% or 5%, people will be motivated to avoid the tax.  Maybe they will try to get the property reclassified to commercial.

Q:  Also, I have my doubts about whether any money taken in would go to affordable housing or homeless services.  The City must fund the rail project and is going to have to find millions to pay for its operation and maintenance.  It must plow hundreds of millions into capital improvements such as sewer system upgrades.  The Mayor also has been talking about upgrades to the Blaisdell Center as well as establishing a transit plaza at Ala Moana Center.

A:  That makes my shopping sound insignificant in comparison!  I guess it’s okay for me to take it up a notch.

Q:  (Whine)  I didn’t see that one coming!

“It’s the Economy, Stupid” is a catchphrase made famous by Bill Clinton when he ran for president in 1992 and won. 

Recently, we have been getting lots of news about our economy here in the islands, and none of it has been good.

 The national site WalletHub has pegged our economy 48th out of 51 (including DC).  We eked out a victory over only Mississippi, Louisiana, and Alaska. 

The University of Hawaii’s economics organization, UHERO, also came out with a somber assessment.  “Over the past year,” it said, “there has been a broad slowing of growth across the four counties. To varying degrees, each has seen a falloff in tourism activity and a slowing of employment growth in a number of sectors.”

The Department of Business, Economic Development and Tourism publishes a quarterly forecast.  The most recent one for Q2 2019 predicts modest growth in the gross domestic product for the state, with annual increases a little less than 4%. 

In the meantime, our county governments are passing record-busting budgets.  

The City and County of Honolulu recently passed a budget 8.8% higher than last year, which included tax hikes on hotel and resort properties and in non-owner occupied “Residential A.”  The Mayor’s chief of staff was quoted as saying, “The additional revenue will be used to remedy Honolulu’s unfunded healthcare and retirement liabilities, and to prepare us for future rail operations and maintenance.”  Prepare us?  Uh-oh, it looks like we have more revenue woes to come.

Maui County passed the largest budget in county history, including tax increases in almost all property classifications including residential.  The budget proposes to spend $823.5 million, 8.6% more than fiscal 2019.  “The council opted for economic investment in Maui County, rather than austerity,” the council chair stated in a news release.  That’s easy to say when the money being invested isn’t theirs.

Kauai adopted a $278 million budget, a 7.75% increase over the prior year.  “With a new Mayor and Administration onboard, the Council carefully set out to provide the Administration with the tools needed to innovatively improve systems, services, and functions Countywide,” the County Council said.  Now someone needs to use the tools.

And the Hawaii County Council passed a $585 million budget, which is more than 13% over last year, adding 95 positions.  “We’re demonstrating to our constituency and taxpayers that we’re watching the bottom line,” one council member is quoted as saying.  Maybe someone needs new glasses.

So, let’s now ask the question.  If the economy isn’t growing as much as the rate government is spending, what’s going to happen?

There is an engine in our society which we call the economy.  Businesses provide goods and services to people and other businesses.   Those businesses can’t do it alone, so they employ people.  The businesses themselves need goods and services to perform, and their employees need meals, shelter, and other goods and services.  Our tax system takes a piece of each of almost all these financial transactions.  So, if our economic engine is running and spinning, our government is taking in money.  That taking acts as a brake on the engine, but if the engine is running fast enough it won’t slow down so much.  But what happens if the engine is just sputtering along and government demands more anyway through tax rate hikes? 

Lawmakers, if you don’t know the answer to that question, just listen to a few of your constituents who were forced to dip into savings, sell household goods or the family home, or even leave our sunny shores for greener pastures—or at least pastures where the taxes are lower.  If it gets bad enough for them, they might exact retribution at the ballot box.  Like how George H.W. Bush lost to Bill Clinton because of “the economy, stupid.”

Just three months ago, the Hawaii State Auditor released the latest in a series of reports over the years on the Hawaii Deposit Beverage Container Program, known as HI-5.  That report, No. 19-08, basically said, “Look.  We’ve issued four audit reports on the program, every two years beginning with 2013.  In each of the reports, we rely on the distributors and redemption centers to be honest and police themselves.  There is no verification or enforcement.  You might think people are honest, but in three out of the four reports we found discrepancies, meaning either that distributors paid the fee on fewer bottles than they distributed, or redemption centers asked for and received more money from the State than they were entitled to.”

To illustrate the point, the 2019 report detailed the story of one staff worker who worked for the accounting firm contracted to help with the report.  He went to a redemption center, dropped off some glass bottles, and was paid 61 cents.  The redemption center altered the receipt log and received a little more than 69 dollars instead.  A few days later, he went to the same redemption center with three pounds of plastic containers and was paid $3.95.  That receipt log was also altered, with the State paying out fifteen bucks.

“The Department of Health has been aware of this flawed payment system since 2006,” the report summary says, “but has done little to address it either with changes to the program or through enforcement inspections.”

When the Auditor’s report came out, it received attention not only from the local press but also national media.  And the Legislature was in session at the time.  Wasn’t it a great time to ask the Legislature to give the Department of Health some resources to put financial controls on the program and perhaps throw in the hoosegow some of the bad actors who had been stealing taxpayer money?

When you read the budget summaries from our legislative folks, however, such as blog posts from the House Majority on House Bill 2 and on the remaining executive budget, there is no mention about fixing the leaks in our bottle bill program.

And, when perusing the news releases from the Department of Health, the Department doesn’t seem to mind publicizing red-placard closures of food establishments as examples of its robust inspections and enforcement on the Big Island and Molokai, but no mention whatsoever is made of the redemption fraud even though the Auditor gave DOH evidence on a silver platter.

Does DOH just not care about millions of taxpayer dollars possibly being stolen from under their noses?  “Fraud is a serious and real risk for this program,” Director of Health Dr. Bruce Anderson stated in a February 21 letter attached to the audit report.  Yet we have heard nothing at all about changes to the program or about wrongdoers getting punished.

Perhaps this apathy is breeding distrust of the program.  Redemption rates for eligible beverage containers are hitting the skids, as this chart shows:

Source:  Office of the Auditor

Perhaps if we can clean up this program, we can help to restore confidence in government’s ability to handle money.  And bottles.

The Hawaii State Tax Watch Doggie’s son has come home from school, and today he has a few more questions than usual.

Q. Dad!  What’s a general ledger?

A. Grrr…I’m trying to write an article here. Why don’t you ask Mom?

Q. She just chased me out of the kitchen.

A. Oh? Okay then. Hmm…lots of businesses and organizations keep track of their finances using an accounting system. The system keeps track of money that is received or paid and breaks it up into categories.

For example, if your school used $20 in cash to buy pencils for your classroom, the system would record on the general ledger a “debit” to classroom supplies for $20 and a “credit” to cash of $20.

Q. Why do you count the $20 twice?

A. Once is to keep track of how much money you have, and the other is to keep track of what happened to it.  The debits and credits must always total the same number, otherwise you’ve lost track of either the money or what it was used for.

Q. So the general ledger is where all the money gets recorded?

A. Right. Why the sudden interest in accounting?

Q. My school told me there’s an organization called the Education Institute of Hawaii that wants to see the general ledger for the whole Department of Education.

A. Well, sure. General ledgers are government records and should be accessible to the public.

Q. But my teacher says that what she gets paid is private information and the government shouldn’t be giving it out.

A. Individual salaries are private information. But most big employers pay their employees on a separate system, and only totals get put on the general ledger. So, releasing the general ledger isn’t supposed to expose private information.

Q. Is that what our school does?

A. I don’t know. But even if there is some private information in the general ledger, there should be a way to take that information out so the public can examine the rest of the ledger.

Q. So my teacher says the Education Institute is going to sue to get the information. She says it’s dumb because all the financial information is supposed to go into a system that will be public next year anyway.

A. Well, just because information is “supposed” to be released in some form at some point in the future is no excuse for refusing to turn it over now to a member of the public who is requesting it.

Q. So is my school going to go to court? Maybe they’ll be next to the Kealoha trial.

A. We’ll see…maybe they’ll go to court, but it’s a different court from the Kealoha trial so it’ll be in a different building at least.

Mom: Dinner’s ready!

A. Whew!  Saved by the bell!

At the Legislature, I often hear legislators considering proposed tax legislation ask our Department of Taxation (DOTAX) how much money a certain proposal would bring in (if it’s a “revenue raiser”) or cost (if it’s a tax credit or exemption).  Sometimes, the DOTAX representative at the hearing peers into a little manila folder he or she brings to the hearing and reads out some numbers.  For at least the last several years, those numbers, and the basis for their calculation, are not in DOTAX’s testimony and are not given out to the public.

DOTAX justified the shroud of darkness surrounding its revenue projections with a theory, derived from federal Freedom of Information Act (FOIA) law, called “deliberative process privilege.”  We want agencies to be able to deliberate and think about their decisions, so the theory goes, but once they decide what to do then the decision becomes public.  Our state Office of Information Practices (OIP), which administers our state’s open records laws, went along with this doctrine for the past 30 years.  But that theory was never put to the test before the Supreme Court of Hawaii…until recently.

In December 2018, in Peer News LLC v. City and County of Honolulu, 143 Haw. 472 (2018), our supreme court spoke.  That case involved a reporter from Civil Beat who was trying to see internal documents generated during the setting of the City & County’s annual operating budget.  He was, essentially, told to take a long walk off a short pier, leading to the lawsuit. The court divided 3 to 2, with the majority holding that the Hawaii act was significantly different from FOIA to justify a different interpretation.  Specifically, the majority refused to recognize the deliberative process privilege.  The majority acknowledged that the law allows withholding documents from public disclosure when exposing those documents would make it difficult or impossible for the agency do its job.  However, the majority was not willing to let this exemption apply to agency decision-making in general, because agencies make decisions all the time.

On May 20, 2019, OIP applied that decision to DOTAX.  An attorney requested worksheets and other information supporting DOTAX’s revenue estimates of tax bills being considered in the legislative session.   OIP ruled that because of the Peer News decision DOTAX could not rely upon the deliberative process privilege.  DOTAX also argued that it would not be able to produce objective and independent revenue estimates if its working papers were disclosed, but OIP held that production of those estimates was just another form of decision-making.

DOTAX also argued that its work is indispensable to the legislative process and should be able to rely on the statute allowing for work product of legislative committees to be kept secret.  OIP dismissed that argument, saying that DOTAX staff don’t work for the legislature and DOTAX is not unique in that many agencies other than DOTAX provide expert and presumably unbiased analysis of various measures before the legislature.

Taken together, these decisions represent a big step forward for transparency.  The dollar impact of a tax or public finance measure is often critically important not only to lawmakers, but to taxpayers.  Government, after all, doesn’t pay taxes.  Taxpayers do.  Public scrutiny and comment on this important aspect should lead to better and more well-informed estimates, and thus to better decision-making on proposed legislation affecting the State’s economy and taxpayers’ pocketbooks.