The story you are about to read is true.  The names have not been changed to protect the innocent.  This is the city:  Honolulu, Hawaii.  I live here.  I’m a doggie.  The suspect is Blankety Blank.

No, that isn’t a cuss word.  It’s just the facts, ma’am. 

Blankety Blank is House Bill 1190.  Its purpose, should you decide to accept it, is “to amend state income tax rates and provide tax relief for taxpayers whose income places them at or below the poverty level.”

But here’s what the bill actually says (for married filing jointly, with other filing statuses having similar language):

In the case of any taxable year beginning after December 31, 2018:

If the taxable income is:            The tax shall be:

Over $6,600 but not over $9,600      ___% of excess over $6,600

Over $9,600 but not over $28,800     $___ plus ___% of excess over $9,600

Over $28,800 but not over $38,400    $___ plus ___% of excess over $28,800

Over $38,400 but not over $48,000    $___ plus ___% of excess over $38,400

Over $48,000 but not over $72,000    $___ plus ___% of excess over $48,000

The list goes on, but I’m sure you get the idea.  Blanks, blanks, and more blanks.

We don’t know if it’s a tax cut, a tax hike, or something in between.  Nevertheless, the bill has oodles of supporters, including the LGBT Caucus of the Democratic Party of Hawaii, Rainbow Family 808, Americans for Democratic Action Hawaii, Hawaiian Community Assets, Hawaii Appleseed Center for Law and Economic Justice, League of Women Voters of Hawaii, Oahu County Democrats, and numerous individuals.  We wonder if all those supporters were aware that they were supporting Blankety Blank.  Maybe they believed the statements about the bill’s intent, or maybe they just didn’t care about what was in the blanks.

Blankety Blank passed the House on March 5th with no one voting “No” and no one voting “Aye with reservations.”

The Senate Ways and Means Committee amended it slightly (but didn’t fill in any of the blanks) and passed it out with no dissent on March 29.  At this writing, it was awaiting third reading in the Senate, after which it will go to a conference committee.

The conference committee conducts its deliberations behind the scenes, and only schedules public meetings when it comes time to vote on the conference draft.  The conference draft, if one is produced, will have the real numbers in it.  Once that draft is released to the public, we will finally know whether we are looking at a tax hike, a tax cut, or something revenue neutral.

The Hawaii Constitution states:  “No bill shall become law unless it shall pass three readings in each house on separate days.”  The Proceedings of the Constitutional Convention of 1950 said that those readings provide “the opportunity for full debate in the open before committees and in each House, during the course of which the purposes of the measures, and their meaning, scope, and probable effect, and the validity of the alleged facts and arguments given in their support can be fully examined, and if false or unsound, can be exposed, before any action of consequence is taken thereon.”

So how do you discuss a Blankety Blank?  Can you really debate the measure’s purpose, meaning, scope, or probable effect without knowing whether you are talking about a tax hike or a tax cut? 

This is a true story.  The end of the story has not yet been written.  We too will be following House Bill 1190 and will bark like crazy if something goes awry.  Ours is a tough job but someone has to do it.  The name’s Watch Doggie.

We’ve previously warned that our legislature has a dogged focus on new taxes –

“ARF!  Don’t make fun of me like that!”

It’s the Hawaii State Tax Watch Doggie, with a report on recent bills!

Q:        What would you like to report?

A:        Our Legislature is wasting no time pushing those revenue raisers!  A couple of them cleared the legislative process already and were sent to the Governor’s desk on March 20th.

Q:        What does that mean?

A:        When a bill is sent to the Governor during session, he needs to decide whether to sign or veto the bill within 10 days rather than the usual 45.  So, bills could become law much earlier than June or July when most bills are approved.

Q:        What else has gone up to the Governor’s office already?  I wrote about SB 94 last week which would try to force presidential candidates to post their tax returns, and I know that’s gone upstairs.

A:        SB 1361 would raise estate taxes on Hawaii estates valued at over $10 million.  It would apply a top tax rate of 20%.  That would make us tied with Washington state as the highest state estate tax rate in the country.

Q:        We want to be top dog that much?

A:        (Facepaw)  I’ll forget you said that.  I guess they really want to soak the rich folks who die here.  That’s dangerous.  You need to remember that these folks easily can jump on a plane and be out of here.  According to the Census Bureau we lost more than 10,000 people a year to the mainland for the last three years.

Q:        Voting with their feet, I guess.

A:        Then, there is SB 396, relating to marketplace facilitators.

Q:        What’s that all about?

A:        The state has tried really hard to go after online sellers like Amazon, Wayfair, and Overstock.  Previously those sellers could offer products to Hawaii customers without paying Hawaii tax, and that  gave them an advantage over local stores.  Last year, following a state-friendly U.S. Supreme Court ruling, our state adopted a law requiring many of those businesses to register and pay tax.

Q:        So there was a problem with that?

A:        The online sellers also set up “marketplaces.”  Under that system they said they weren’t selling their own products, but were selling on behalf of other stores like Dan’s Dog Food in Plano, Texas.  So the marketplace said Dan’s Dog Food isn’t registered or paying tax in Hawaii, so the marketplace had no responsibility to collect or pay GET.  Amazon, for example, was only paying tax on about half of its sales because the other half was marketplace sales.

Q:        Why Dan’s Dog Food?

A:        I’m hungry.

Q:        So SB 396 will change this?

A:        Yes.  It says that if an online marketplace collects money on a sale to Hawaii, the marketplace needs to pay GET as the retailer.  The business on whose behalf the marketplace is selling is treated as selling its goods to the marketplace.

Q:        So the marketplace pays 4%, and Dan’s Dog Food would pay the half-percent wholesale rate GET.

A:        Yes.  I don’t know if Dan’s will actually pay, but that’s the theory.  And the marketplace facilitators that don’t handle money will be required to report all of their Hawaii sales, with names and addresses of the buyers, to our tax office. 

Q:        Anything else on its way to the Gov’s desk?

A:        Not right now, but we’ll keep you informed!  Woof!

Several online travel companies engaged in protracted litigation against the Department of Taxation over whether and to what extent they are liable for Hawaii General Excise and Transient Accommodations Taxes on hotel accommodations that they sold to third parties on their respective platforms.  The litigation spanned multiple years, resulted in one exhaustive Hawaii Supreme Court opinion, In re Travelocity.com, Inc., 135 Haw. 88, 346 P.3d 157 (2015), and then resulted in entry of judgment.

Before the ink was dry on those judgments, the Department of Taxation produced additional assessments against the taxpayers, this time on car rental commissions, for the same tax type (General Excise Tax) and for many of the same years as those covered in the judgment.  Can they do that?

The Supreme Court of Hawaii’s answer:  Yes, they can.

The case name is In re Priceline.com, Inc.  The decision was rendered on March 4, 2019.

Normally in civil litigation, if A sues B, both A and B need to include in the lawsuit all the claims that each of them has against the other.  If the lawsuit goes to trial and final judgment is rendered, the controversy between A and B is at an end.  The courts won’t be too happy if either A or B had some other beef, for whatever reason forgot to put it into the suit, and now wants to do another trial.  “Not happening,” they’ll say.

When one of the litigants is the Department of Taxation exercising the government’s sovereign power, however, the rules are a little different.  Basically, they want to make sure that the government’s rights are not lost through a boo-boo made by some random government official.  Such as the ones who agreed to the lower court’s judgment when there were still car rental taxes to be paid.

This decision isn’t as outrageous as it sounds.  First, it only applies when the accused taxpayer has not filed a return.  If a return has been filed, there is a statute of limitations that runs against the State.  Second, if the taxpayer and the State have actually litigated the issue that the taxpayer is complaining about, the State is barred. It won’t get another shot at litigating an issue it has already litigated and lost.  The rule is apparently designed to protect the State if the taxpayer has never filed returns and is not forthcoming with any information, the Department digs up information about income source #1, assesses, litigates, and obtains judgment, and then later digs up information about income source #2.

Still, it’s tough to accept that the second wave of assessments should be allowed here.  When the online travel companies were first audited, their books were exposed to a thorough and searching examination.  If no one was playing “hide the ball” (if some of that went on, that would be actual fraud, with understandably dire consequences to the fraudster), the financial details of both the hotel and the car rental income would have been fully exposed to the Department’s auditors.  If the Department was fully aware of the issue but decided not to pursue it in the assessments and litigation, then they should be made to sleep on the bed that they made for themselves.

Judges and taxpayers alike should take this ruling to heart.  Taxpayers need to understand that filing their annual returns is critical.  Those with disputes must make sure that the case being litigated contains all the Department’s claims.  If the Department is declining to pursue one or more issues that come up in an audit or assessment, this fact must be made clear in the record so the Department cannot later claim to be blindsided and take advantage of this case precedent.

One of the more debate-worthy bills at our Legislature (Senate Bill 94) involves requiring candidates for President and Vice President of the United States to post their tax returns on the Internet.  If they don’t, the bill says, they won’t appear on the Hawaii ballot and even if they somehow win, the folks that we send to the Electoral College won’t be allowed to vote for them.

Is this kind of restriction even legal?  After all, the qualifications for federal elected office are prescribed by the Constitution of the United States.  Does the state have any business adding to those qualifications from their own perspective?  The Supreme Court already has said no.  In Arkansas, voters amended their state constitution to set term limits on their own Congressional Representatives and Senators, and if the term limit was up, the candidate’s name would not appear on the ballot.  The Supreme Court, in U.S. Term Limits, Inc. v. Thornton, 514 U.S. 779 (1995), held that Arkansas couldn’t do that.  That’s why our own Attorney General has raised questions about this bill.

In addition, we in Hawaii have a constitutional right to privacy.  Private information includes financial information, and information on tax returns is confidential under our state law, as it is in all states.  We ask taxpayers to bare their souls, or at least the financial part, to our tax agencies so they can collect the right amount of tax; and in return, we instruct our agency workers, under pain of criminal penalty, not to share that information with others unless they have a legitimate right to know.

Occasionally, we require people aspiring to higher office to make financial disclosures.  We see these requirements as necessary to protect transparency and ethical behavior. If we know what companies a responsible government officer has a financial interest in, for example, we can scrutinize those transactions more carefully for any conflicts of interest.

What people might not already know is that candidates for President and Vice President of the United States already are required to make financial disclosures to the Federal Election Commission, which then turns over the information to the Office of Government Ethics.  The financial disclosures for the President and Vice President can be downloaded from this page.  The law prescribing the contents of those reports, 5 U.S.C. App. § 102, requires disclosure of the source, type, and amount of income from any source, including honoraria; all gifts, other than from family; all liabilities exceeding $10,000; and tons of other information, more extensive than that normally found on a tax return.  President Trump’s financial disclosures for 2017 and 2018 were 98 and 92 pages, respectively.  With that kind of information already available publicly, one needs to wonder what, if anything, disclosing a federal tax return would add.

Thus, we raise the question, “Why do we need this bill?”  Do we need it to thumb our noses at the President and Vice President?  Do we want to help the IRS because we think that embarrassing or false information may be in those returns and that the IRS won’t be able to deal with it?  Are we trying to prove that Hawaii has more ethics than anywhere else?  And if we think it’s such a great idea, why don’t we apply it to state executives, judges, or legislators?

If you’re following bills as they move through our legislature, there are a couple of practices that we need you to know about. Often, committee chairs will refer to one or both of these practices when they move bills forward.

Each bill must have an effective date so that we know when it starts doing what it is supposed to if it’s signed into law.  Typically, income tax bills become effective for tax years beginning after a certain date.  Excise tax bills usually become effective on July 1st to coincide with the start of the State’s fiscal year.  “Defect the date” refers to setting the effective date very far in the future, such as July 1, 2050, so the bill would have no effect if enacted into law in that form.  A bill with such an effective date is still alive, but the legislators are not comfortable enough with it to let it pass in that form.  Instead, they are willing to let the bill survive for now “so that the discussion can continue,” but they want to take a look at it again, perhaps in conference committee, before deciding whether to send the bill to the Governor’s desk.

“Blank the amount” is a similar technique that can be used whenever a bill has a number in it.  The technique is often used on an appropriation bill that sets aside a certain amount of money to do what the bill proponents want.  It can also be used to earmark tax revenues, as is done with SB 1474 Senate Draft 2 that proposes an increase in the GET.  The bill now specifies that “__ per cent or $ _____, whichever is greater, of the revenues shall be deposited into a special account in the general fund for appropriation to and expenditure for operations of the department of education.”  A similar clause is provided for operations of the University of Hawaii.

Obviously, bills with blank amounts in them won’t have much of an effect if they are enacted in that form, even if they have an effective date that is not defective.  (We actually enacted such a bill in 1999.  Act 306 of 1999 enacted credits for the construction or renovation of a “qualified resort facility” and a “qualified general facility.”  The credit amounts were percentages of the capitalized costs but were left blank.  The Department then refused to allow any credit under these circumstances, as it explained in Department of Taxation Announcement No. 99-27.)

Bills with blank amounts perhaps serve the same purpose as bills with defective effective dates, but the blank amounts are quite a bit more problematic.  First, it’s easy to imagine that what goes in the blank will have a difference in our lawmakers’ willingness to vote for the bill.  A lawmaker who might be willing to stomach an increase in the base GET rate from 4% to 4.5%, for example, might be outraged enough to hit the “No” button if the bill’s proponents wanted to fill in the blank with 7%.  Next, the Department of Taxation normally calculates the revenue impact of a tax or credit bill, because that information is important to lawmakers.  If such a bill has a blank amount in it, it would be easy for the Department economists to throw up their hands and say, “We have no idea!  Obviously, it would depend on what you guys put in the blank.”

It is common for the defective dates to be fixed, and for the blank amounts to be filled in, when a bill pops out of conference committee.  At that point, of course, the deal is done and there is no opportunity for public hearings or testimony.  The public can still weigh in on the process by contacting individual legislators in hopes of swaying their votes on the floor, but for many of us that seems to be a waste of effort.  Can the system be improved?  We hope so!

“Friends!  Romans!  Countrymen!  We desperately need to lift our public schools and our namesake university into the 21st Century.  Senate Bill 1474 will do this by a teensy little increase of half a percent to our general excise tax (“GET”), and by establishing two special funds for the Department of Education and the University of Hawaii that will give a dedicated funding source for these fine departments charged with the heavy responsibility of educating our students.  Isn’t that a small price to ask for the future of our keiki?”

That speech was made up, but the bill was not.  The speech is a summary of what many of the bill’s supporters are testifying in support of it.  As of this writing, the bill is very much alive and headed over from the Senate to the House of Representatives.

There’s no mistaking that we have problems in our school system.  When school officials are reduced to going to their local neighborhood boards to beg for spare change to buy pencils when the overall budget of the Department of Education is in the billions of dollars, something is seriously wrong with the system we now have.  Why is it that the multiple management layers that stand between the appropriated king’s ransom and the classrooms allow so little to filter through?  And why aren’t we making the effort to pull down available federal funds, as we have written about before?  Shouldn’t we be trying to address these problems before putting an even heavier monkey on the backs of our working families?  (And, make no mistake, this monkey weighs more heavily on those least able to afford it.  We and others have written on several occasions that the GET is regressive, meaning that those with the least ability to pay are hurt the most.)

Can the life of our teachers and professors be improved with a “dedicated funding source”?  That argument is a smelly red herring.  As we said during the debate over the failed constitutional amendment to surcharge real property taxes, our educational institutions already receive a ton of general fund money.  Adding a special fund won’t and can’t prevent either this or a future legislature from redirecting those general fund moneys to other pressing needs.  Floods on Kauai?  Lava devastation on the Big Island?  Money for relief from those natural disasters has to come from somewhere.  And then there are the other problems like cost of living, the homeless, invasive species, and the list goes on.  Big, fat special funds would make oversight of how the money is spent tougher and would lessen accountability even more.

And, as we wrote about before, for more than twenty years our legislature shoveled $90 million a year into an “educational facilities special fund.”  That fund was in existence between 1990 and 2013.  At the beginning of this year, DOE’s maintenance backlog was found to be a whopping $868 million, while that of UH wasn’t far behind with $722 million.  Did the backlog swell to that level in just the last 5-6 years?  If not, let’s stop thinking that a special fund will be a cure-all.

Instead, what we really need to do is fix the inefficiency – whatever is causing the “trickle-out economics” that causes the staggering sums our legislature throws at our educational institutions to be reduced to peanuts by the time it reaches the classrooms.  This fix will not be easy.  There will be pain.  Those whose actions have caused or perpetuated these disasters deserve some head-rolling, and hopefully some of that will happen.

Well, we’re in the thick of tax season!  It’s that time of year when individuals, gritting and gnashing their teeth, scour through their financial records and begin the arduous process of completing their 2018 federal and state tax returns.

Here are some thoughts to keep in mind when filling out your Hawaii return.  Do not assume that specialized computer tax preparation software services (you know which ones they are) are going to pick up every nuance of Hawaii tax law, especially after a major federal change.  They are usually pretty good at coming to the right answer eventually, but in the first one or two years you should be especially careful, because the reality is that Hawaii-specific changes are not that high on their priority list as compared to those in other, more populous states.

First, watch out for the state and local tax deduction.  Normally, state income tax and property tax are deductible.  The new federal tax law says that no more than $10,000 in state and local taxes are deductible.  It doesn’t take much to get to that number in Hawaii, so many of us will find that our state tax deduction is capped at the $10,000.  The cap does not apply for state tax purposes, so if your tax software cuts you off at the same amount on your state return, you need to find a way of getting your deduction for the extra dollars for state purposes.

Next, if you have a mortgage and/or home equity loan, the federal rules changed so that the deductible mortgage interest may be limited, and the HELOC interest may be disallowed entirely.  These new caps do not apply for Hawaii tax purposes, so, just as with the state and local tax deduction it may be worth your while to make sure that your mortgage interest deduction is being handled correctly.

Are you an employer who saw lots of changes in the amount you can deduct from business income?  For example, the new federal law doesn’t allow a deduction for parking benefits, it halves the amount you can deduct for food and drinks purchased for the office, and it completely disallows any deduction for business entertainment in 2018.  Hawaii did pick up all those changes, so there will be no new break on the Hawaii return for those items.

There’s some good news and bad news if you own a small business, are a partner in a partnership, are a shareholder in a S corporation, or get dividends from a real estate investment trust.  The good news is that you get a new federal deduction, which tax practitioners call the “Section 199A deduction,” that is intended to give a tax break to individuals who conduct business that gets taxed on their individual tax forms.  The bad news is that Hawaii didn’t adopt it, so don’t expect to get a benefit of that deduction on your Hawaii income tax return.

Also, if you have claimed lots of itemized deductions, the federal return will allow you to add them up, within the limits previously described.  On the Hawaii return, if adjusted gross income is above a certain amount then a pre-TrumpTax law called the “Pease limitation” kicks in and eats away at your itemized deductions.  As a result, the total itemized deductions that you are allowed to deduct in calculating taxable income may be somewhat less than the sum of the various categories of your itemized deductions.

And even if you do use a professional preparer, make sure to go over your draft return carefully before you sign your name to the final version.  Make sure that these law changes are included.  And good luck with your tax season!

Individual Development Accounts, a program that seems to be gaining traction at our Legislature, is a way to help lower-income people build self-sufficiency.

Under conventional welfare rules, applicants for public assistance are awarded assistance based on need, which means that if the applicants have assets that could be sold or used to support the applicant, benefits are either reduced or denied.  That, of course, discourages needy folks from saving or working.  Would you rather sit idle and get free money, or work and get your earnings taken away?  Tough choice.

So here is what happens with an IDA.  If an eligible person deposits money into the account, a sponsor such as a government agency matches the deposit.  The amount of the match depends on the program, but it results in more money being made available for the eligible person’s overall goal such as buying a first home, paying for education or training costs, or starting a small business.  Typically, the eligible person will need to sit down with a case worker to define the person’s goals and will sign an agreement to that effect.  The person will need to have earned income, and will need to agree to take classes in financial literacy.  The funds in the IDA can then be used only for specific purposes.

Most IDA programs only let you save a limited amount of money, usually $4,000 to $6,000. This includes the money deposited and any matching funds. Once the limit is reached, no more deposits into the account are allowed.  IDA programs also last only a limited number of years, like five years.

One important point is that federally funded IDAs won’t count in the calculation of resource limits for other federal programs such as Supplemental Security Income, Food Assistance, and Medicaid.

With all of this, there should be no reason for welfare recipients to simply sit on their okoles.  They can find employment and go back to school for more education and training, and thereby proceed down the road toward self-sufficiency.

The federal government and many states now have IDA programs.  At the turn of the century, we had one too.  It was enacted in 1999 and is still contained in HRS chapter 257, which we never bothered to repeal even though the program sunset in 2004 – perhaps people were thinking that the program would be resurrected someday.  It was run by the Department of Human Services, and it lasted from 2000 to 2004.  At the time that our Legislature enacted the program back at the turn of the millennium, the Foundation had glowing things to say about it (and there are some who say it was rare for my predecessor to have glowing things to say about any state program).

At that time, the IDA program offered a tax credit to folks who would provide the matching funds to go into the accounts.  If was a 50% match, meaning that if Joe Citizen contributed $100 to his IDA and Nonprofit X contributed $100 in matching funds so that Joe Citizen then had $200 to spend on education or starting a business, than Nonprofit X would get a $50 State tax credit.  At the time, however, the credit wasn’t well used – 9 taxpayers claimed $3,000 during that program’s five-year history.

Discussions at the Legislature are now focused on what IDA Version 2.0 is going to look like.  The current versions of the legislation are now in House Bill 334 and Senate Bill 1081.  Hopefully, this program can make a positive difference in people’s lives and not cause massive damage to the public fisc.

Well, it looks like the Hawaii State Watch Doggie has woken up from his nap.

A:  Hey!  Keeping watch is hard work!

Q:  Undoubtedly.  So what are you reading there?  It looks like an Auditor’s report — “Review of Special Funds, Revolving Funds, Trust Funds, and Trust Accounts of the Department of Transportation.”

A:  Oh, yes. It’s an outrage.

Q:  What’s the problem?

A:  Well, you know that the DOT is telling the Legislature to raise taxes.  Fuel tax, vehicle weight tax, registration fees.  Taxes, taxes, taxes.

Q:  So how are they different from any other government agency?

A:  The auditor found that they have lots of money lying around. More than $120 million in accounts that haven’t been even touched for five years.

Q:  And they’re asking for more.

A:  And that’s not all.  A few years ago, the Feds got mad at them because they had close to a billion dollars in unused federal money.  The Feds gave us money to work on roads and bridges, and it wasn’t getting spent, so they were saying, “Why should we give you more money if you can’t spend what you have?”

Q:  But they have been working the backlog down over the years.

A:  Come on. More than a hundred million that hasn’t been touched for years?  Makes me want to bite someone.

Q:  Jeez!  Don’t look at me so intensely when you’re saying that!

But didn’t they say that most of the money is a reserve that they have to keep around for their airport bonds?

A:  Hey, if the bond agreement requires millions to be held in reserve, DOT should have been able to point to the part of the bond agreement saying that. Did they? No!  And there’s more.

Q: There’s more?

A: There’s a law that says that DOT has to report all of their funds to the Legislature.  They’re not supposed to squirrel away their money.

Q: So how much did they fail to report?  Enough to buy a few bags of kibble?

A: More than $120 million.

Q: Different from the $120 million that they found lying around?

A: There’s some overlap, but mostly in addition to the idle $120 million.

Q: Did DOT say why those accounts weren’t reported to the Legislature?

A: Airports Division said that the Airports account the Auditor identified had no money in it anyway and they forgot to report it.  The other divisions didn’t say anything.

Q: Not even “Oops,” eh?  But they did report some of their accounts to the Legislature, right?

A: Yes, but not accurately.  The Auditor found that Highways Division’s fund reporting was inconsistent and sometimes inaccurate.  For example, a fund reported as “Revolving & OHA” was actually five different funds, and none of them were related to OHA.

Q: Oh, man.  Whatever can we do about that?

A: I’m going to bite someone on the schnozzola.

Q: If you can reach it, that is.  You’re only a 7-pound doggie.

A: Details.