A few days ago, I got my annual emailed reminder from the Social Security folks that they prepared an electronic statement for me – they’ve gone green, so they aren’t sending those statements on paper any more.  So, for the first time in years, I logged in and looked at it.  There, in the middle of the page, were some words that smacked me in the face with reality.

Your estimated benefits are based on current law.  Congress has made changes to the law in the past and can do so at any time.  The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.

For all these years, I thought I was paying money into an insurance system – after all, the official name for Social Security is Old Age, Survivors, and Disability Insurance or OASDI – which I thought gave me some vested benefit.  The reality is that it isn’t insurance at all.  OASDI is a tax, the government got my money and keeps getting my money, and although they promised to give me benefits they didn’t promise that those benefits would never change.  Remember Darth Vader’s line in “The Empire Strikes Back”?  “I am altering the deal.  Pray I don’t alter it any further.”

I am not, of course, accusing anyone or any group of malice or even mismanagement.  But we need to realize that when government makes promises, sometimes those promises change.

I am reminded that when our Transient Accommodations Tax (TAT) was adopted in 1986, vocal and strident opposition from the Neighbor Islands and from the tourist industry was quelled by promises that the TAT would only be needed to fund the convention center, which would benefit all islands, and then the tax would go away once the center was built and paid for.  Well, the center was built and paid for, but the TAT is still with us, not on a temporary but on a permanent basis, at more than double the tax rate it was when first enacted.  Moreover, a controversial “resort fee” bill now threatens to expand its scope to reach everything that a hotel charges a tourist.  The deal has been altered, several times in fact, and we pray that it not be altered further.

Plans and promises can also be revisited even if they are kept initially.  After the Great Recession of 2008, our lawmakers pleaded with the electorate for their understanding when they enacted a “temporary” income tax hike on individuals, with new 9%, 10%, and 11% tax brackets, “just to get us through the recession.”  The new brackets did indeed expire at the end of 2015.  But lawmakers reinstated them in the 2017 session, effective at the beginning of 2018, to improve or expand tax credits to assist with poverty relief.  The deal has been altered and we pray that it not be altered further.

This year is an election year.  We can go to the polls later this year and do our part to see that those elected to office can be trusted to keep their promises, or that appropriate consequences befall those who can’t.  If we don’t do our part, the only thing we can do when we are affected by a tax deal that has been altered is to pray that the deal not be altered further.

Recently, State Auditor Les Kondo shocked the public and some Honolulu Authority for Rapid Transportation (HART) Board members when he charged, at a HART board meeting, that HART employees had been required to record all interviews with State Auditor personnel and then submit the recordings to management to be transcribed.  That’s “interference with the audit process,” he said.

What happened next, however, was even more shocking, at least to an untrained observer like me.

A city attorney then pops up and says, in effect, “We’ve received testimony, but it doesn’t relate to any agenda item, so the Board can’t discuss it.”

“I’d like to ask a follow-up question,” one Board member states.

The city attorney then repeated his previous statement.  Meaning, of course, that the Board member couldn’t ask her question.

The Board, clearly flummoxed by this development, decided it couldn’t do anything about the issue that had surfaced, and moved on.

Odd as they may seem, the city attorney’s comments weren’t wrong.  Our Sunshine Law (Hawaii Revised Statutes chapter 92) governs meetings of most boards, commissions, and county councils.  (The State Legislature is allowed to follow different procedures.)  That law says that a public board generally isn’t supposed to be working on items that aren’t on the published agenda.  This is to protect those in the public who didn’t come to the hearing or submit testimony but would have testified, attended, or both if they knew this particular subject would be discussed.  So, to be completely proper, the Board isn’t supposed to do anything about an item that isn’t on the agenda.  It might want to put the item on the agenda for the next meeting.

But what is to be done if the matter brought up is something that needs expedited consideration?  The HART Board meets once or twice a month.  Auditor personnel are typically in the field for a limited time, one or two weeks perhaps.  If you were the HART Board member who was cut off by the City attorney in the dialogue above and you wanted to discuss and possibly do something about the State Auditor’s concerns, is there anything you could have done at the meeting?

How about, “Mr. Chair, I move to amend the agenda to add a business item relating to the concerns expressed by the State Auditor in his testimony”?

In most organizations, it is proper to move to amend the agenda.  The motion typically requires a two-thirds vote to pass.

The Sunshine Law does recognize that things may come up in the meeting that aren’t accounted for in the agenda and that may need prompt attention.  So, section 92-7(d) of the law now says: “No board shall change the agenda, once filed, by adding items thereto without a two-thirds recorded vote of all members to which the board is entitled; provided that no item shall be added to the agenda if it is of reasonably major importance and action thereon by the board will affect a significant number of persons.  Items of reasonably major importance not decided at a scheduled meeting shall be considered only at a meeting continued to a reasonable day and time.”  Thus, the agenda can be changed to add an item that either is not of major importance or that will not affect a significant number of people.

A development such as this one, which is more concerned with the internal operations of HART as opposed to something like a decision to change the rail route which certainly would affect many people, could have been dealt with using a motion to amend the agenda.

Hopefully, next time those on boards, commissions, or other bodies subject to the Sunshine Law will have this tool ready to tackle items of concern that pop up unexpectedly.  It beats having the meeting result in a train wreck!

If you are a serious student of Hawaii constitutional law, here is a question for you.  Where in our state constitution does it say we have to have a balanced budget?  The answer appears later in this article.

The part of our constitution directly governing our state’s budget is Article VII, section 8.  It says that “the governor shall submit to the legislature a budget in a form provided by law setting forth a complete plan of proposed expenditures of the executive branch, estimates as provided by law of the aggregate expenditures of the judicial and legislative branches, and anticipated receipts of the State for the ensuing fiscal biennium, together with such other information as the legislature may require.”  The chief justice of the Hawaii supreme court is supposed to submit the same information for the judiciary branch.

There is also language in sections 8 and 9 limiting general fund expenditures by an “expenditure ceiling.”  However, it is easy to breach the ceiling.  If the governor is proposing a budget that would breach the ceiling, the governor needs to specify by how much the ceiling would be breached, and why.  This past session, for example, the governor’s proposed budget contained some language buried in the appendix to the budget: “Total proposed appropriation measures from the general fund … will exceed the appropriation ceiling by $36:7 million (or 0.5%) in FY 19.  The reasons for this excess are the substantial costs of social assistance entitlements, support for public education, fringe benefits and other critical requirements.”  The legislature then can approve appropriations that breach the ceiling by passing a bill with a two-thirds vote in both houses which will “set forth the dollar amount and the rate by which the ceiling will be exceeded and the reasons therefor.”  That isn’t a terribly high hurdle to jump either.

So here is the answer to the question posed at the beginning of the article.  According to Attorney General Opinion 97-1, if you are looking for language in the constitution requiring a balanced budget, you won’t find it.  “There is no express requirement for a balanced budget in either the State Constitution or the applicable statutes,” it says.  After the Attorney General goes through several constitutional provisions, statutes, and proceedings of the 1978 constitutional convention, she concludes:

Thus, although the express words “balanced budget” are not included in the State Constitution or the statutes relating to the state budget, the Constitutional and statutory provisions require it by requiring a description of the proposed expenditures and the sources of revenues to pay for them.  If there is a shortfall in resources to pay for the proposed expenditures, revenue enhancements to cover the deficit must be proposed, or reductions in expenditures must be proposed to balance out the anticipated revenues.

Back in 1997, it was suggested that the governor’s budget could be submitted to the legislature in an unbalanced state, but the governor’s office would then impose spending restrictions so that actual expenditures would not exceed revenues.  The attorney general nixed that idea.

As reported in a past article, this year’s legislature was given a financial plan where spending exceeded revenues by $200 million a year.  That might not be kosher under our constitution for the reasons discussed above.  We hope that more awareness of the issue will prevent the same thing from happening in the future.

BY FRANK SALVATO

It is true that in the United States, everyone who qualifies under the requirements of the Constitution has the right to run for office. In fact, the beauty of the American experience is that our nation is governed by her people, not a ruling class, or so it is supposed to be.

Currently, we are undergoing a rebellion against a professional class of politicians who have stolen government from the people. Since the beginning of our nation, opportunistic individuals have sought to manipulate the governmental system to both push ideology and enrich themselves.

At the national level, we have ideological groups that seek to alter the fabric of our nation; who attempt to circumvent the US Constitution at every turn. Additionally, there are political opportunists who see an avenue to wealth off the hard work of the American people. How else do people enter into office with modest means only to leave office as millionaires?

Then, of course – at the local levels of government, we have the “good ol’ boy” networkers. These individuals seek to maintain power in an effort to install a lingering status quo beneficial to their desires; desires that almost always end up lining their pockets and the pockets of their benefactors and cronies, even as they control our daily lives right down to the traffic patterns we have to navigate.

After generations of this garbage – from the local levels to national, people are rebelling. This is one reason President Trump came to office; a perceived outsider. It is also why a wave of people unfamiliar with the political world find themselves vying for office.

American politics is a rough and tumble game; game being a term of endearment from my perspective. Sadly, if one isn’t experienced in life, well-organized, backed by at least a modest amount of financial backing, and graced with a small army of people who will volunteer their time on behalf of the candidate, there is zero chance of being elected. And those who believe that a political campaign can be won simply through the exploitation of social media are either smoking something legal in Colorado or really haven’t been on social media lately.

One of the biggest pitfalls on social media platforms, where the political novice is concerned, is getting caught up in the “disingenuous debate”; getting snared by the “Internet trolls.” By common definition, a “troll” is:

“…a person who sows discord on the Internet by starting quarrels or upsetting people, by posting inflammatory, extraneous, or off-topic messages in an online community with the intent of provoking readers into an emotional response or of otherwise disrupting normal, on-topic discussion…”

This is a staple of the political operative, especially on Facebook. These people goad the novice into providing them with minutia information easily found on a campaign’s webpage. They do so in an effort to:

• Occupy the novice candidate’s time;
• Provoke the novice candidate into losing their patience/temper;
• Drive the novice candidate to contradict themselves on matters of position;
• Cede the narrative so as to allow the operative (read: opposition) to paint the novice candidate in a less than flattering – and often damaging – light.

These trolls also infect the efforts of volunteers who sincerely want to disseminate legitimate information about the candidate. The troll seeks to occupy the volunteers’ time and provoke them into sometimes heated exchanges that can often times reflect poorly on the novice candidate.

So, what to do about “disingenuous debater”; the Internet trolls; these political hacks (and this really is what they are)?

First, always take the high road. Stay focused on the primary task: disseminating fact-based, legitimate information. It takes two parties to enter into a debate, so don’t take the bait. This sometimes requires a great deal of restraint but not getting lured into a pseudo-debate with someone whose goal is disingenuous; to occupy time, capture the narrative and damage a candidate, is a great payoff for applying that restraint.

Then there are the nuclear options, which any candidate and/or campaign – established or otherwise – should only use as a last resort, the actions tempting to reflect directly on the campaign. One can report the “disingenuous debater” (read: political operative) to the forum’s administrators (if this avenue is chosen you have to thoroughly make your case so the administrators are sympathetic to your request and pray the administrator isn’t a troll, too) or you can block the operative, which very well may elicit calls of censorship.

The primary task on social media for any novice political candidate is to “identify the trolls.” Make a list of the trolls’ shine a light on them. Make sure each and everyone in your campaign knows who the trolls are and instruct them to offer a common response. This response should be to refer the troll to the webpage for more information and/or to avoid engaging them all together.

When a troll is left to the hollow echo of his or her own voice, the other readers of the forum are able to hear the shrill disingenuousness of their words; to see the transparent disingenuousness of their efforts. This, incidentally, leads to their efforts backfiring and painting their political choice with the stain of deception and dishonesty.

About three months ago, I wrote about the $10,000 limitation on deductions for state and local tax that is part of the Tax Cuts and Jobs Act of 2017.  In a nutshell, you can only deduct up to $10,000 in state and local tax.  If you paid more, you get no tax deduction for the excess; not now, and not later.  (This limitation applies only to non-business taxes. If you have a business and it pays taxes, such as our state GET, those taxes are still fully deductible.)

Some states, especially those with high income taxes, have been actively considering a “workaround.”  New York, New Jersey, and Connecticut have passed legislation establishing a state fund into which people can “contribute” money in exchange for getting all or most of it back in the form of tax credits that can be used to reduce their tax burden.  California and some other states are considering similar proposals.  California’s legislation has cleared one of its two legislative chambers so far.

Now, the IRS and the U.S. Treasury have indicated that they are going to weigh in.  On Wednesday, May 23, IRS released Notice 2018-54, entitled “Guidance on Certain Payments Made in Exchange for State and Local Tax Credits.”

The Notice says, “In response to [the $10,000 limitation discussed above], some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay.”  (Translation: “We know what you, states, are trying to do.”)

“Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions,” the notice continues, “taxpayers should be mindful that federal law controls the proper characterization of payments for income tax purposes.”  (Translation: “You think we’re going to respect this type of payment as a deductible charitable contribution?  Go on.  Make our day!”)

“The Treasury Department and the IRS intend to propose regulations addressing the federal income tax treatment of transfers to funds controlled by state and local governments (or other state-specified transferees) that the transferor can treat in whole or in part as satisfying state and local tax obligations.  The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance over-form principles, govern the federal income tax treatment of such transfers.  The proposed regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.”  (Translation: “It.  Doesn’t.  Work.  And if you think it does, we are going to make you attach Form 8275-R to your return, saying that your return position is contrary to regulations.  Which, by the way, makes your audit risk higher by a bazillion percent.”)

In the meantime, one state that’s been targeted by the notice said that it isn’t backing down.  New Jersey Attorney General Gurbir Grewal threatened a swift and blistering court fight over the program in a letter to the IRS Commissioner.  Grewal argued that 100 different charitable programs in 33 states, all of which offer credits for contributions to specified charitable programs, could be destroyed if the IRS attacks New Jersey’s new law.

It looks like we can look forward to seeing some fireworks over this kind of tax workaround / tax dodge.  So, when it comes time for you to take a position on your return, choose your side carefully.

This week we look at HB 2416, a bill that applies Hawaii Use Tax to intangible property.

The Use Tax is a tax designed to protect our local businesses.  As a consumer, you often have a choice between buying a product from a local seller and one from somewhere out of state.  Our general excise tax applies to the local seller, but it might not apply to the foreign one.  Therefore, our law says that if you buy from the foreign seller and our GET in fact cannot apply to that sale (usually because the seller does not have a sufficient presence within Hawaii for it to be subject to Hawaii taxes), then you as the buyer will have to pay the same amount of tax to the State directly.

Most states that have a sales tax also have a use tax, for these reasons.   But those states’ taxes generally apply only to sales of goods, not to services or anything else.  Our tax applies to other things as well since there was a realization that local sellers of services needed to be protected.  Thus, in 2000 and 2001 the laws were amended to bring services and contracting within the scope of the Use Tax.  At the time, there was a lot of thought given to the issue because an “import” of services is tougher to see than, say, the import of a new car.

Here, this bill makes taxable an entire new category, and it’s unclear how much thought, if any, was given to the matter.  The bill sailed through the legislative process without much in the way of testimony.  Even our Department of Taxation was only able to say that the bill was consistent with its position on custom software (software specially written for a customer).  The relevance of the Department’s position is debatable because most states, including ours, consider custom software to be services, and we already apply Use Tax to services.

So what, if anything, is the bill trying to tax?  License fees, franchise fees, and royalties perhaps?  Certainly, a franchise to run a particular branded business in Hawaii or a license to show a particular television show here, for example, are intangible property in Hawaii.  But there is already a Hawaii Supreme Court case, In re Heftel Broadcasting Honolulu, Inc., 57 Haw. 175, 554 P.2d 242 (1976), cert. denied, 429 U.S. 1073 (1977), saying that when that kind of intangible property is created, the franchise owner or license owner has to pay GET, even though the owner may not have any other connection with or physical presence in Hawaii.  Now, the way the Use Tax is designed is that if the seller is legally obligated to pay GET, Use Tax is not imposed on the buyer.  The buyer won’t know if the seller paid the GET, so liability for Use Tax doesn’t depend on whether the seller actually paid the GET.

So what is really happening?  Is the objective to scare people into paying taxes they don’t owe?  Consider what happened to the automobile dealerships in the late 1960’s and through the 1970’s when they were paying Use Tax, thinking that they were importing automobiles from an unlicensed seller, and the Department was getting GET from the manufacturers unknown to the dealerships.  The story is described in another Hawaii Supreme Court case, In re Aloha Motors, Inc., 69 Haw. 515, 750 P.2d 81 (1988), but the court had to give effect to the statute of limitations and held that the dealerships could get a refund of three years of Use Tax, although there had been double payments for a decade.  Eventually, special legislation was passed in 1990 (Act 297) to relieve the dealerships from this injustice.

The Use Tax Law is already confusing.  Rather than mindlessly adding to the confusion with new taxes that haven’t been tried anywhere else, a comprehensive revamp of the Use Tax Law is needed.  At least make it so people have a reasonable chance of understanding the existing law.

In a recent hearing in the Honolulu City Council’s Budget Committee, council leaders say that they might have found a “magic bullet” – one that they say will get the City’s share of rail funding done painlessly.

Here’s the issue.  The City needs to cover $44 million in administrative costs for rail for 2018 and 2019.  The City previously didn’t provide for them in its budget, on the ground that the project already had enough money to cover those costs, but the Federal Transit Administration didn’t like that, thinking that the City didn’t have enough of its own skin in the game.  Thus, the Mayor included that money in the City’s fiscal 2019 budget.

The City Council’s budget chair proposed to deal with it by putting it in the Honolulu Authority for Rapid Transportation’s capital budget.  That way, dollars from the Hawaii general excise tax surcharge, which are restricted in that they can pay for the capital cost of the project only, would be available to pay those charges.  So, the City wouldn’t need to endure the pain of paying them out of its own operational funds.

But wait.  Is that really a viable solution to this problem?

Normally, an operating budget pays for the ongoing operational costs of a business, including salaries, wages, office overhead, and other day-to-day costs.

A capital budget normally pays for the costs of building something and getting it into a state of readiness for its intended use.  If you are building something very large, for example, those costs may include buying the parts, paying for the labor to move those parts to their intended location and to assemble them, for example.  Those costs are incurred to build the asset and then stop when the asset is built and in use.

The general and administrative costs of HART – the salary of the executive director, for example – are not going to stop after the project is built, so it is hard to think of those as capital costs.

There is also the matter of state law.  Hawaii Revised Statutes section 248-2.7(c)(2), which was added in the special session of 2017, says that the monies in the mass transit special fund, which includes the GET surcharge as well as the extra percentage point of transient accommodations tax, can’t be used for: “Administrative, operating, marketing, or maintenance costs, including personnel costs, of a rapid transportation authority charged with the responsibility for constructing, operating, or maintaining the mass transit project.”

Merely putting the administrative costs of HART into its capital budget isn’t going to get around these requirements.  Unless the City Council budget chair has a secret weapon.

Maybe the Council can argue, “Guys, the GET surcharge is City money from the outset because we raised it through a City taxing ordinance, so you folks at the State don’t have the right to restrict our ability to spend it.”

Mayor Caldwell, in the meantime, issued a statement saying that he would support the plan if the FTA does.

Has the Council found the magic bullet?  Only time will tell.