UHERO tax expert cites ‘values’ as key to tax policy

from Grassroot Institute of Hawaii, February 1, 2024

More than 200 tax-related bills are being considered by the Hawaii Legislature this year, but whether you think the individual bills are good or bad depends on your values, according to Dylan Moore, an associate professor of economics affiliated with the Economic Research Organization at the University of Hawai‘i.

Moore, who joined co-hosts Tom Yamachika and Mark Coleman on the latest episode of “Talking Tax” on ThinkTech Hawaii, said ultimately tax policy is “about facts and it’s about values. I think people can strenuously disagree about tax policy — partially because of facts and partially because of values.”

As an economist,” he said, “it’s not my job to necessarily say what the one right answer is, but rather to sort of highlight, you know, different trade-offs that exist.” 

Regarding Gov. Josh Green’s plan to index the state’s tax code to inflation, which would save Hawaii taxpayers about $90 million, Moore said, “If you don’t index the tax code to inflation, it’s like everyone’s taxes are going up a little bit every year  … because your wages go up because of inflation and the cost of living goes up, but the tax bracket thresholds stay the same and you end up in a higher tax bracket.” 

Other proposals this year that could save Hawaii taxpayers money include various tax credits and more exemptions from the all-encompassing state general excise tax. But there also are many proposals that would increase or create new taxes.

Asked by Coleman, managing editor at the Grassroot Institute of Hawaii, whether Hawaii has “exceeded the cap of a reasonable tax burden,” Moore said: “It seems to me that it’s a case-by-case basis. … But I have reasons to be concerned that we might be taxing so much that we’re losing revenue.”

Regarding Hawaii’s personal income tax rates, Moore said: “The top income tax rates, if they’re not so high that they’re costing us revenue, it’s at least possible that they’re not providing a very efficient source of revenue.” 

In addition, he said, “some people might leave the state, some people might reduce their income, and so we’re not going to get 100% of the money that we expect to get when we raise a tax like that.” 

Yamachika, president of the Tax Foundation of Hawaii and a Grassroot Scholar, said the exodus of thousands of residents from the state is “an indicator that we may have kind of stepped over the line. He urged lawmakers to carefully consider the potential impacts of passing tax hikes this session.

If you would like to hear the entire conversation, click on the image below. A complete transcript follows.

TRANSCRIPT

Mark Coleman: Good morning, everybody. This is Mark Coleman — I’m Mark Coleman. And I’m your co-host today on “Talking Tax,” which brings you the latest on taxes in Hawaii, featuring — my co-host really — Tom Yamachika, who is president of the Tax Foundation of Hawaii. 

And we have a special guest today, Dylan Moore. He’s an associate professor of economics at the University of Hawaii. He’s affiliated with the Economic Research Organization at the UH, also called UHERO. Although that acronym is kind of weird, you know, because it doesn’t quite match up the order of the words. 

But anyway, that’s the highly respected economic research organization that everybody relies — that a lot of people rely on —for the facts about, you know, where we stand in Hawaii.

And he’s, like I said, an associate professor of economics. He specializes in public finance, labor economics and the economics of taxation. Optimal taxation policy, actually. 

And that’s we’re going to be talking about, all the new tax bills that have been introduced or, you know, basically, in general, at the Legislature of Hawaii this year, which got underway last week. 

And believe it or not, there’s — counting the ones that were left over from last year — there’s hundreds of them. Which always amazes me because it seems like we’re already the No. 1, you know, highest tax burden in the nation, one of the highest tax burdens. So, it seems very confusing to me. 

In fact, Tom wrote an article about that two weeks ago, I believe it was now, called “More taxes coming” — “More tax hikes coming,” there you go. And, you know, it remains to be seen how many of those tax bills will be put into place. 

But Tom, would you like to summarize the theme of your last article and what you’ve been thinking in general on this subject?

Tom Yamachika: Yes. So, and thanks for being on this show as well. 

We have a lot of activity at this year’s Legislature, which is called, you know, “the big square building.” And already we’ve seen like about 2,600 bills introduced. 

Maybe it’s going to be a little bit more because 2,600 is what we saw as of last night. And a full 200 of these are what we’re following in terms of bills that will affect tax, public finance or similar subjects.

One of the notable ones is — and I’m going to talk about some of the shockers later — but one of the notable ones that we’re going to be discussing today is the Green Affordability Plan, what we called GAP last year. I don’t know if they still want, you know, to use the same acronym this year.

But this year, there are a couple of, you know, different aspects to it, and we’ll talk about that in a little bit.

But, like I said, we’ve been following the Legislature; at this point in time the bills have only been introduced, so each one is maybe one person’s opinion and we need to wait till the end to see what’s going to pass.

Now, professor, you’ve been following several of these bills as well, I understand. And what do you think about some of them?

Dylan Moore: Well, I think, you know, it’s true that some of the bills are tax hikes.  But one of the more interesting aspects of the Green Affordability Plan bill is a sort of proposal to index large portions of the tax code to inflation moving forward, which I would think of as — if not a tax cut — a sort of a foregoing of a previously scheduled tax hike.

I think this is how economists think about it. If you don’t index the tax code to inflation, it’s like everyone’s taxes are going up a little bit every year, because, you know, your wages go up because of inflation and the cost of living goes up, but the tax bracket thresholds stay the same and you end up in a higher tax bracket — even though your actual sort of cost of living, and your sort of income and really, the purchasing power of your income hasn’t changed.

Yamachika: Yeah, we call that being “bracket creeped.”

Moore: Exactly, yes. Yeah, this is a plan to sort of put that to an end. And in fact, backtrack to like, you know, as if it was in 2019 — I think is their goal — is to sort of reduce all of the bracket thresholds and increase — or rather, sorry, increase the bracket thresholds and increase the standard deduction and personal exemption amounts — so that it’s as if we started indexing to inflation back in 2019. I believe that’s the objective of some of those provisions.

Yamachika: Yeah. The governor actually introduced that last year as well. But as it went through the legislative process, the committees that heard it kind of morphed that beyond recognition and eventually just dropped the indexing part altogether.

Coleman: Yeah. 

Moore: That’s right. 

Coleman: Now that you mention it, yes, this list of hundreds of bills from last year and this year that Tom is following, all related somehow to taxation, they’re not all tax increases. In fact, there’s a lot of tax credits and like you say, the indexing proposal, which would save a lot of money in the future for Hawaii taxpayers.

Yamachika: Well, but let’s think about that. You know, if you’re giving out a lot of credits, government’s not going to get any smaller. So what do you think is going to happen to the rest of us?

Moore: The credits, I think ,are so … say, the tax credits — I mean, there are many tax credits — and every year in any Legislature, there are many different types of tax credits that are proposed. But say, one of the bigger ones that I see is the proposal to expand the child and dependent care tax credit. 

Now, undoubtedly, this expansion will come at some cost. But it’s important to keep in mind that the cost of a tax policy is not always exactly the sort of cost that you would expect holding everyone’s behavior constant. So this is a good example. 

There’s some growing evidence recently that the child and dependent care tax credit expansions at the federal level and in some other states, lead to entry into the labor force by secondary earners. So if you have two-parent households, the second parent enters the labor force.

When the second parent enters the labor force, especially in the long run, they end up contributing something to income tax revenue. And that can offset some of the costs of the actual tax credit in the first place. That doesn’t necessarily mean it’s a good policy. 

But it’s important to keep in mind that, you know, the costs might be lower than what the upfront costs appear to be, because of these effects that the policy has on people’s behavior that affect the amount of revenue that we’ll get in the future. Nothing is free, but —

Yamachika: Of course not. I mean, as an example, the indexation of the brackets that you just talked about, I think the revenue estimate on that one was like, it’s going to cost $89 million.

Moore: So, it would probably cost a bit less than that, because we think that, like, increasing people’s taxes, generally speaking, encourages them to either report less income or to actually earn less income. 

And there are various mechanisms through which people can do this — either by changing actually how much money they’re earning or by recharacterizing their income, in some cases. 

And so, when you cut people’s taxes, it probably costs a little bit less than what the Tax Department says it’s going to cost.  Because you would expect that as people’s taxes are reduced, their income actually will be increased by some amount because they are no longer as disincentivized to earn income. I wouldn’t expect these are going to be huge effects, but there’ll be some effects for sure. 

Yamachika: Yeah. And of course, when you reduce taxes and put more money in people’s pockets, people will spend more. And in our state, we get a piece of each spend through the general excise tax. 

Moore: Absolutely. 

Coleman: Speaking of which …

Moore: It’s important to keep in mind, sorry —

Coleman: Well, speaking of which, the GET itself, you know — which is a major generation of taxes in Hawaii, major generator — that has like 50-plus exemptions and people are always … In fact, there’s a bill now to exempt medical services from that, and for food and medicine, whatever. 

But considering those exemptions, do you think that’s optimal too? What do you think about the GET? I guess is what I’m trying to say.

Moore: Sure. So, I think some broader context is helpful here. 

So, the general excise tax actually — probably in the context of the United States — has probably the least exemptions by far of any sort of sales or excise tax in any state that has a substantial sales or excise tax, in the U.S. context.

And to a tax economist, that generally looks like a good thing. So the view of a tax economist these days is that the general excise tax works best when you provide the fewest exemptions. Because we’re concerned about sort of distorting people’s decisions, like encouraging them to spend more money on one thing than another. If you want to raise money, the idea is sort of treat everything equally. 

And one way to think about why we might like the general excise tax more generally, so in addition to not wanting to exempt things, economists view this usually as a good way to raise revenue. When economists think about something like the general excise tax, in general, we think it’s a good tax, even though there are concerns that it’s regressive.

And it’s true that viewed by itself, it might in some sense be a regressive tax. But you never want to view any aspect of the tax system in isolation. 

So, the idea behind why economists like the excise tax is because if you want a more progressive tax system, you could always take the revenue raised through the excise tax and use it to fund something like a tax credit or a social programming,  social program, targeting lower income people. You can make the tax system more progressive by refunding the revenue generated to residents through some other tax credit or social program. 

And so, economists then like it because it’s a good source of tax revenue, it’s relatively easy to administer, and in some cases, it’s relatively easy to enforce as compared to income taxes.

Coleman: You mentioned that it’s regressive. Everyone agrees about that, I think; you know, it’s cascading. But you know, even within the, even though, however — it has the exemptions, it has a lot of exemptions — at least you say that’s not a lot compared to other places. 

But actually, most other states don’t have a GET, they have sales taxes. And that only applies at the point of sale, whereas the GET applies at wholesale, and you know, every transaction really. 

And you have exemptions, right? And so — but I do like your idea that it should be, everyone should be paying the same amount that, you know, that’s the flat tax idea. 

However, because there are different rates for, like, wholesale and insurance sales and stuff like this, does that skew it a bit in your mind?

Moore: So, it’s meant to try and make it more like a value-added tax, which exists in some other places. Or to make it more like a sales tax, maybe. 

Coleman: Right. 

Moore: It really ends up being a kind of hybrid. The ideal would be, I think, to have a value-added tax. You know, we think that that’s a much less distortionary tax as economists. But it’s difficult to administer, it’s difficult to transition from the current system to that system.

And so, we have a system where you apply smaller rates and you use a bunch of exemptions to try and make sure that you’re not charging too much on business-to-business transactions. 

The reason we don’t want to charge a lot on business to business transactions is because what we really want to do is tax, like, the total amount of value added that’s created along the process of creating a good or service to sell to the final customers.

If we tax business-to-business transactions in addition to the final product, we make it so that businesses have an incentive to try and, you know, do more things in-house. And we don’t particularly want to create that kind of distortion in the tax system. 

Coleman: Right, that’s how the tax code …  OK, so the title of one of your papers was “Optimal tax systems with endogenous behavioral biases.”

Moore: Sure, yes. 

Coleman: That basically going back to that statement you made earlier regarding the thinking that you can change the tax code, but everybody’s going to keep behaving the same. That’s, like, kind of a mistake. You know, obviously, it’s going to change behavior. 

OK, well we’ve been talking about the GET for a few moments. So, he’s just explaining that idea and I forget what we’re talking about right now. But can you remember the thread there?

Moore: I can’t, I’ve lost it. 

Coleman: The thread was uh, we were talking about … 

Moore: You mentioned the exemptions. I was talking about [how] the exemptions are meant to try and replicate some of the features of a VAT in some sense.

Coleman: Oh right, right. Are there any states that have VATs right now? 

Moore: No. 

Coleman: And if the GET’s so great, why don’t you think more states have the GET?

Moore: I’m not … I think it’s very difficult to explain the history of sales tax policy in the United States, without thinking about the federal government. And the lack of, sort of, any kind of sales tax or excise tax, comprehensive sales or excise tax policy at the federal level.

So in many other places where they have regional governments are levying, say, a value-added tax, they’re doing so by sort of borrowing the enforcement and administration infrastructure provided by the federal government. 

So it’s really a federal VAT that has some regional governments that are kind of hanging on and able to levy their own taxes through that.

So at the state level in the U.S., I think state sales and excise tax policy looks, like, extremely different from one place to the next, and it’s because everyone’s kind of developed their own thing. 

I don’t know that there’s a lot of great explanation as to why one place did it one way and one place did it another. You’d have to ask a historian probably, you know.

Coleman: I’m sorry, maybe we should get back on track about the tax situation at the Legislature, Tom, you know, to bring this back. I’m curious, what is the optimal tax situation in your mind, Dylan? 

We have one group that would like to see — that’s all they do, that’s all they talk about — is tax increases. Wanting to make it allegedly more equitable, pile more taxes onto the wealthy and give more tax breaks to the poor or the lower-income families — which actually, I kind of liked that idea — more exemptions for everybody as far as I’m concerned. 

But I mean, the wealthy in the state already do pay a lion’s share of all the taxes, right?

Moore: So, certainly, it’s true that higher-income people account for a very large proportion of tax revenue. I think that when you ask me, you know, sort of what’s the optimal tax system in my mind — it’s true that I study optimal taxation. And so I think about how to design a tax system. 

But as an economist, it’s not my job to necessarily say what the one right answer is, but rather to sort of highlight, you know, different trade-offs that exist. 

So it’s true that some people have very strong preferences for a more equitable tax system. A tax system that does a lot of redistribution and is meant to try and create a lot of, say, equality in outcome.

And other people have different sorts of preferences that are less in favor of that. And there are different types of tax systems that you would choose that are all sort of optimal in some sense. They could be well designed, depending on which side of that, sort of line you’re on with what are your preferences about how equitable the tax system should be. 

But any sort of amount of equity preferences, you still have to deal with the constraints of how do people’s behavior change when the tax policy changes. 

And so, my role is perhaps to help inform that side of the conversation. If you tell me your objectives, I can tell you how to achieve them. But I can’t tell you what your objectives should be. 

Coleman: Right, right. 

Yamachika: I mean, already we have, you know, people leaving the state in droves. So, that probably is an indicator that we may have kind of stepped over the line a little bit.

But anyway, you know, getting back to our Legislature. One of the things that is part of the Green Affordability Plan now, is an extra $25 per stay for transient accommodations. 

It’s a little bit different from the Green Affordability Plan’s “tourist green fee,” quote unquote, that we had considered in the last session. And I think the difference is that we’re adding on to an established tax. And local people will pay it too, if they, you know, go stay at transient accommodations, maybe on another island or, you know, for a staycation, ;ike, if I were to go to Turtle Bay from here in Aina Haina, for example, and stay there, I would pay that $25 too. 

So what do you think about that?

Moore: So I think there are sort of two important things. 

Yamachika: It’s kind of a new concept this year. 

Moore: So, it’s also possible whenever we think about a tax, because behavior changes when taxes change, you know, as we were talking about earlier. Behavior of businesses also changes when taxes change.

And so in some cases, you might expect that when the hotel tax goes up, what will happen is that hotels will reduce room rates to some extent. 

And so, one question we need to ask is, “To what extent do we think that the effect, the burden of the tax, will be sort of basically paid for by the hotels?”

You would expect this to happen if, like, the supply of hotel rooms is very constrained and can’t respond much. And probably that’s true here to some extent, right? I’m sure that it’s not 100% true, but it’s probably approximately true that the number of rooms, at least in the short run, is fixed.

And so, if a tax is introduced that threatens to reduce the number of people who come here, we would expect hotels to respond by reducing rates, at least to some extent. 

But the other side of the conversation that I think is worth mentioning is, it’s true that if the tax does lead to an increase in the sort of total amount that people have to pay when they go to a hotel, and that burdens residents, that we can always offset the impact on residents through other measures.

So the revenue, again, could be used for, in part to finance, say, a tax credit that goes back to residents of Hawaii. 

Can we perfectly design a system that gets the $25 back to the resident who stayed in the hotel? Probably not. 

But I think, to sort of forego an opportunity to export the tax burden onto non-residents or potentially onto hotel profits — because you can’t design the perfect sort of offsetting system — I can’t say for sure that it’s a mistake, but it’s costly. 

It’s a potentially very efficient source of revenue, I think, relative to some alternatives. So I think it’s worth considering, certainly. 

Coleman: Yeah. 

Yamachika: Yeah, there are other, you know, more outlandish proposals that are being considered at the Legislature. But I don’t think we’re gonna have enough time for the prof to stay here for those. So we can, you know, talk about those a little bit later. 

Coleman: Well one thing in that long list of bills, Tom, is special funds. And Dylan just sort of broached that topic suggesting that, you know, these extra monies that they’re tacking on to the tourists or the hotels or whatever, that there could be some sort of a refund or some sort of way to use that money that benefits people.

However, special funds are problematic, right?

Yamachika: Yeah, the bill as it’s drafted now creates a new climate, health, and environmental action special fund. 

Coleman: Yeah, right. 

Yamachika: And I and our organization have not been a fan of special funds for a very, very long time. The reason being, you know, it’s tough enough to balance one checkbook, you know. Try to balance, you know, 2,000 or 20,000.

We have maybe, I think, 2,000 special funds now. It used to be worse, but now it’s still pretty bad. And I don’t think there’s anybody in the state that can tell you how much money we have.

Moore: I’d be strongly inclined to agree that this is probably not best practice, you know, at least to a tax economist. I think the way you want to think about these things is, you know, you should sort of think about spending and revenue as sort of separate problems to some extent. 

There are some cases where that’s less true, but, you know, if a program is worth financing, it should be sort of worth financing, perhaps, irrespective of what exactly is the source of the revenue that’s paying for it.

Again, that might not always be true in the case of, like, public parks or something. But it’s not clear to me why you would want to allocate funds from this TAT proposal to some specific special fund. And it does create a lot of complexities in administering the budget, as Tom suggested.

Coleman: There’s also the point Tom brought up in his article that the state has trouble spending the money that it has already. And, you know, millions, you know, tens of millions, hundreds of millions of dollars, were going unspent at the Department of Education, for example.

So again, do you think that Hawaii has tipped over the limit, exceeded the cap of a reasonable tax burden? 

Moore: I’d be … I think it’s, it seems to me that it’s a case-by-case basis. So there are some taxes where I have reason to be concerned. I wouldn’t say that I know for sure 100%, but I have reasons to be concerned that we might be taxing so much that we’re losing revenue. 

So I think that that’s probably, there’s a decent chance that that’s true of the corporate tax. I don’t want to commit to that 100% in this conversation. It’s something that I want to, you know, continue studying. But that’s one that I’m particularly suspicious of.

I think it’s possible that the top [personal] income tax rates, if they’re not so high that they’re costing us revenue, it’s at least possible that they’re not providing a very efficient source of revenue at this point to raise more money. 

Because again, if I raise those top tax rates on the income tax schedule, people will reduce their income a little bit. And so, I don’t get dollar for dollar what I’m expecting to when we go run our tax forecast, right?

If we raise that top rate to 12%, you could go do some calculation that’s based on assuming no one changes their behavior. But some people might leave the state, some people might reduce their income, and so we’re not going to get 100% of the money that we expect to get when we raise a tax like that.

So, I think there are parts of the tax code that look a little suspect. 

Whether the overall tax burden is so high that it’s, you know, leading to actually us getting less revenue, I’d be inclined to be skeptical. 

But you know, as for whether the overall burden is too high — it partially that depends on how you feel about the trade off between how much equity we should have — and you know, what is a fair burden for different people in different parts of the tax schedule.

Coleman: I’m sorry, Tom noted that, you know, one obvious result is that tens of thousands of people are leaving the state. You know, they just can’t afford to be here anymore. 

Tom, we’re coming into our closing moments of this episode, do you want to have a last couple words here? And then we’ll let Dylan throw in a comment too.

Yamachika: Sure. One of the things that obviously we’re going to be looking at in this year’s Legislature is, you know, should we raise taxes? Should we provide these credits? Should we, you know, change tax policy? And there are a lot of things that go into the question.

We’re going to have behavioral changes that are coming up as a result of this. You know, the professor has gone through some of those. And we do have some, you know, very radical bills that are going to propose just that. 

Coleman: Professor, any last words?

Moore: I think tax policy is very exciting to me because it’s about values, partially. So it’s about fact and it’s about values. And I think people can strenuously disagree about tax policy — partially because of facts and partially because of values. I think both sides of that are interesting. 

I hope that I’ve brought to this conversation a little bit of what I know about the facts, but a lot of it’s up to people’s individual values, and it’s not up to me, you know. And I hope it’s something people keep in mind when they think about this stuff.

Coleman: Thank you very much, Dylan. It’s been great having you here today. You really contributed a lot to this conversation. Sounds like you and Tom might need to get together or want to get together in the future to talk about more of this kind of thing. 

Moore: For sure. 

Coleman: Thank you very much, everybody. We’ve really had a great time here today. We’ll be talking probably more — well, definitely about taxes — this is the name of the show, “Talking Tax.” 

And I hope you will join us in the future. If you like this show, please click the button below and subscribe to the ThinkTech channel. We really appreciate you being here with us today. Thank you very much, y’all, and aloha. 

Moore: Thank you.