Research & Commentary

Penny for your Thoughts? No? How about 50 Million of Them?

You may all recall that if you go to the store in Hawaii and buy a bottle of your favorite beverage, a couple of other charges show up on your bill. One is a 5 cent deposit, which you can get back if you bring back the bottle for recycling, and the other is a one cent fee, which you don’t get back. (This fee was increased to a penny and a half between September 2012 and August 2015 because the recycling rate was too high – which I think is perverse but that’s another story.) Today, we’ll be talking about these charges, which are part of the Deposit Beverage Container Program. In late 2008, the Department of Health (DOH), which administers the program, needed an audit of six of the redemption centers it certified. What happened next is a classic example of the procurement process running amok, as found by the State Auditor in its Report 15-09, issued last month. DOH sent out a request for proposals, or RFP, which was designed to invite potential vendors to bid on the job. Only one vendor bid. Accounting Firm G said they could do it for $76,400…but they wanted to talk about it some more. In the ensuing months, Firm G figured out that they were the sole bidder, so they said they really needed to rethink their bid. That made DOH ask the State Procurement Office (SPO) for advice on whether they should re-do the RFP. SPO concluded that additional bidders might be interested in the changed job specifications, and recommended re-solicitation as a services procurement. Indeed, another accounting...

Fact Checking Some of the ‘Patriotism’ Arguments Made by Jones Act Supporters

The Garden Island published on Sunday, August 30, 2015, a response from a Jones Act supporter to Steven McMacken’s letter published Saturday, which was critical of the Jones Act and stated that it causes higher transportation costs to Hawaii. In her response, Suzan Kelsey Brooks, also of Lihue, Kauai, claims that the Jones Act helps Hawaii and repeats some of the usual canards promulgated by the Jones Act industry to defend the federal protections it enjoys. Brooks’ opposition to liberalizing the Jones Act – that is to removing or loosening Jones Act restrictions – is based upon her desire to ensure national security through maintaining a strong U.S. merchant marine. Typically, this line of argument in defense of Jones Act cabotage is based upon three legs: (1) sealift, (2) shipbuilding industrial base and (3) seafarers. However, as the great 18th Century British man of letters, Dr. Samuel Johnson, famously said (on April 7, 1775), “patriotism is the last refuge of a scoundrel.” Recommending that any recourse to national security must be viewed carefully. Brook asks several misleading questions in attempt to make her case. Books asks, “What would happen if . . . U.S. ships and merchant marine . . . withered away in the name of the “free market?” Actually, that has already occurred. Less than 1% of ocean cargo volume in the foreign trade of the U.S. are carried by U.S. flag ships (that includes both Jones Act ships and non-Jones Act foreign built U.S. flag ships). In domestic Jones Act trades, there are only 92 large oceangoing ships of the kind that are employed between the...

Manufacturing a (Tax) Problem

Take a moment and look over this graph of effective tax rates in Hawaii, divided by industry. No points for guessing what type of business the government is currently trying to lure into the state. It’s almost startling. In every category except Research & Development, the effective tax rate is at least 12% and goes as high as 26%. In the category of R&D, however, a refundable tax credit can actually drop the rate to -0.6%.  This is what all the political eloquence about economic development in our state has wrought–a great tax rate for R&D operations. Too bad that the costs on nearly every other industry continue to make Hawaii an expensive place to do business. The information comes courtesy of the Tax Foundation, which compared data across states and ranked them based on effective tax rates. The point of the survey was to understand the state tax costs that are faced by real-world businesses. Unsurprisingly, the excise tax and  its multiple layers of taxation had a big impact–especially on manufacturing: More than in other states, Hawaii’s sales tax (called the General Excise Tax) applies to sales between businesses rather than just to the end consumer. As such, manufacturing machinery is taxed in Hawaii, so the cost of equipment and other inputs for manufacturing firms is significantly higher in Hawaii than in other states.   Hawaii imposes some of the highest tax costs in the nation on both new and mature labor-intensive manufacturing, with effective tax rates of 16.9 and 14.8 percent respectively, both over 60 percent above the median rates nationwide. The sales tax on manufacturing machinery is a...

The Clouded Judgment of Tax Authorities

The greed of tax authorities seems limitless. Revenue agencies will often seek to extend taxes well beyond what was contemplated when legislation was enacted, in the name of securing ever more money for government. Some even go so far as to extend taxes to services even in the absence of a tax that actually includes the item or service at issue. For example, Chicago recently instituted a “cloud tax,” a new extension of the existing “amusement tax,” and “personal property lease transaction tax” that will apply to streaming and cloud-based services. At a whopping 9 percent, the tax is expected to generate $12 million in revenue per year–or rather, innovative companies and consumers will lose $12 million every year. The Windy City’s tech community has complained loudly about the impact this discriminatory tax will have on the city’s innovation economy. Streaming customers and cloud-dependent technology companies have effectively been told that they are not wanted. What is the “the cloud”? Cloud computing is the storage and access of data with multiple redundant systems to ensure that the data is not lost, and access to programs over the Internet rather than on a local hard drive. In other words, the cloud is remote access and storage, and is simply a metaphor for the Internet. But why the seemingly sudden interest in taxing “the cloud”? As reported in the Wall Street Journal, “With sales of DVDs, video games and traditional packaged software slumping for years, more state and local governments are eyeing technologies such as streaming video subscriptions and cloud computing to help make up for hundreds of millions of dollars or...

Rising Chinese Frustration with North Korea

SHENYANG, CHINA—Public space is shrinking in China for discussion of “Western” views. But “contrary to the general crackdown, North Korea policy seems to be an exception,” a U.S. diplomat told me on my recent trip to China. One hears plenty of criticism of Pyongyang. Even official Beijing’s unhappiness with the Democratic People’s Republic of Korea is evident, though China continues to bankroll the Kim Jong-un regime. It’s a position some Chinese would like to change, including a scholar in Shenyang, a couple hours away from the Yalu by car. My colleague was careful not to directly criticize Beijing policy but advocated a much different approach. He noted that the two nations “still care about each other,” but now there are a “lot of problems between the countries.” The most important issue, no surprise, is nuclear weapons. China supports denuclearization of the Korean peninsula. This is the “worst disagreement between them.” Second is economic development. “China insists on reform of the whole economic and political system,” explained my friend. Beijing’s objective is to “transform North Korea.” The DPRK government fears such change. Issue number three involves bilateral commerce. “China wants to have normal trade with North Korea,” but the DPRK expects to receive goods even if it does not pay. This has “caused great loss for China and for companies in China.” The fourth concern is refugees. “Many North Koreans have fled to this part of China,” he said, forcing Beijing to “think about how to deal with the issue.” So far, the People’s Republic of China has returned refugees when caught, sparking sharp international criticism. Coming in at fifth...

Jones Act Opposition from the Carolinas

The Aiken Standard (Aiken, South Carolina) published a letter to the editor addressing the 2016 Federal Budget currently in process in the Congress and proposed the Jones Act should be addressed in the budget. The 2016 federal budget will be for the federal fiscal year from October 1, 2015 through September 30, 2016. The writer, Gil Mullins, from a distinctive conservative perspective, proposes the Republican-led Congress adopt a 2016 federal budget based upon the 2013 continuing resolution – popularly known as the sequester – and add the $74 billion in defense appropriations proposed in the President’s 2016 budget submitted to the Congress on February 4, 2015. As the writer acknowledges this will probably bring a Democratic caucus filibuster in the U.S. Senate – which the writer welcomes and believes the Republicans will win and propel them to victory in the 2016 elections. There have been Jones Act critics in the Carolinas since the 1990’s due to the lack of dry bulk carriers in the Jones Act fleet to provide transportation of domestically produced feed grains to the hog and chicken farmers there. Instead, the farmers have been importing foreign feed grains to take advantage of the international shipping fleet. This is an example of import substitution – due to a lack of domestic transportation. Although the writer is impassioned in his views, it remains doubtful that the Jones Act will be addressed in the 2016 federal budget. However, the letter does express the conservative frustration with the Republican led Congress and the longtime dissatisfaction with the Jones Act in the Carolinas. A key excerpt: Prepare now for a government...

Relativity Media: E + MC = 0

The formula in today’s title is not related to Einstein’s famous theory. Rather, it’s the story of anExisting business, always needing more cash (or more tax credits) and it now finds itself with zero and it’s in bankruptcy. You may remember Relativity Media from its efforts at the Hawaii Legislature in 2011 and 2012 to sweeten the existing motion picture and television production credit, and to enact a separate credit for building production infrastructure, specifically studios on four of the Hawaiian Islands. A number of its presentations before the Legislature seemed to be based on the theory of “shock and awe.” In 2011, former President Bill Clinton submitted an open letter to the Hawaii Legislature endorsing Relativity’s proposals. “The Shangri-La/Relativity commitment to build the most environmentally friendly stages in existence, coupled with the economic benefits of this bill and Hawaii’s timeless appeal, will make Hawaii the most attractive place in the world to shoot a film,” he said. Relativity also flew in Hollywood personalities to testify at legislative hearings, and threw an invitation-only reception at the Mandalay restaurant in downtown Honolulu. And if that wasn’t enough, some legislators received gifts. Relativity gave out a total of thirty-five DVD sets to legislators and staffers, and one representative even accepted an iPad2 from Relativity but returned it to the company later in 2011. At that time Relativity reported that it spent $10,150 on the gifts. This, of course, was all part of a grander master plan. Relativity dove into the television, digital and sports agency industries. It forged a partnership in China with Huaxia Film Distribution Co., and launched a fashion...

The Growing Support for an Article V Convention of the States

One reason Donald Trump is finding support for his presidential bid is that so many people are fed up with Washington and its inability to get things done—that is, get things done the way the fed-up people think they should. Some of that sentiment is also driving a reexamination of an Article V Convention of the States. Most Americans know that the Founding Fathers tried to set up a system of checks and balances, but that issue is usually discussed in relation to the three branches of the federal government imposing a check on each other. But Article V of the U.S. Constitution creates a check and balance between the states and Washington. If two-thirds of the states apply to Congress for a convention for the purpose of amending the Constitution, Congress must convene it. If the convention of the states is able to agree upon a constitutional amendment, and if three-fourths of the states ratify the amendment, it would become part of the Constitution. There is a growing interest among state legislators who believe that Washington has ignored some of its constitutional responsibilities and far exceeded its allowable reach with respect to the states. An Article V convention might restore some of the historic balance. The country’s top expert on an Article V Convention is Rob Natelson, who used to be a law professor teaching constitutional law. He is now with the Independence Institute in Colorado. Natleson points out that there have been numerous multi-state conventions to consider similar issues, and that the process is pretty-well established. Participating states would send their representatives to the convention. Only the...

You Can Have That Road, Alphonse … No! You Take It, Gaston!

CNBC’s recent rankings of “America’s Top States for Business” pegged Hawaii at #50 overall, despite a #1 rating for quality of life. One factor that led to Hawaii’s rock-bottom position was the condition of its roads and bridges. A big contributor to this state of affairs is that the State and counties aren’t clear on which roads they own, they don’t want to maintain them if they don’t know that they own them, and so there are a number of roads that are not getting maintained. Welcome to “Roads in Limbo.” When Hawaii was a kingdom, there were no counties; all roads belonged to the people through the sovereign. The counties were established in 1905, and while the counties were given certain rights and duties with respect to the roads in the following years, the division of roads into territorial and county highways did not happen until 1947. The law now defining state versus county highways, which dates back to 1963, refers to state highways as those acquired by or under jurisdiction of the Department of Transportation, and county highways as all other public highways. The law also mentions private roads that are surrendered or dedicated to the government and clearly says that in that context the government’s legislative body (such as the county council) needs to accept the dedication before the government takes over the road. The big question left open by these provisions is what happens to roads that were never private, but were originally government roads. Is the State allowed to say, “Hey, county, this road is in miserable, substandard condition so it’s now yours, you...