HOUSE OF REPRESENTATIVES

STATE OF HAWAII STATE CAPITOL HONOLULU, HAWAII 96813

September 8, 2012

VIA EMAIL

Mr. Randall Y. Iwase, Chair and Members 2010-2012 Tax Review Commission go Department of Taxation State of Hawaii P.O. Box 259 Honolulu, Hawaii 96809-0259

TESTIMONY IN DISAGREEMENT TO THE CONCLUSIONS REACHED IN THE DRAFT STUDY AND REPORTS
Dear Chair Iwase and Members of the Tax Review Commission: Thank you for the opportunity to testify and comment on: 1. The Draft of the Study of the Hawaii Tax System By Public Financial Management.
2. Study on Selected issues of Hawaii General Excise Tax By William Fox.

I would like to thank Chair Iwase and the members of the Tax Review Commission for all of their hard work serving on the commission. Having been on the Tax Review Commission, I can appreciate all of the time, effort and hard work this commission has had to endure. I have great reservations about the hypothesis used by the drafters of the study. If I understand the authors correctly, they are saying, because of unrestrained government spending, our tax system is not adequate. They cite the areas concerning accrued liabilities, specifically, employee's pension benefits, employee's health insurance costs, and possible Medicaid cost increases as examples for the need of additional revenues. In other words, government services provided by the State of Hawaii cannot be sustained by the current tax system, and if they continue to spend as they do, they will not be able to pay their bills. Using this hypothesis of unchecked spending, no tax system would even be adequate. The reality being, there is an insatiable appetite for government services.
Manoa University - McCully- Moiliili Hawaii State Capitol, Room 404 / Honolulu, HI 96813 Phone: (808) 586-8475 / Fax: (808) 586-8479 / Email: reochoy(Mcaoitol.hawaii.gov

Representative Isaac Choy's Testimony Page 2

The authors fail to take into consideration the steps that the legislature can take to manage these liabilities. For example, if you study the attached report titled, Projection Results Based on the June 30, 2012 Actuarial Valuation by Gabriel, Roeder, Smith & Company, the actuaries for the Hawaii State ERS, you will see that accrued pension liabilities start trending downwards in 2021 and will eventually be zero. This is the result of the pension reform legislation passed by the state legislature. This example of how the Hawaii State Legislature can mitigate government obligations can also be applied to all of the other liabilities that are used in the study. It is important to note that it is the obligation of the state legislature to manage the expenditures of the state. Currently, our tax system is evaluated by studying the elasticity of revenues to total personal income. Simply put, when the taxpayers of Hawaii get a raise, the state gets a raise. This method, although not perfect, is a good guide line, not only for testing the adequacy of the tax system, but also makes a good guide line for the amount of expenditures that should be made. For their hypothesis to be applied completely, the authors should define what are core government services and what the related costs are, to justify the need to raise taxes. If the authors had defined what additional core services are needed, then I believe, it would be prudent to increase revenues. Without examining every expenditure and defining core services, it is very difficult to accept the need for raising revenues as proposed in this report. Therefore, I do not agree to the conclusions in this report. Comment on Study on Selected issues of Hawaii General Excise Tax by William Fox: I do not agree that the State of Hawaii is losing $145,000,000 in tax revenue for e commerce and catalog sales. If this amount was divided by 4%, it would amount to $3,625,000,000 in sales. Dr. Fox's method of guessing the total of amount of e commerce nationally, and then trying to allocate those lost sales to specific states, is not an accurate way of forecasting e commerce sales in Hawaii. Talking with other state tax administrators at a Federal Tax Administrators conference, their experiences have been, they have been collecting an average of about ten percent of Dr. Fox's estimate.

Manoa University - McCully- Moiliili Hawaii State Capitol, Room 404 / Honolulu, HI 96813 Phone: (808) 586-8475 / Fax: (808) 586-8479 / Email: repchovrWcapitol.hawaileov

Representative Isaac Choy's Testimony Page 3

IN CONCLUSION, I disagree with Dr. Fox's estimate of the amount of taxes that is lost from e commerce and catalog sales. Thank you for allowing me the opportunity to testify and share my comments with you.

Sincerely,

Isaac W. Choy, CPA State Representative, District 24

Attachment

Manoa University - McCully - Moiliili Hawaii State Capitol, Room 404/ Honolulu, HI 96813 Phone: (808) 586-8475 / Fax: (808) 586-8479 / Email: reochovacapitol.hawailgov

HI All Employees Projection Results Based on June 30, 2010 Actuarial Valuation
Market Earnings 7.75% for All Years Market Return for FY Beginning on Valuation Date (2) 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7,75% 7.75% 7.75% 7.75% 775% 7.75% 735% 735% 7.75% 7.75% 735% 7.75% Employer Contribution Rate for Fiscal Year Following Compensation Valuation Date (In Millions) (3) 15.52% 1611% 16-67% 17.23% $ Actuarial Acalarial Value Accrued Employer . Contributions Liability (AAL, of Asa.ets (AVA, in Millions) in Millions) (in Millions) (6) (7) (5) 614 $ 660 702 747 796 20 , 070 $ 20999 - 21,931 22867 23,804 24,739 25,670 26,596 27519 28437 Unfunded Actuarial Accrued
LAablllty

Valuation as of August 31, (1) 2011 2012 2013 =20146' 2015 2016 2017 201-8 2019 2020

(1JAAL, in (8) _ 8,127 $ 8 , 435 8,697 8922 9,104

Benefits and Refunds (in Millions) (9) 1023 1099 1,177 1,259 1,345 1433 1,523 1,613 1,703 1,795 1887 1980 2074 2168 2264 2358 2452 2,546 2638 2 , 729

External Cash Flovi (10) $ (212) (226) (247) (269) = (290) (331) (376) (418) (459) (498) . (536) __ ( 571 ) (604) (636) (667)

External Cash Flow as Percetnage of Assets (11) 1.82% -1.84% -1.909b - 1,95% -4995 -2.15% -231% -2.45% -2.55% =-2.64% -2.70% -2.74% -2.77% -2.78% -2,78% -2,75% -2.72% -2.66% -2.58% -2,49%

0,79% 1-7.90% 17.90%

17.90% 1790% 17.90% 17.90% 1790% 1790% 17.90% 1190% 1790% 17.90% 17.90% 1790% 17.90%

39553 $ 4093.4 4210.3 43380 4473.8 46169 4,767.5 4,926.6 5,094.7 5,272.4 5459.7 5,6564 58625 6,0783 6304.3 6,540.5 6,787.7 7,046.4 7,317.0 7,600.2

11943 $ 12,564 _, 1R234 13946 '14,700

15 ,500 _ 16,325 17,173 18,046 18947

826
853 882 912 944 977 1,012 1 049 1088 1,128 1,171 1,215 1 261 1,310 1,360

9,239 - 9,345 9,424 9473 9490 9472 9413 9311 9,159 8953 _ 8687 8,353 7,945 7456 6 , 877

2022 2023 2024 2025 2026 2027 2028 2029 2030

29352 - 19880 20,849 30262 21857 31 168 22910 32069 24,013 32966 33856 34,742 35,625 36507 37,389 , -25,169 26389 27,680 29051 30 , 513

(693) . (716) (736) (750) (761)

1:\ 3046 \ 2011\PRflonepass\ Hi nonpf Proj 2011 (IL Ipass_LW xls Summary combo

Gabriel, Roeder, Smith & Company

2/17/2012