‘Copy Colorado’ is Mitchell’s prescription for Hawaii’s budgeting woes
from Grassroot Institute of Hawaii, August 22, 2022
Grassroot Scholar Daniel Mitchell, co-founder of the Center for Freedom and Prosperity and a nationally recognized economist based in Washington, D.C., has traveled the world and become well versed in public policy — specifically, what works and what doesn’t.
Fresh off the heels of a European speaking tour, Mitchell gave presentations this month on Maui and Oahu at luncheons sponsored by the Grassroot Institute of Hawaii.
Addressing the topic “Better Budgeting for a Better Economy,” Mitchell proposed course-correcting solutions for Hawaii’s dire financial situation, such as a Taxpayer Bill of Rights like the one in Colorado.
At the Aug. 19 luncheon on Oahu, Mitchell explained that Hawaii has a good spending cap, but the lawmakers are allowed to waive the state’s spending cap by a two-thirds vote, which they routinely do.
He recommended that Hawaii adopt something similar to the Colorado Taxpayer Bill of Rights, which requires a vote of the people before that state’s spending cap can be increased.
“You have the framework of a good idea in your Constitution; you just have the wrong design and execution,” Mitchell said. “Copy Colorado.”
Grassroot Institute President Keli‘i Akina noted that Hawaii’s state government has been spending at a pace twice as fast as the growth of the private sector, and asked Mitchell what he thought about that. Mitchell responded:
“You need to remember that it’s ultimately the private economy that generates the wealth that government can spend. You need to keep the private sector strong; you need it creating new jobs, generating income, because otherwise, at some point, there’s nothing left to steal — and that should motivate a politician more than anything.”
Mitchell said Hawaii’s tax system ranks 41st in the national Tax Foundation’s 2022 State Business Tax Climate Index.
“As bad as government spending is in Hawaii compared to other states, the tax system is really the main problem,” he said, later noting that nowhere else in the country are middle- to upper-class families earning between $200,000 and $400,000 taxed as heavily as they are in Hawaii.
Looking ahead, “Fiscal policy is all about trend lines,” he said.
>> “If you have unfriendly trend lines, like government growing faster than the private sector, that becomes a big danger in the long run.
>> “If you have unfriendly trend lines in terms of taxable income emigrating from your state as opposed to immigrating to your state, that’s a very bad trend line.
>> “When you have unfunded liabilities out there like a ticking time bomb, along with trend lines that are very unfavorable on all sorts of different metrics, that is not a reason to be encouraged about where Hawaii is right now.”
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8-19-22 Daniel Mitchell budget presentation, moderated by Keli‘i Akina
Keli‘i Akina: Well, aloha everyone, and welcome to our seminar today entitled, “How to Ensure Better Budgeting and Better Economy.”
You know, budgeting is so important in our own households. If we get it wrong — if we don’t know how much we have and how much we owe — we can get into big trouble.
Well, unfortunately, our government doesn’t always know what it has — in fact, it doesn’t know. It doesn’t know what it owes. And, not surprisingly — at the state level, at least — we get into a lot of trouble.
Right now, one of the common refrains at the state Capitol is that we are in the midst of a financial bonanza. Money is growing on trees. And basically, that’s because of federal funds that have come in during COVID; it’s partly because of inflation; and partly because, naturally, when we open up the economy after having shut it down so tightly for two years, there’s going to be more activity.
But just because technically and on paper the state may be flush with money, doesn’t mean that we’re in a very good position. That has not changed whatsoever the fact that we have one of the lowest ratings in the nation in terms of cost of living — with the highest cost of living.
Infrastructure; the ease with which to start a business and to keep it going; the level of debt our government is carrying; the pace at which residents are leaving Hawaii — and you’ve seen our Grassroot Institute documentation of Hawaii people are leaving Hawaii.
Well, there’s one individual I appreciate tremendously because he eats, sleeps and drinks these problems and how to solve them. He’s one of the best analysts around at understanding government budgets at every level — the federal level, the state level, the county level.
I’ve had the privilege of hearing him at conferences, running into him across the nation, and he has engaged with us as one of our scholars at the Grassroot Institute, whom we consult in trying to find solutions here.
You may have seen him in much of our media; even in a setting like this, we’ve had him by Zoom. But I’m so glad that we were able to bring him from Washington, D.C., to Hawaii.
Dan Mitchell is a — well, yes, give him a hand first, and I’ll call him up in just a minute.
I have to say a couple of good things about you first.
Daniel Mitchell: Make sure to say it as long as I wrote them.
Akina: That’s right. He’s an extremely respected, recognized economist. He’s the founder of the Center for Freedom and Prosperity — that’s in Alexandria, Virginia — and he publishes a daily newsletter called International Liberty.
More than that, he has a deep understanding of the problems that states, counties and the federal government face with regard to budgeting.
And he’s also my friend. I want to ask you, please, to welcome Dan Mitchell.
[applause, presentation of lei]
Great having you here in Hawaii. Do you want to say hi?
Mitchell: Well, hello.
Mitchell: Alo-ha. That — was that [correct]? You do it perfectly. You say, “Alo-ha.”
Akina: That’s close enough.
We’re so glad you’re here, Dan. Let me throw out a couple of questions. You have just come back from being on the road at what may be called a free market road show. What was that all about? Go ahead and talk in here. [gestures to microphone]
Mitchell: Every year, the Austrian Economics Center and the Hayek Institute in Vienna, Austria,organize a whole series of conferences around Europe that are designed to sort of rebuild the ideas of classical liberalism that actually originated in Europe.
And so, actually three times this year, I was over in Europe doing different legs of this tour. It’s sort of like the old tourist things where you spend one day in every city. Well, we do the same thing, except you’re just busier; you’re waking up, you’re going to a conference, you’re giving a speech, you’re having dinner, you’re going to sleep, you’re waking up, going to the airport.
Akina: Sounds like fun.
Mitchell: And so you wind up doing this for a week here and a week there. But you get to meet a lot of good people, and you’re hopefully sort of rejuvenating this idea — the ideas that you talked about of individual liberty and free markets. And of course, in Europe, they need that message a lot.
Akina: Absolutely. So next time you plan one of these trips, let me know, and we’ll organize a cruise. We’ll call it the Frederick Hayek Cruise with Dan Mitchell. Now, let me …
Mitchell: Well, actually, I should say that one of the big friends of the Grassroot Institute, Li Schoolland, was part of one of the legs that I was on. So yes, Hawaii does get represented. But we’d want more people, I’m sure.
Akina: Wonderful, wonderful. Now, Dan, real briefly: When you compare budgeting, in terms of government budgets at the federal level to the state and local level, what’s the primary difference?
Mitchell: The main difference is that Washington has a much bigger footprint. And those of you who are in business and paying taxes, you probably know this. Because, as bad as Hawaii’s tax system is with a top rate of 11%, that’s just a fraction of what the federal government does, where, depending on how you’re counting different surcharges, the federal tax rate, top tax rate, is about 40%.
And if you look at total government spending as a share of the economy, state and local governments are not even one-third of the total. Washington represents, by far, the biggest chunk of government spending in the United States.
Now, by the way, it didn’t use to be that way. It used to be — back in the days when we still had real federalism and constraints on the power of the federal government — it used to be that state and local governments were twice as big as the federal government. And that, of course, I think was a better approach.
Akina: Well, talking about state government, I was speaking with one of our legislators recently, who chided me on Grassroot Institute encouraging lower taxes. He said that would ultimately work against the people who need the government to spend money. And then he cited an oft-heard quotation in Washington, D.C.: “The government must spend money in order to make money.” For every dollar, he said, that the government spends, it produces $1.50.
Dan, what are your thoughts? Put your truth detector on and tell us what your thoughts are on that.
Mitchell: I don’t know whether your legislative friend knew this or not, but he was spouting the idea of Keynesian economics. And the idea of Keynesian economics is that [the] government borrows a bunch of money and just dumps it onto people, and then people go around spending it; which sounds good. If you’re showered with money from Uncle Sam or the state, of course you go out and you spend some of it, and the person you spend it on then spends it on someone else.
[It’s a] wonderful theory, except where did the government get the money in the first place? They had to borrow it out of the economy before they could give it away, and so there’s no net increase in what Keynesians call aggregate demand — the total amount of money.
Actually, I want to be fair. You can, if you’re borrowing from China or something like that, for a little while, you could have more consumption than what you produce in your economy. So, yes, in a few narrow circumstances, for a little while, you can artificially boost your consumption in your economy. But of course, only by going further into debt and lowering your living standards in the future.
But the bottom line is, your friend is wrong; he’s misguided on that. Government crowds out the private sector.
Akina: Oh, OK.
Mitchell: And of course, the private sector’s more efficient.
Akina: So, he’s wrong. Too bad, I just voted for him.
But in any case, you know, in the race to spend more money, the government is actually winning in some ways. And here in Hawaii, our Grassroot Institute research has shown that one race they’re winning is against the private market.
Over the last decade, our government here in the state of Hawaii has been spending at a pace twice as fast as the growth of the private sector. What’s the danger of that?
Mitchell: The danger of that is that as you crowd out more and more private sector activity, you need to remember that it’s ultimately the private economy that generates the wealth that government can spend. And as government keeps growing faster and faster than the private sector, what does that mean economically?
I always think of it in sort of these wonky terms. It means that the burden of government as a share of the state economy — and, by the way, the same problem exists in Washington, so we also have the federal government growing as a share of the economy — what does that do? It means we become more and more like Italy and Greece as a country. And are those role models? Are those examples that we want to follow?
The government simply doesn’t spend resources and allocate resources as efficiently or as intelligently as people who have to follow bottom-line incentives. That’s why a vibrant private sector is needed. And I try to tell my friends on the left in Washington: You know, if you really want to have money to redistribute and you want to have government take care of those truly who need, don’t kill the goose that lays the golden egg.
You need to keep the private sector strong; you need it creating new jobs, generating income, because otherwise, at some point, there’s nothing left to steal — and that should motivate a politician more than anything.
Akina: There you go. Now, thank you. We could go on with this banter, but I’d be stealing time from your presentation. And we all want to get to these detailed economic charts and the big words like aggregate demand and so forth.
But, do me a favor though, Dan. Speak to me, the person who doesn’t understand the technical jargon, so that we can get a good grasp on the very important things that you have to share.
Now, I want all of you to feel free to ask questions, so we’re going to put up a microphone right over here. And when Dan is done, I invite you to walk up to the microphone, say who you are, and ask your question.
But until then, for the next 25 minutes or so, please give your full attention to our wonderful speaker today, Dan Mitchell. Dan, take it away.
Mitchell: Thank you.
Well, thank you very much. I promise not to use too many big words because I’m used to trying to brief politicians in Washington. So believe me, you can’t get too detailed when you’re doing that if you want them to pay attention.
I’m going to be explaining, at the start of my presentation, some concepts of fiscal policy. So yes, I am going to be an economist, and I’m going to try to drum a few concepts into our collective consciousness here.
Government spending: How much, and how is it spent? Taxes: How much; how is it raised? The impact of red ink — how much debt today; how much in the future? In other words, unfunded liabilities.
And actually, I think unfunded liabilities in most states are a bigger problem than the current level of debt. Not true in Washington; the current level of debt is a bigger problem. Well, actually, I don’t know about that, with Social Security and Medicare and all that. But anyhow, let’s get right into sort of these concepts that I want to talk about.
And this, just like the question I was just asked: Is government spending good for the economy? And frankly, it does depend on how you’re spending it.
Some types of government spending can be productive, especially like core public goods — that’s a term economists like to use — things like the administration of justice.
Some types of spending may be good. Like, obviously, some types of infrastructure are good for your economy. But sometimes politicians just waste it on pork.
Some types of education spending are good for your economy, but you look at a lot of states that are — you know, in the District of Columbia, right near where I work, you know, they spend more per pupil than just about any place in the world, and yet they get terrible results. So that’s one of the reasons I’m in favor of things like school choice because we’re spending a lot of money in some areas; in theory, it’s a good area to spend money in, but the way the government does it generates very bad results.
And then, of course, most government spending — especially nationally, but I suspect with a lot of states as well — is for what economists call transfer or consumption outlays, and those types of spending tend to be associated with weaker economic performance.
And I want to give a little bit of an economics lesson that ties into what we just talked about with Keynesian economics. Some of you in school may have learned this little equation: Y = C + I +G.
And in that equation, Y is national income — or sometimes it’s called GDP, gross domestic product. And so this Y is a function of consumption plus investment plus government. That’s how we allocate our national income.
The problem with that — and this would be true of the state Legislature, the legislator that we just mentioned — is that when people think about this Y = C + I + G formula, it’s an accounting identity, but they think it actually is a driving force in the economy. So they think if you increase G in this equation, you increase Y. This is Keynesian economics.
And a lot of politicians, of course, they’re not economists; they have no idea what Keynesian economics really is. But they remember this Y = C + I + G [equation] that they got in Macroeconomics 101, and because [of] that equation, they don’t understand what the equation actually represents. They think increasing the government spending increases the national income, or they think lowering government spending is bad for growth.
But that’s a fundamental misreading, because GDP — gross domestic product — is a measure of how our national income is allocated. What we really need to figure out is how our national income is accumulated, and that’s a totally different measure.
Well, actually, before I say GDI, just gross domestic income, here’s the key thing to understand about GDP: Y is fixed, it’s an after-the-fact measure. It’s like if you’re looking at your last year’s family budget, and you’re saying, “How much did I spend on housing? How much did I spend on food?” so on and so forth, you’ll get that kind of equation; just like if you do it in the country, you get that kind of equation.
But, if you increase government spending with a fixed Y, by definition, you’re lowering investment or consumption spending. That’s why government spending, even under the Keynesian construct, doesn’t help. Which is why, when I’m talking to politicians, I try to tell them to focus not on gross domestic product, but to focus on gross domestic income.
Gross domestic income isn’t how we allocate our income, it’s how we earn our income. It’s things like wages, salaries, corporate profits, other types of business income. And if you want more economic growth in your society, you need to figure out how to move GDI, not GDP.
And you can think about it this way: Same type of equation, but in this case, when you increase things on the right side of the equation, it actually does increase what’s on the left side of the equation.
Now, this is all very wonky, but it’s vitally important. I can’t tell you how many times I’m talking to journalists — financial journalists who should know better — or even politicians, and they don’t understand these basic concepts.
You have to increase production to increase your income. When people are focusing on GDP, they’re simply rearranging a fixed pie; they’re re-slicing a fixed pie. The goal should be to grow the pie.
So, now that I have that wonky part out of the way, let me just underscore something: I’m not giving you some crazy idea. This is a flow chart from the Bureau of Economic Analysis at the Commerce Department, and it notes that GDP and GDI are the same thing, minus statistical discrepancy.
You know, when you’re measuring, if you were to measure all your income and measure all your spending, they probably wouldn’t match up because you’d forget about things and stuff like that. [The] same thing happens with the government, which is why the St. Louis Federal Reserve, when they measure GDI and GDP, yeah, they track very closely, but not exactly.
I’m showing you those two things just to underscore that this is not some weird theory that Dan Mitchell has. This is something where the government accumulates this data, they put it together; every quarter, you get both GDP and GDI numbers.
Unfortunately, financial journalists all talk about GDP and write about GDP. GDP is what we hear about on the news. It’s GDI that really matters.
Now, let me take off my wonky hat and now get into the meat of the presentation.
What is good tax policy? It’s having a low tax rate, unless you’re trying to punish something. If you want to discourage tobacco, have a high tax rate. But when we’re talking about general economic activity — jobs, business, things like that — you want a low tax rate.
And you also don’t want to double-tax saving and investing, which is a big problem in Washington; it’s not so much a big issue on the state level. But I want to show you a couple of things that — I like using these little visuals when I’m talking to politicians because it helps them understand.
I ask the hypothetical question: Should an individual sweat, sacrifice and struggle to earn another $1,000? Well, economists like talking about the marginal tax rate. What’s the marginal tax rate? It’s the tax on the additional income you might earn if you decide to work harder, work more, work more cleverly. So, if you have a chance to earn another $1,000, it doesn’t matter what the taxes are on your previous levels of income, what matters is the additional tax you pay on that additional $1,000.
Now, if it’s zero — “Yes.” If it’s 20% — “Sure, why not?” If it’s 50% — “Well, not today.” And if it’s 100%, you say, “No blankety-blank way.”
And by the way, that’s not a hypothetical example. In France, in, I think, 2013, there were more than 8,000 households that had a tax rate of over 100%. And there was a famous Swedish author in the 1980s who immigrated out of the country because she calculated that her tax rate one year was 103%. That’s usually when you have countries with wealth taxes in addition to regular income taxes.
But the point is: Keep the tax rates low on things that you think are good, and have the tax rates high on the things that you think are bad.
And politicians understand this halfway. Because they know — oh, bang your fist on the table and say, “We need higher taxes on tobacco because smoking is bad.” Well, I have libertarian sympathies, so I don’t think it’s their job to control people’s private lives. But I give them an A+ for economics, because they understand [that] the more you tax something, the less you get of it. But as the famous “philosoraptor” meme tells us, if it’s bad, if higher taxes on cigarettes deter smoking, what do higher taxes on work do?
Of course, they’re going to discourage work. Not for everyone,and not on everyone by the same amount. Economics is always about all sorts of different preferences people have — different sensitivities, or as economists say, we talk about elasticities. Why don’t we just say sensitivities? But, we like jargon.
But the point is, the more — some people are very sensitive to taxes, some people are less sensitive to taxes — but overall, when tax rates go up, economic activity or whatever is being taxed goes down. So, if you want to tax cigarettes at a high rate, OK. Like I said, I don’t want to control people’s lives, but OK, there’s a reason you do it. Why on earth would you want to tax work, saving, investment, entrepreneurship — the things that generate the wealth for our society?
And remember the little Q&A session we just had up here: If you believe in helping the less fortunate, you want a vibrant economy generating lots of income and wealth so you actually have something to redistribute. And unfortunately, some of our friends don’t understand that.
I want to make one point about saving and investing. And again, I already said this is mostly a problem in Washington. Between the capital gains tax, the corporate income tax, the double tax on dividends and the death tax, you could have income tax as many as four different times if you save and invest. But if you consume, you don’t get hit with those taxes.
So the thing that every economic theory says is good — saving and investment — even the socialists agree with that; now, they think that government should do the investing, which is kind of silly. But every economic theory known to man agrees that saving and investing is key for long-run growth. And yet, what do we do with our tax system? When you consume, very low taxes; when you save and invest, very high taxes.
And the analogy I use when talking to politicians — because again, you have to keep it simple — is I tell them to imagine that they owned an apple orchard. And I say: You have the land, you plant the trees, you tend the trees, the trees grow, you fight off pests, you do all these things — that’s capital expenditure. The tree is capital. And eventually, that tree is going to bear fruit — that’s the income that is generated by the saving and the investment.
How do you harvest that fruit? Do you pick it from the tree, or do you chop down the tree?
Now, maybe it’s easier to harvest apples if you chop down the tree; but even a politician will understand if you chop down the tree, you’re not going to have apples next year. Now, technically, we don’t chop down the tree; we saw branches off the tree. But the net effect is you have fewer apples next year.
Now, why do politicians do that? Because rich people own the apple trees. So, in order to punish the rich people, they decrease the supply of apples, which is the income for the rest of us and the prosperity for the rest of us. So I’m a big believer that the whole class-warfare approach is fundamentally misguided.
Now that I’ve sort of gone through a little bit about government spending and taxes, let’s talk about fiscal policy in Hawaii. The good news is that you’re not at the very bottom of the list. You’re 15th from the bottom. Depending on whether you see the glass as half empty or half full; maybe you like it if you have the 15th highest level of government spending on a per capita basis. But that’s probably not a good idea if you believe in being more competitive as a state.
So, the spending level in Hawaii — and, of course, as was already talked about in the introduction — government spending is on an upward trajectory growing faster than the private sector.
Now, remember, what is the private sector? The private sector is your tax base. So if your tax base is growing like this, and your government spending is growing like that, that is not a very sustainable approach. That’s a recipe for either endless tax increases or endless debt increases, and none of that will end very well for a state or a country, for that matter.
But as bad as government spending is in Hawaii compared to other states, the tax system is really the main problem. According to the Tax Foundation, you’re ranked number 41 — not the worst, but definitely on the bottom 10. And when you focus specifically on top income tax rates, which is what really drives a lot of investment and entrepreneurship and small business activity, you either have the second or the third highest rate.
Why do I say either? Because it depends whether you count New York City local taxes in the equation. Because if you live in New York City, yes, your top tax rate will be higher than Hawaii; but [if] you live in Syracuse or someplace like that, Hawaii will have a higher tax rate. And of course, California is the worst state in the nation in terms of taxing entrepreneurs and investors.
But here’s the fundamental problem with that comparison: You don’t start paying the high tax rate in New York until your income is about a million dollars a year. If you live in Hawaii, whether you’re looking at single or married couples, you’re talking about $200,000 to $400,000 as the level of income where you start paying that 11% rate.
So, nowhere else in the country are sort of these, I don’t know, upper/middle-class people taxed as heavily as they are in Hawaii. So, you are on the bottom of the list. Or again, if you like high taxes, you’re at the top of the list. But since I don’t like high taxes, I don’t think that’s a good list to be at the top of.
Now, here’s a map showing the top tax rates. You don’t want to be sort of the dark red or maroon, whatever that color is. And you can see Hawaii right here is a very high state.
And by the way, several people have told me since I’ve been here that Las Vegas is the ninth island of Hawaii. Notice that [in] Las Vegas in Nevada, there’s no state income tax.
So ask yourself: Is it worth 11% of your income as a successful person to live in Hawaii?
Hawaii’s a great place. This is my third visit. It’s wonderful. But if I was a successful entrepreneur, as opposed to just a policy wonk that, you know, for the most part, you don’t get rich being a policy wonk — or at least I haven’t.
So, if I was actually very successful, would it be worth paying 11% compared to living in Florida, Tennessee, Texas, Nevada, so on and so forth? Probably not.
Now, again, I want to stress something I said before about the sensitivity to taxes — different people of different sensitivity. Not every rich person is going to say, “I’m going to move to Nevada.” Maybe only 2% will. But over time, 2% — when you’re dropping your state taxable income over time because just a trickle of rich people are leaving — that adds up to a big number by the time you get 10 years out, 20 years out.
Fiscal policy is all about trend lines. If you have unfriendly trend lines, like government growing faster than the private sector, that becomes a big danger in the long run. If you have unfriendly trend lines in terms of taxable income emigrating from your state as opposed to immigrating to your state, that’s a very bad trend line.
Here’s a five-column table I put together dividing states from the best tax system to the worst tax system. On the left side, you have the no-income-tax states. Then you have next to them, the flat-tax states. Then you have three columns with so-called progressive taxes.
Some states have very low graduated tax rates — less than 5%. Some are between 5% and 8%. But then on the far right, you have the worst states with the very high punitive progressive tax systems. Hawaii, unfortunately, is in that category.
One state — Iowa — adopted a flat tax this year, so they’re going to move to the second column phasing in over the next couple of years; so they’re escaping an unfortunate position. There doesn’t seem to be any momentum for Hawaii to escape.
Now, one problem is not just that you have a very high tax burden in Hawaii; you also live in a state that is more expensive to live in than any other state in the country.
Your cost of living is — well, compare it to Nevada. So, $100 goes $102.56 in Nevada; $100 goes $84.67 cents in Hawaii. But y’all know that. I mean, heck, I know it. I went to IHOP for breakfast this morning — it’s twice as high as IHOP in the [mainland] United States. You know, I said, “What is this?” I was about to, you know, [ask], “Where is the government regulator to protect me from that price gouging?” But of course, I resisted that impulse.
So, high taxes, high cost of living — that’s not a good combination.
Now, here’s what makes it even worse: Other states are cutting taxes. Just in the last two years alone, the green states are cutting individual income tax rates; the blue states are cutting corporate income tax rates; and of course, if you bisect it, you’re cutting both of them. And of course, there are several states that have no income taxes to cut anyhow.
So, the rest of the country — in part, by the way, because of this windfall of money that Trump and Biden have dumped onto state and local governments — some states are doing the right thing with that money. They’re saying, “OK, Uncle Sam’s going to give us a windfall of money; let’s cut taxes.” So I didn’t like the federal government spending all that money, but at least we’re getting something good out of it in some states.
In many states, though, they’re taking that windfall of money, and they’re creating permanent obligations.
Now, think about that. Let’s say you win the lottery. You don’t have a lottery here, though. OK, well let’s say you’re at an illegal gambling parlor.
Not that you would ever do that. But you’re at a gambling parlor. You win, all of a sudden, $20,000. You think that’s great.
Would you permanently increase your household expenses by $20,000 a year? Of course — at least I hope — you wouldn’t. That would not make sense. But that’s what a lot of state and local governments are doing with this windfall of money that Uncle Sam has been dumping on them. They’re permanently increasing their spending liabilities in response to a one-time windfall of revenue. That is not good fiscal policy.
And don’t forget unfunded liabilities. I already said at the start that unfunded liabilities, in many cases, are a bigger problem than the already-existing debt.
Let’s see where Hawaii ranks. [Looking at a chart] This is unfunded liabilities per capita. Hawaii [is] number 47. So you’re not in last place, but 47th place is not a good place to be. Here’s unfunded liabilities as a percentage of gross state product, which is Hawaii’s share of gross domestic product, or gross domestic income, if you want to use my favorite statistic. You’re 44th. So, that’s not quite as bad as 47. But in both cases, you are near the bottom.
Now, what does this mean? You already have government spending growing like this when your state economy is growing like this. You already have debt. And you have this sort of big, giant pile of debt that’s going to come due in the future. It doesn’t count in your official debt now; you haven’t already issued bonds to reflect that. But it’s a promise that has been made that in most cases, you are contractually obliged to because the state and local politicians have been doing very generous contracts with state and local government workers.
That is a ticking time bomb on your state that is going to blow up at some point. The smart thing to do is to set aside a lot of money; have a what’s called a fund-it system.
Of course, the smartest thing is not to be overly generous in the first place.
But when you have unfunded liabilities out there like a ticking time bomb, along with trend lines that are very unfavorable on all sorts of different metrics, that is not a reason to be encouraged about where Hawaii is right now.
Now, let me say something about whether there are offsetting benefits. Because if you just look at fiscal policy, there are some countries that have very high taxes and spending, like the Nordic nations, but they’re still relatively prosperous and competitive. Why? Because they are a very free market in other areas.
If you go to the Economic Freedom of the World index from the Fraser Institute or the Index of Economic Freedom from my old colleagues at the Heritage Foundation, you will find that the Nordic nations rank among the top 25 out of like 175 countries in the world. So, they’re still pretty competitive. Why? Because they’re very bad on fiscal policy, but they do very, very well in terms of having low levels of regulation, very stable money, good rule of law, open trade — things like that. Does Hawaii?
Now, let’s ask whether Hawaii is like the Nordic nations. Do you have a high fiscal burden, but you make up for it by being very free-market elsewhere? Nope.
[In] “Freedom in the 50 States,” published by my old colleagues at [the] Cato [Institute], you’re ranked number 49; Economic Freedom in North America,” published by Fraser, number 44. So, you’re not making up for bad fiscal policy by being good elsewhere. This is a long-run problem for Hawaii.
Now, let me go ahead and wrap up because I know the Q&A is always one of the best parts. What do you do to get good fiscal policy? Well, here’s the frustrating thing. You already have a spending cap in your state constitution — that’s the good news. The bad news is the spending cap is set too high.
Now, let’s do an analogy. Is it good to have a speed limit in a school zone when children are crossing the street? Yeah. Should that speed limit be 75 miles an hour? That sort of defeats the whole purpose.
Now, Hawaii’s spending cap isn’t quite 75 miles an hour, but it is set to the growth of state income. But that’s actually not even the biggest problem. The biggest problem is routinely, state politicians — because, in the Constitution, you can waive it with a two-thirds vote — and they routinely waive it. So it’s sort of like saying, “Oh, yeah, we have that 75-mile-an-hour speed limit; the kids are crossing the street; but we’re going to put like a, we’re going to cover up the signs and have a no-penalty phase for speeding cars.”
So, you have a spending cap. It’s set too high, and you routinely waive even that very high spending cap. That’s not the right approach.
So, what do you do? Do you somehow alert honest, well-intentioned lawmakers? We’d like to do that in D.C. — we’ve never figured out how to do it.
Do you have constitutional limits on the role of government? Well, we actually have that in Article 1, Section 8 of the U.S. Constitution, but Congress ignores that as well.
Do you have balanced budget rules? I like balanced budgets, but let me say something about — let me skip ahead. I want to say something about debt, and I’ll wrap up on this. I don’t like government debt, but the main thing to understand is that debt is simply a symptom of too much government spending.
If I go to the doctor because I have a headache and the doctor does like those MRIs or CT scans and tells me I have a brain tumor, is my problem headaches? No, my problem is the brain tumor. The headaches are a symptom of the problem.
And let me show you why balanced budgets — well, first of all, balanced budget rules don’t work. We have balanced budget constitutional provisions in California, New Jersey, Illinois, states like that. You have anti-deficit rules in places like France, Spain, Italy. None of that stops the big spenders from taxing and spending their states or countries into a hole.
But let me show you this: This is the federal government’s revenue on a year-to-year basis. When the economy’s growing, politicians spend money hand-over-fist. When the economy’s in a recession and revenues fall, if there was a balanced budget requirement, what do you think they’re going to do? They’re going to raise taxes. They’re not going to cut spending.
“Cut spending in a recession when people are hurting? We can’t do that. Our job is to play Santa Claus.”
So, when you have a balanced budget requirement, what you are telling politicians in places like California, Illinois, is that they have to raise taxes. That’s why Hawaii has the right theory — a spending cap — but you have the wrong execution.
The Colorado’s Taxpayer Bill Of Rights, their spending cap is much better. It is set at population plus inflation; and [in] nine out of 10 years, population plus inflation is lower than what’s happening to gross state income. Not only that, but it’s very difficult for Colorado politicians to try to increase the spending cap by increasing revenue. Why? Because you have to have a vote of the people to raise taxes.
So, I’ve mostly given you depressing information here today.
But there is a solution. You have the framework of a good idea in your Constitution; you just have the wrong design and execution. Copy Colorado.
Now there’s a whole separate discussion, which is, how do you convince the lawmakers to do that? But that’s what the Grassroot Institute is here for. It’s going to be a challenging task — because we’re certainly not successful in doing that in Washington.
By the way, Switzerland has a very good spending cap as well. They’re of course a role model in all sorts of ways for fiscal policy. But limiting spending — let me get to my three challenges.
First, understand the problem — government spending.
Second, figure out how to bend the cost curve down.
But then the big problem is, how do you convince politicians to handcuff themselves?
That is our challenge in Washington. That’s your problem here in Hawaii. That’s the problem in Greece. That’s the problem in 99.9% of the political jurisdictions in the world.
So with that, I’ll shut up, and we’ll have Q&A moderated, and [I’m] happy to take your questions.
Akina: Let’s have a hand for Dan.
Mitchell: Thank you.
Akina: Well, you’ve helped to make clear a very confusing topic, and it’s so very important for us to not only understand it — we need to talk to our state legislators and others so that they can understand the budgeting process.
If you have questions for Dan, now is the time to ask them. We have a microphone that will be right here. Melissa has it, if you’ll step up over here, Melissa. And if you’ll just stand in line, that’ll be great. So, Melissa, would you come over here? And anybody who’d like to speak, come on up [to] the line.
One question, to which the answer may probably be yes, is: Dan, would you like to come over to our house and have dinner sometime this weekend?
Mitchell: That sounds like an easy yes.
Akina: Five-star restaurant, would that do OK?
Mitchell: I suspect whatever you choose will work just fine for me.
Akina: So, you’re going to be flying out on Sunday, is that right?
Mitchell: Sunday evening.
Akina: Sunday evening, OK. So, right after the seminar today, come on up, and Dan will book it himself, that’ll be good.
If you’d be so kind to introduce yourself and ask your question, Andrew.
Andrew Zimmerman: I’m Andrew Zimmerman, and my question is: I think most of your analysis was based on taxes pretty much decreasing/diminishing a society’s ability to create wealth, generally speaking. But it also was all based on income taxes, for the most part. And, they’re high here, everybody knows that; the rate’s high here, as you pointed out. But it seems to me like the overall more critical factor would be the overall tax burden.
So, for example, Hawaii has very low property taxes, and it’s got a very low sales tax. Texas, for example, has property taxes about three to four times what our property tax is here, and the sales tax in Texas is 9% to 10%, and we’re four-ish[%], depending on how you want to count the upgrade.
So, that being said, if you would agree with that, where would Hawaii stand on the 50 states relative to overall tax burden, which seems like that would be a more crucial point rather than just the state income tax.
Akina: Thanks for your question, Andrew, appreciate it.
Mitchell: Well, I mentioned at the start of my, early in the presentation, that the Tax Foundation ranks Hawaii 41 out of 50. Now, the Tax Foundation has all sorts of variables that are included — including sales tax, state income tax, state business taxes, property taxes. The one thing they don’t have, and I agree with you that this is something important, is that they don’t measure the total tax take, because the total tax take has a big effect on the total burden of government spending.
And so, for instance, states like Wyoming and Alaska come out very high on the Tax Foundation’s index. They both get a lot of revenue, but they get it from excise taxes on energy production.
So, now, that’s not a bad idea for those states because you’re in effect exporting your taxes. Just like if you tax tourists here in Hawaii — that’s a pretty smart way of taxing, assum[ing] you don’t kill the goose that lays the golden eggs. But because there’s so much energy produced in those two states, Alaska and Wyoming, they finance a government spending that is far too big.
So, I love the Tax Foundation’s State Tax Climate Index, but I don’t think it’s perfect. I think it should include a measure of total spending. And that’s why, when I had the data on Hawaii’s government spending, you have the 15th highest in the country per capita spending burden.
And one thing I should have mentioned: New Hampshire has not too different size of a population than Hawaii. The per-person spending in New Hampshire is $4,000 less than the per-person spending in Hawaii. Now, I understand that people here are probably not going to be terribly familiar with Hawaii fiscal policy, but just think to yourself: Are people in Hawaii getting $4,000 more benefit on average from government than they’re getting in New Hampshire? I don’t think so.
I do the same thing, by the way, if I’m in France, where I was earlier this year as part of that free market roadshow. I asked the audience: Government spending in Switzerland is about one-third of GDP; government spending in France is more than 50% of GDP; I say, ”Are you getting thousands and thousands of dollars better services from government than the people of Switzerland?” Of course, the answer is no. Switzerland’s a much better-run country.
So yes, all these things matter in terms of comparing how you raise your money, how you spend your money, and the overall level of the taxes and the spending.
Akina: Well, thank you, Andrew, for that question. We now have another question over here, please introduce yourself.
Kim Nikolaidis: Hi, my name’s Kim Nikolaidis, thanks so much for the invitation. I really did appreciate your talk very much and learned a lot from it.
As I was following along in the talk, I got to a point where you threw me by one expression you made, and so this is a very simple question, but — you came to the point where you said, on cutting or putting spending limits on government, where you said, “Well we have to measure the population plus inflation,” and I just didn’t know what that meant.
Akina: Thank you.
Mitchell: Let’s say inflation, on average — of course, we’re in a high-spike period now — but let’s say on average, inflation goes up maybe 2 ½ percent a year. And let’s say population, on average, goes up 1% a year. A spending cap simply says you add those two together, and government spending can grow three and a half percent a year.
So as far as I’m concerned, I would like to put like a hard freeze on government spending or even reduce government spending in nominal terms. But in terms of what’s politically sustainable, I think the Colorado spending cap, which technically, actually, is a revenue cap.
What actually, the way Colorado actually works under their Taxpayer Bill of Rights, is total revenue to the government cannot grow faster than inflation plus population. But when you marry that provision to a balanced budget requirement, it means that spending can only [go] up at population plus inflation.
I didn’t want to get into the weeds with all those technical details, but it is a well-functioning, very successful, very durable spending cap that works.
And that’s why, when I’m speaking internationally, I cite Switzerland as an example, because it works. When I speak domestically in the U.S., I cite Colorado as an example, because it works.
But in terms of just the basic man on the street, all they need to understand is that there’s no reason why government should be growing any faster than the population plus inflation.
And if you do that, remember, usually the average year, your economy is going to grow a little bit faster than those two things. So, over the long run, you actually increase the size of your private sector relative to the burden of government. So, it is a very important goal.
Akina: Thank you, Dan, and thank you, Kimon. We have another question over here.
Annie Burns: Hi. I’m Annie.
Akina: Annie, introduce yourself.
Annie: Annie Burns, and my question [is] with regards to unfunded liabilities and a shrinking tax base like Hawaii has. Does Hawaii get a mulligan in a way because, well, the tax base may be shrinking [but] we’re always going to have rich people that want to come here because we’re the awesomest place ever.
Akina: Thank you, Annie.
Annie: I mean, with regards to beauty and such. If you’re rich, what’s the problem? Unless we kill the goose that lays the golden egg and we become, you know, like a bad place to visit.
Mitchell: Well, what you want is not just to be a place for rich people to visit. You want them to move here. But then you want them to move here while they’re earning income. Because if I’m a rich person — nice thought — if I’m a rich person, and I basically want to retire, and I move to Hawaii, and I’m not — you know, OK, I’m getting some income from my investments and stuff — but I’m not at my peak earning years, so Hawaii isn’t really benefiting. I mean, it’s benefiting from me, but not benefiting from me as much as if I was an active participant in the economy. That’s what you really, really want.
Now, the IRS data, by the way — and I was looking at it pre-COVID, because any data over the last couple of years is going to be just a mess and unsustainable — but pre-COVID, Hawaii on net loses taxable income because of migration patterns inside the United States.
You don’t lose nearly as much as California or New York. They literally lose tens of billions of dollars of taxable income to states like Florida and Texas, in part because Florida and Texas don’t tax it.
But the IRS, again, tracks that data on an annual basis. Hawaii right now is not a net winner from that. You’re not a big net loser because it is a great place — people want to be here.
And here’s something I said yesterday in Maui, sort of talking about these same issues: You can afford, because of the attractiveness of your state, you can afford to tax more than average. Doesn’t mean you should, but you can afford it because people want to be here. Just like people want to be in California.
For a long time, California got away with having higher taxes and a bigger burden of government; but eventually, you get to that killing-the-goose-with-the-golden-egg point. And that’s where California has already run into the brick — I’m mixing my metaphors, but you know what I’m saying.
California is now having a big out-migration, even though it is probably, on the continental U.S., the best place to live in terms of climate, topography, recreational opportunities — all sorts of things. But now people are leaving.
And Hawaii isn’t as bad as California, but I’m not sure I would feel comfortable with where you are right now and with the trend lines on where you’re heading.
Akina: I like that tourism slogan. We should put it on a bumper sticker: “Hawaii isn’t as bad as California.”
Akina: Go ahead and introduce yourself.
Luke McKenney: Hello, I’m Luke McKenney. One of the things I noticed you pointed out was the, well, one, you wanted to handcuff the government from producing certain things and how to limit spending and also the core government functions.
I noticed a lot of people, when they think of core government functions as kind of whatever I want the government to produce. It’s been a while since I got my degree in economics, but I remember there’s three definitions or limits on what the government is actually efficient at producing and it should limit itself to producing all those things.
I know one is exclusability; I can’t remember the other two [off] the top of my head. But I think that would help if whenever a politician was to say, “Hey, let’s produce this. Let’s spend money on this,” if they had to explain it how government is the most efficient producer of that good and service instead of the private sector.
Akina: Thank you, Luke.
Mitchell: Yeah, for those of you who didn’t get into the details of economics like Luke obviously did, there’s something called public goods, which I mentioned before, and I think the two terms are nonrival risk and exclusability. Of course, am I even saying that right?
But the point is, it’s like national defense on the federal level is considered a public good. It’s something that benefits everyone, and you can’t deny somebody the benefits of it without denying everyone the benefits of it.
Now, that doesn’t mean that you should have a bloated defense budget with lots of waste in it, but it does mean that [the] core function of national defense is a public good theoretically benefiting everyone in the country. I used the example of administration of justice being a core public good.
There are actually technical terms for these things in the public finance literature. I did not want to bore everyone with them, but Luke raises a very good point: What do we want government to do? And if you want to maximize your growth and your efficiency in your economy, you want to try to keep government as focused as possible on providing those core public goods.
Now, you can relax the definition and also include things, as I indicated, like capital. Human capital, like education. Physical capital, like ports, roads, sewage systems and stuff like that.
The problem is, most governments spend most of their money on other areas — redistribution, consumption spending. And these things, they might be truly heartfelt, politicians may vote for these things for the very best of reasons, but they do enough of that and you wind up having a very negative effect because you trap poor people in dependency, and then you have to have high tax rates on people who are still working, and that’s what eventually spins out of control and becomes Greece.
And that’s the problem: Once you open the door for government to start engaging in these activities, what’s to stop them every year from deciding they want to play Santa Claus even more and more and more? And that just doesn’t end well.
Akina: Well, thank you, and we have time for one more question. I see Rob Burns is over there. Come on up and introduce yourself and ask your question.
Rob Burns: I’m Rob Burns. You know, it just seems like, Mr. Zimmerman said something like low taxes are 4.5, but the reality of that 4.5% tax — not that it’s supposed to have gone away already, but it’s probably going to get bigger. Isn’t it around 16% or 18% at the bottom line when you step on it? You know, this guy wholesales this to this.
Mitchell: Oh, it’s a cascading tax?
Burns: Oh, yeah.
Mitchell: Oh, OK, then that’s — OK, I thought the sales tax wasn’t that bad, but most …
Audience: It’s a general excise tax.
Akina: I believe our friend is asking a question. Although the sales/GET tax is about 4.5%, what’s the ultimate impact and ramification of that upon the citizen?
Mitchell: Well, when I talk about value-added taxes in Washington, because one of my big efforts [is] to make sure we don’t get that additional European-style, hidden sales tax in the United States, a value-added tax — you have a tree farm; you sell your trees to the lumber mill; the lumber mill sells the trees to a factory to make furniture; the factory then sells the furniture to a wholesaler, who then sells it to a retailer.
A value-added tax hits at every level of that production process, but you rebate the previous taxes at every level of the production process. If you have something like a gross receipts tax, which it sounds like your excise tax is, what happens is you tax at every level of the process, and all of a sudden, instead of your tax being 4.25 or whatever it is, it winds up — depending on how many layers you have in your process — the tax can wind up much heavier. Which in part simply creates a big incentive for vertical integration — you want to do everything inside one company because then there are no prices for government to tax. But that’s not efficient; you don’t want there to be vertical integration unless there’s an economic underlying rationale for it.
So it sounds like that’s part of your tax system that requires more investigation. Because I just thought it was like a 4.25 or 4.5, whatever it was, sales tax, which wouldn’t be bad. But a cascading tax, because that’s what it means when you’re taxing at all sorts of different levels, that can wind up being a much — not only a harsher burden in terms of the total amount of money — but it can be a very inefficient tax because it does create all these incentives for businesses to structure themselves in certain ways just to avoid that cascading effect.
Akina: Well, thank you. Dan, we’re going to call it right now. But everyone, please give a big hand for Dan.
Mitchell: Thank you. Now, let me say one last thing. Danieljmitchell.wordpress.com — that’s where I send out my daily column, and it has the right price at zero.
Now, you get what you pay for, so I don’t want any money-back requests.
Akina: Thank you very much.
Mitchell: Thank you.
Akina: Well, we’re so grateful that Dan joined us here all the way from Washington, D.C., and I mean it. He’ll be here for a couple of days, and if you want to get together with him, have coffee or go out, take him out, feel free to do that, just go up to him. And do stick around. We have coffee, tea and dessert available, and one of the fun things to do is to talk with each other.
By the way, if you’d like to make sure that you are informed of all of our events and what we do, and every week get reports on our research and so forth, we have a free newsletter, just sign up for that, stop at the desk over here. And we welcome you to join us as supporters of the Grassroot Institute. Did you enjoy today’s luncheon and presentation?
Thank you so much for standing for liberty, and thank you for being with us. Aloha and happy Statehood Day.