The tax doesn’t touch locals.

But it’s so important to Hawaii’s counties that the state’s four mayors were willing to sit for hours in the Legislature during budget proceedings just to remind lawmakers of what it means to them — and the people they represent.

They successfully fended off attempts this year to take the revenue from the Transient Accommodations Tax, but the fight revealed why the tax is vulnerable and how important it has become to continuing the daily services provided by Hawaii counties.

One of the reasons the money is vulnerable is because it’s not reserved for specific uses.

“The money goes to the counties without strings,” said Murray Towill, president of the Hawaii Hotel and Lodging Association, a statewide organization representing 80 percent of all lodging units in the islands.

The 8.25 percent (soon to be 9.25 percent) tax is charged on all units rented for fewer than 180 days. Approximately 45 percent of the tax collected, or $90 million, goes to the four counties. That may sound good today. But when the tax began in 1990, the counties got 95 percent of the total. Also, the counties are limited to a percentage of the 7.25 percent tax rate. Everything collected above that goes directly to the state.

The tax was born out of a dispute over who should bear the burden of tourism. Visitors come to Hawaii and use the beaches, parks and other public facilities that taxpayers sustain. The law was meant to force visitors staying in any hotel or short-term rental property to pay a tax the state would collect and then redistribute to the four counties. The formula redistribution was arbitrary, said Andrew Kato, a specialist with the University of Hawaii Economic Research Organization.

“Prior to the start of January 1993 legislative session, the director of the Department of Budget and Finance proposed upping the state’s share of the Transient Accommodation Tax (TAT) from 5 percent to 30 percent, something that would have cost the counties millions of dollars in revenue, without providing relief from existing responsibilities,” Richard C. Pratt wrote in his book
“Hawaii Politics and Government: An American State in a Pacific World.”

And thus began the creeping takeover of the tax by the state, and the effort to cap the revenues going to the counties, leaving any gains beyond those limits to the state.

Now, Honolulu receives 44.1 percent of the counties’ share of the tax. The counties receive 44.8 percent of the total TAT, or $94.3 million — whichever is less. For fiscal year 2011, which begins in July, Honolulu’s share is expected to be nearly $41 million of a $1.8 billion operating budget. The island of Hawaii’s $18 million chunk is 18.6 percent of the counties’ share, and is the second largest revenue source in the Big Island budget. Kauai’s 14.5 percent share will amount to $12 million in 2011 — 8 percent of its entire general fund budget. Maui gets 22.8 percent of the tax. In 2011, this could amount to $17.5 million, or 33 percent of Maui county’s budget. After property taxes, the TAT is the largest source of general fund revenues for operations on Maui.

Losing the TAT as a source of revenue would have forced counties to make massive cuts in programs or increased taxes, placing the burden on local residents to make up the difference. Instead, the legislature in 2009 raised the tax to 9.25 percent and put a heavier burden on the lodging industry and tourists.

“The TAT… certainly helps to defray the cost of the wide array of services we provide for our tourists and the visitor industry,” Mayor Mufi Hannemann wrote in a letter to Rep. Marcus Oshiro, chairman of the House Finance Committee. “And tourists certainly tax our community’s infrastructure — roadways, solid waste disposal system, and wastewater system.”

In addition, 4,327 victims of crime — approximately 7 percent — were visitors. The cost of operating District 6 in Waikiki, which serves visitors primarily, is about $12 million per year. The Honolulu Fire Department estimates it spends $1.3 annually to serve tourists and the tourism industry through inspections and thousands of responses.

If just $1 million were taken from the Ocean Safety Division’s budget, the division would lose 34 positions — possibly eliminating lifeguard services at Waikiki beach, Hannemann’s letter said. The city estimates that 6,000 people use Ala Moana and Kapiolani parks daily. Seventy-five percent of those users are visitors.

Counties are desperate to hang onto this revenue because it’s much more difficult for them to raise revenue than it is for the state, said Andrew Kato, a Specialist with the University of Hawaii Economic Research Organization.

“For the state to raise $90 million is not that hard,” he said. “If you raise the General Excise Tax one-sixth of 1 percent, you would have generated almost the same amount of money,” he said of attempts to take all the TAT.

“It’s a way to push down the problem to someone else’s plate, and the counties have fewer tools to deal with it,” said David Carey, president and CEO of Outrigger Enterprises Group, the parent company of Outrigger Hotels & Resorts.

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