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State lawmakers should lift the cap on the counties’ share of hotel tax money and instead give them a 45 percent share, so their funding can grow as the tourism industry does, according to a working group’s report released Tuesday.
Honolulu, Maui, Kauai and Hawaii counties would receive millions of additional dollars from the state’s 9.25 percent transient accommodations tax if the Legislature approves the group’s proposal next session, which starts Jan. 20.
The counties rely on the TAT money. It is one of their biggest sources of revenue after property taxes. But when the economy sputtered a few years ago, the Legislature, in 2011, found a way for the state to take an ever-increasing share and use the money however lawmakers chose — even though the tax was created 30 years ago specifically to help ease the burden the visitor industry places on public resources.
Mayors and council members have argued that the state has shortchanged them. They point at the county services that visitors use — including roads, police, parks and lifeguards. On Maui and Kauai, one in four people on any given day is a tourist.
Not unlike the counties, the state is in a climate of competing demands for additional resources. Schools need to be fixed, jails need to be rebuilt and hospitals need more support. Eliminating the TAT cap would divert tens of millions of dollars in revenue over the coming years that could help fund such state services.
The 13-member State-County Functions Working Group, headed by retired Hawaii Supreme Court Justice Simeon Acoba, studied the issue for the past year at the Legislature’s request before coming up with its unanimous recommendations.
The group’s 173-page report calls for eliminating the $103 million cap the state imposed on the four counties this year to share. That allotment is set to drop to $93 million next fiscal year, which begins July 1, if no action is taken.
The group instead proposes that the state receive 55 percent of the hotel tax money, with the counties splitting the remaining 45 percent. The City and County of Honolulu would get 44.1 percent of that amount, Maui County would get 22.8 percent, Hawaii County would get 18.6 percent, and Kauai County would get 14.5 percent.
That split would come after deducting roughly $113 million from the overall TAT collections — estimated to be $450 million in 2016 — for the Tourism Special Fund, Hawaii Convention Center, Turtle Bay conservation easement and the Special Land Development Fund.
That’s roughly the same deal the counties had before the state capped them at $93 million in 2011 to help the state balance its budget.
The Legislature gave the counties an extra $10 million for the 2015 and 2016 fiscal years as the economy rebounded. But mayors and council members have continued to lobby for a return to the percent system, which they deem fairer.
Maui County Council Chair Mike White points at how disproportionately the counties have been affected by the shift to a cap instead of a percentage share of the TAT money. The counties’ share has remained relatively flat over the past three decades, but the state’s portion has soared in recent years.
White has argued for the counties to receive a 50 percent cut of the overall TAT collections. Even that, he said, would not provide all the revenue the counties could use.
Since 2007, the counties’ share of the TAT has increased $2.2 million, or 2.2 percent, while the state’s has increased $196.6 million, or 2,363 percent, according to White. Meanwhile, the cost for the four counties to provide police, fire and park services has gone up $170.3 million, or 31 percent.
Historically, the TAT was set up to help the counties provide services that visitors use and to ensure they have a “safe, fun and enjoyable experience,” he said.
“It’s a fairness issue,” White said, adding that this is supposed to be a partnership between the state and counties.
Rep. Sylvia Luke, who chairs the House Finance Committee, said lawmakers will definitely look at the working group’s report and consider taking action, but the challenge is a lack of information. She had expected the report to detail what functions traditionally are the responsibility of the state and which ones are the counties’ kuleana.
Without knowing that, Luke said, it’s difficult to know how much TAT money the state should provide. Services such as education, jails and hospitals that counties provide in other jurisdictions have been absorbed by the state here, she said.
“We should have a bigger discussion,” Luke said.
The state has hauled in record amounts of TAT revenue over the past few years by limiting the counties’ allocation. Without the cap, the counties would have seen millions of additional dollars as the tourism industry has grown.
In 2015, the state poured $205 million of TAT revenue into the general fund and projects to receive $234 million in 2016. All the while the counties hold at $103 million.
If the formula is changed to a 55-45 percent split, starting in fiscal 2017, the counties would receive $163 million and the state would get $199 million. The working group’s model assumes a 5.4 percent growth in TAT revenues. Under this system, it would be 2020 before the state gets back to where it is today.
The working group endeavored to have the counties and state put hard numbers on the amount of money they spend on visitors as part of the effort to decide how the TAT fund should be divvied up.
The hotel tax money does not come close to covering the amount the state or counties spend on services visitors use. The counties’ share of $103 million does not even cover Honolulu’s estimated tourism-related expenditures of almost $116 million.
Overall, the counties estimate they spend $236 million on visitors, representing almost 13 percent of their overall expenditures. On Kauai and Maui, the ratio of visitors to residents is one to three.
The state determined it spends about $453 million a year on visitors, which is roughly 4 percent of its overall expenditures, according to the working group’s report.
The Hawaii State Association of Counties, which is comprised of council members representing the four counties, has started talking about how it plans to lobby the Legislature next session. It’s a battle they fight year after year; but at times they have struggled to find a unified voice.
At its November meeting, White delivered a presentation noting how state revenues have rebounded 34 percent, nearly $1.8 billion compared with 2010. The state’s net TAT revenue went from $8.3 million in 2007 to nearly $205 million today.
White has rejected suggestions that the counties increase property taxes or implement a 0.5 percent state general excise tax surcharge, as Honolulu has done to fund its 20-mile rail project. The counties feel the GET is a regressive tax that applies to basic necessities such as food and medical services and can only be used for transportation and ADA compliance, according to the meeting’s minutes.
“This is an issue that’s going to be with us a long time,” he said Tuesday.
Read the working group’s full report below.