Honolulu city officials and business leaders Monday asked lawmakers to reject last-minute proposed legislation to increase Hawaii’s hotel room tax by 30 percent to fund the Honolulu Authority for Rapid Transportation’s 20-mile long, 21-station rail line, which has been plagued by cost overruns and delays.

The bill would hinder the city’s ability to balance its budget and fail to withstand legal challenge, said City Council Chairman Ron Menor. He was joined at a news conference by his City Council colleague, Joey Manahan, who is chair of the council’s Budget Committee, and several tourism, labor, and community leaders.

Instead of raising the hotel tax, Menor and Manahan said the Legislature should adopt a proposal which would extend an Oahu-only Honolulu surcharge on the state’s general excise tax past the current expiration date in 2027.

Kekoa McClellan, a spokesman for the American Hotel & Lodging Association, said the hike in the transient accommodations tax would give Honolulu one of the highest hotel room tax rates in the United States. The move, he said, would encourage more visitors to stay in Airbnb rentals and other short-term accommodations that often operate in violation of neighborhood zoning laws and do not pay the TAT.

Chair Honolulu City Council Ron Menor speaks on rail leg measure2. 1 may 2017
Honolulu City Council Chairman Ron Menor speaks out Monday against a bill that would increase the state hotel tax by 30 percent to help pay for the troubled Honolulu rail project. Cory Lum/Civil Beat

The proposal is “incentivizing the illegal activity that’s taking place in our neighborhoods,” said McClellan. His organization represents 150 hotel properties employing 110,000 workers statewide.

Several lawmakers did not respond to calls for comment Monday about criticisms from the city and the hotel industry.

Hawaii set another tourism record in 2016 with 8.9 million visitors who spent $1.7 billion, according to the Hawaii Tourism Authority. The TAT generated $485 million.

In addition to the potential tourism impact, council members complain the proposal is costly for the city. The proposed bill would make the city spend $13 million of its share of the hotel tax for the rail instead of other services, Manahan said.

“The Legislature is really putting us in a bind,” he said.

Menor said Oahu residents might have to make up for the redirected TAT money with a property tax increase.

“Unfortunately, the measure that the Legislature is considering would place an even greater burden on our residents,” Menor said.

The increase in the hotel room tax is the latest proposal to fund the rail project. Lawmakers had considered the extension of the Oahu-only surcharge.

But last week, in a surprise move, House and Senate leaders struck a tentative deal to instead raise the TAT from 9.25 to 12 percent for 10 years starting in 2018. The move would generate $1.3 billion for the rail project over that time.

HART Rail Salt Lake Boulevard Aloha Stadium2. Near Kamehameha Hwy. 23 feb 2017
Construction of the HART line along Salt Lake Boulevard near Aloha Stadium. The project is way over budget and far behind schedule. Cory Lum/Civil Beat

Honolulu Mayor Kirk Caldwell said previously that increasing the TAT would still leave the project, which is expected to cost as much as $10 billion, with a deficit of as much as $1.5 billion by 2037. He said the city would have to make up the difference with some combination of higher revenues and cuts to other services.

The plan is scheduled for a final House and Senate vote Tuesday. If it passes, the bill then goes to Gov. David Ige for his consideration.

Uncertain Impact On Demand

Visitors to Honolulu currently pay an additional 13.75 percent of the cost of a hotel room in taxes, counting the TAT and general excise tax.  That puts Honolulu toward the middle of the top 150 urban centers based on total lodging tax rate ranking for 2015, according to tourism consulting firm HVS Convention, Sports & Entertainment’s “2016 HVS Lodging Tax Report – USA.”

Honolulu’s rate was lower than in tourist destinations like Anaheim, California (17 percent); San Antonio (17 percent); New Orleans (14.75 percent); New York (14.75 percent); Portland (14.5 percent) and Boston (14.45 percent). The tax rate is already higher than places like Miami (13 percent), Nashville (13 percent) and Orlando (12.5 percent).

The proposed increase would bump Honolulu’s rate to about 16 percent, near the front of the pack of U.S. travel destinations.

The tax hike would also apply to short-term rentals that use online brokers such as Airbnb, but it’s believed many of those accommodations are not registered to pay taxes.

Whether higher tax rates keep tourists from visiting destinations is not clear. “We have not been able to find any hard evidence that it affects levels of travel in terms of demand,” said Tom Hazinski, managing director of HVS’s Chicago office.

Hazinski said he has heard anecdotally that tax rates can affect the rates hotels can charge when negotiating group rates; however, he has seen “no conclusive studies that measure what the effect is.”

Critics complain that lawmakers improperly crafted the hotel tax increase behind closed doors in the waning days of the legislative session, when it was too late for any public testimony. By contrast, the GET surcharge measure had been through a number of iterations that the public had a chance to review and weigh in on.

A Last-Minute Proposal

The proposal was publicly unveiled by Rep. Henry Aquino and House Finance Chair Sylvia Luke during a conference committee hearing last Friday.

In theory, conference committee rules prevent such surprise proposals.  The committee’s authority is supposed to be limited to resolving differences between House and Senate versions of a bill. The rules generally prohibit a conference committee from amending a bill by adding “any unrelated or new subject matter.” However, the rules do not define “new subject matter.”

Even if the amendment is new subject matter, the conference committee may still include it with advance written approval of both the Senate president and House speaker, the conference committee rules say.

Regardless, Tom Yamachika, president of the Tax Foundation of Hawaii, said it is unusual to see a major tax hike proposed with no input from a  powerful industry that the tax would hit.

“Procedurally, it’s very obvious that the change in the measure caught the visitor industry by surprise,” Yamachika said. “And in an ideal world, that’s not supposed to happen.”

Among those speaking  out against the bill were David Arakawa, executive director of the Land Use Research Foundation of Hawaii, which represents developers; the Rev. Bob Nakata, a housing advocate; Cedric Ota, president of the General Contractors Association of Hawaii; and Pane Maetoga, Jr. of the International Union of Operating Engineers.

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