State lawmakers appear skeptical of Honolulu Mayor Kirk Caldwell’s continued insistence that the state’s general excise tax should be extended to pay for the much-over-budget Honolulu rail project.
Legislators grilled advocates of the troubled Honolulu rail project during an all-day public briefing on Monday, in a likely preview of the special session scheduled for Aug. 28.
Policymakers need to raise an additional $2.5 billion from taxpayers to fill a budget shortfall for the $10 billion project. The question is what tax or combination of taxes to impose to fill the gap. Lawmakers ended the last session without a solution and are going back into the special session to take another stab at rescuing the city’s flailing project.
Legislators took no positions during the briefing, but the scope and tone of questions suggested they would not simply grant Honolulu Mayor Kirk Caldwell’s request to extend a half-percentage-point state general excise tax paid by Oahu taxpayers, which is set to expire in 2027.
Although the rail project is strictly an Oahu development, running 20 miles from East Kapolei to Ala Moana Center, Caldwell and Honolulu City Council members have refused to raise the extra money through property taxes. Instead, Caldwell has asked the Legislature to step in and extend the half-percent state general excise tax by 10 years.
Caldwell said using GET money is better than raising the state hotel room tax because the GET is a more stable revenue source. The hotel industry also has opposed paying for rail with room taxes.
Monday’s briefing drew a standing-room-only crowd to the Hawaii State Capitol’s 200-seat auditorium, where city officials and other stakeholders testified before a phalanx of lawmakers.
Caldwell reiterated his request for the Legislature to make up the $2.5 billion shortfall by extending the GET. Honolulu City Council members Ron Menor and Joey Manahan also urged legislators to support extending the GET, saying that paying for the rail with a property tax would hurt Honolulu’s credit rating.
Lawmakers were not impressed.
Sen. Donna Mercado Kim said it was Honolulu Hale’s responsibility to consider the city’s bond rating when it was deciding to build the rail.
Kim was clearly displeased that city officials were coming to the Legislature years later, saying, as she put it, “Woe is us. If you don’t do this, you could affect our bond rating.”
“I don’t believe the city has been responsible,” said Kim, a former Senate President whose district includes Kapalama, Alewa, and Kalihi Valley.
One key takeaway, House Speaker Scott Saiki said after the briefing, was an acknowledgement that the 10-year excise tax extension would produce more money than the city actually needs to finish the rail line.
Key leaders also expressed concerns about another aspect of extending the GET. As House Budget Committee Chair Sylvia Luke described it, extending the tax would mean taxpayers would end up paying about $2 billion in financing fees. By contrast, imposing a new tax, such as an increase in the hotel tax, could save the taxpayers the bulk of those fees, Luke said.
Luke’s Senate counterpart, Ways and Means Committee Chair Donovan Dela Cruz, echoed Luke’s concerns.
Luke pressed Caldwell’s chief of staff, Gary Kurokawa, to admit that it made fiscal and financial sense to avoid paying $2 billion in financing fees.
Saiki said that “front-loading” the tax could save taxpayers more than $1 billion in financing fees.
Front-loading the tax, however, likely means increasing the hotel room tax, which will require no shortage of political will by lawmakers to get that through.
Last session, the House and Senate leaders struck a tentative deal to raise the tax from 9.25 percent to 12 percent for 10 years starting in 2018. The move would have generated $1.3 billion for the rail project over that time.
But that proposal ultimately fell apart.
Visitors to Honolulu now pay an additional 13.75 percent of the cost of a hotel room in taxes, counting the hotel room 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.”
Case said taxes at some point will drive tourists away. “Tourists can and do vote,” he said. “They vote with their feet.”
Lawmakers were skeptical. Dela Cruz questioned why Outrigger charges resort fees to customers if the firm is concerned that higher travel costs will drive tourists away, and Case was asked to provide lawmakers a report on Outrigger’s hotel room rates over the past decade.
Kim said the argument that increasing hotel taxes will “kill the goose that lays the golden egg” rings hollow.
“I’ve been here 35 years, and I’ve heard that same argument year after year,” she said.