As Gov. David Ige decides which of the Legislature’s bills he’ll sign, veto or let pass without his signature, one measure offers the governor the chance to have a significant impact on the state’s most important industry.
The bill would radically change use of the state’s hotel room tax. It would mean shutting off a guaranteed stream of hotel tax money that now goes to the Hawaii Tourism Authority, which is primarily in charge of marketing Hawaii, as well as streams of hotel tax money that go to the counties.
Instead, HTA would have to go to the Legislature for funding each year, like other agencies, and the counties could impose their own hotel taxes to make up for the lost revenue.
Complicating the situation are two issues: first, public sentiment appears to be continuing to turn against tourism, despite the pandemic and the need for jobs; and second, the HTA is beginning an effort to respond to the souring sentiment by crafting plans to manage tourism and its negative side effects.
To Hawaii’s tourism industry, House Bill 862 is a jobs killer, coming just as Hawaii is starting to recover from an economic crisis caused by COVID-19.
“It’s all about timing,” said Mufi Hannemann, a former Honolulu mayor who now heads the Hawaii Lodging and Tourism Association. “We still have a lot of people who are unemployed, over 50,000. This is where we have to be very careful.”
But as Hawaii Rep. Sylvia Luke sees it, the measure responds to public calls to rein in the tourism industry, which had grown to more than 10 million visitors annually before the pandemic. If higher hotel taxes do lead to fewer people, and those who do come spend more money, Luke said, that’s not necessarily a bad thing.
“Isn’t that what people want?” asked Luke, who chairs the House Finance Committee. “And then we have all these people coming out against it. We were just floored.”
It’s not just the tourism industry that’s opposed. More than 30 tourism and business groups sent Ige a letter in May asking him to veto the bill. Led by Hannemann, the letter carried signatures from groups like the Chamber of Commerce Hawaii, Hawaii Agricultural Foundation and Hawaii Teamsters Local 996, among others not directly involved in tourism.
“As we can all agree, destination marketing will play an outsize role in determining how long it takes for our economy to rebound,” they wrote, urging Ige to veto the bill.
Luke, meanwhile, insists that the measure provides a sensible path forward for the state.
A fiscal hawk known for her detailed knowledge of the state budget, Luke for years has been working to eliminate special funds to give the Legislature more oversight on how taxpayer money is used.
Usually, when people pay taxes, the Legislature gets to decide how to spend it during a highly public budget process. But over the years, often as the result of political wrangling, lawmakers have agreed to set up numerous special funds that steer money directly from taxpayers to agencies with relatively little say from lawmakers.
The Hawaii Tourism Authority is the beneficiary of one such fund. The House bill would eliminate the HTA’s special fund, which means the hotel tax revenue would flow into the general fund used to cover all kinds of state expenses. The bill reduces HTA’s budget for the next fiscal year from $80 million to $60 million, which would be paid for with federal stimulus money.
The hotel tax is called the Transient Accommodation Tax, or TAT.
Business leaders oppose the HTA’s having to go to the Legislature every year.
“Any longer-term marketing campaign that you launch is going to be multi-year,” Hannemann said. That means going to the Legislature every year simply isn’t practical.
Perhaps more worrisome to opponents is what seems an inevitable increase in hotel taxes. That’s because the bill would cut hotel tax money the counties receive – ranging from $45.4 million for Oahu to $14.9 million for Kauai – and let the counties impose their own hotel taxes of up to 3%.
Hawaii visitors pay an extra 14.25% for hotel rooms, thanks to a 10.25% hotel room tax and a 4% general excise tax, for a total of 14.25%. It’s a little higher on Oahu, 14.75%, because there’s an excise tax surcharge to pay for the rail project.
That places Hawaii’s effective tax rate on hotel rooms third in the nation, behind only Connecticut’s 15% and Maine’s 14.5%, according to the HVS U.S. Lodging Tax Report for 2019.
But that statistic fails to tell the whole story. California, for instance, has the nation’s lowest state hotel tax rate, at 0%, according to HVS.
But when counting local taxes, Anaheim has one of the nation’s highest hotel taxes at 17%. In fact, when factoring in local hotel room taxes, Honolulu drops to 58th nationally, behind places like San Francisco (16.75%), Seattle (15.5%), Los Angeles (15.5%), Portland (15.3%) and Sacramento (15.0%).
Luke argues that the counties wouldn’t have to raise taxes the full 3% to make up for lost revenue. Based on pre-COVID-19 revenues, she says, Honolulu could be made whole with a 1.6 percentage point increase and Maui with a 1.2 percentage point increase.
Hannemann agreed the counties might not need to impose the full 3% taxes.
“But they will,” he said. “They have ice cream in front of them.”
How much impact raising hotel room rates would have on hotel room revenues is hard to say, said Carl Bonham, executive director of the University of Hawaii Economic Research Organization.
Research done in the 1990s after a 5% hotel room tax was first imposed showed no decline in hotel revenues after the increase, Bonham said.
“That doesn’t prove that there’s not any impact,” he said. “But we couldn’t find it, and we tried pretty hard.”
At some point, an increased tax would drive away tourists to a point where there are declines in revenue to the hotels and the state, even with a higher tax rate, he said. Where that point is isn’t clear.
Bonham questioned whether the bill would have its intended effect. For example, Bonham said it makes sense to give the authority more time to implement plans to mitigate the negative side effects of tourism.
“It’s been made pretty clear that the job for HTA is no longer adding more and more visitors every year,” he said.
Bonham wasn’t swayed by the argument that the Department of Land and Natural Resources, which manages things like trails and beaches, could do a better job.
“That’s easy to say, but DLNR has been underfunded forever,” he said.
As for holding the HTA accountable, he said, lawmakers can do that without requiring the authority to engage in an annual lobbying effort for its budget.
“What’s the plan,” he asked. “If we defund HTA, what’s the plan to manage tourism?”
Luke insisted that the Legislature would continue to fund HTA’s marketing of Hawaii and managing tourism. The main difference, she said, is that HTA’s research arm would be moved to the Department of Business, Economic Development and Tourism.
Regardless, she said, lawmakers are trying to use some of its few available tools to respond to the public.
In 2017, UHERO economist Jim Mak outlined the then budding problem of overtourism in a paper titled “How Many Tourists Is Too Many?” published on UHERO’s website.
Mak went on to explain that federal laws hinder Hawaii from limiting the number of people who travel here.
“Even if we wanted to, Hawaii has few weapons available to control the inflow of visitors,” Mak wrote. “We can raise taxes on tourism to make it more expensive to visit Hawaii; spend less on tourism promotion; tighten and enforce land use and zoning laws; or make Hawaii a less attractive place for tourists (and, unfortunately, for us as well!).”
Luke noted that the Legislature is trying to use two of those tools: raising taxes and controlling spending on tourism promotion. She reiterated her frustration with business interests opposing the bill after saying it could be good for Hawaii to have fewer, better spending visitors.
“They should just come out and say it: ‘We didn’t mean it all along,’” she said. “ʻWe actually just want more and more and more, and it’s up to you to curtail it.’”
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