Planners with the Honolulu rail authority are analyzing how much money could be raised to help fund construction of the unfinished transit line if the city imposes its own hotel room tax and gives the project a share of the money.

But it is still unclear if the Honolulu City Council is inclined to use its new taxing authority to finance another rail bailout, and it appears certain the hotel industry will resist any plan to jack up the Oahu hotel room tax even further.

Members of the Honolulu Authority for Rapid Transportation board in recent weeks have been discussing a vague plan in which the city would levy the new hotel tax, and then deliver some portion of the revenue to help HART cope with its huge budget shortfall, estimated at $3.6 billion.

At a meeting of the HART Finance Committee last week, Chief Operating Officer Rick Keene said HART staff is analyzing how much money could be raised if the city issued bonds to borrow more money for rail, and then repaid that debt with revenue from the new city transient accommodations tax.

The HART rail train travels along the guideway near the H1/H2 freeway merge near Leeward Community College.
A train travels along the guideway near Leeward Community College. The Honolulu rail authority is considering how much money could be raised through a new city hotel room tax to patch up the finances of the rail project. Cory Lum/Civil Beat/2021

HART Board Chairwoman Colleen Hanabusa asked if HART might be able raise enough money that way to cover the $3.6 billion rail budget shortfall. Keene said he doesn’t know.

“We haven’t quantified it yet, so I’m not sure how much of the shortfall it would cover, but it would certainly help,” Keene told members of the HART Finance Committee on Thursday. “We have had discussions with city administration on that topic, on the TAT and the city’s ability now to levy TAT.

“There is interest from the administration and at least from some members of the City Council to allocating a portion of that tax — the new TAT — to this project.”

He said HART staff is working with outside investment bankers to determine how that cash flow might be leveraged by issuing long-term bonds to raise money for rail.

By one rough estimate, a cash flow of $50 million per year for 25 to 30 years is enough to finance $1 billion in bonds, money that could be applied to construction costs on the unfinished 20-mile rail line.

“It could be very substantial,” Keene said. “So, if we do get that dedicated stream — we don’t know yet what that  amount would be, how much of that would be able to be allocated to us, if any — but we are looking at different scenarios, working with administration on those scenarios, trying to come up with a plan or recommendation on that.”

Mayor Rick Blangiardi answers media questions about Tier 4 reopenings at Honolulu Hale.
Honolulu Mayor Rick Blangiardi’s spokesman said the new revenue plan for rail is being discussed. Cory Lum/Civil Beat/2021

Tim Sakahara, spokesman for Mayor Rick Blangiardi, said in a written statement that “discussions are ongoing between the city and HART regarding the possibility of allocating a portion of the TAT for rail, however no decisions or commitments have been made at this time.

“It is too preliminary to comment on the potential impact of the TAT on the rail project.”

City Council Chairman Tommy Waters said in a written statement that “whether a portion of any potential hotel tax revenue could be utilized to support rail is something we’ll be looking at very closely with our members and Mayor Blangiardi.”

The Legislature this year re-wrote the law governing distribution of the state’s 10.25% hotel room tax, which is offering the new opportunity to pump more money into the rail project.

In recent years the state has distributed $103 million of the proceeds from the hotel tax to the city and the neighbor island counties. But under House Bill 862, lawmakers opted to keep that $103 million for the state, and instead authorized the counties to each levy their own hotel room tax of 3%.

The state tax department estimates the full 3% tax on Oahu would initially generate slightly less than $50 million per year for the city, but would grow to more than $90 million per year within five years.

Tax officials also say their revenue estimates for the first two years are probably understated because they are based on overly conservative estimates of the tourism recovery that have already been surpassed as Hawaii reopened for business.

Tommy Waters1.
Honolulu City Council Chairman Tommy Waters said he wants to avoid residents paying higher property taxes. Cory Lum/Civil Beat

But the city likely will need some of the money from a new hotel room tax. The Legislature’s claiming of the $103 million in hotel tax collections that previously were distributed to the counties stripped away about $45 million per year that had been going to the city.

Waters said the council is still deciding exactly what to do about that. “I will continue to advocate for solutions to ensure that we can better manage tourism and ensure that our local residents do not have to bear the burden of closing budget shortfalls by paying more in property taxes,” Waters said in his statement.

Calvin Say, a former chairman of the House Finance Committee who was elected to the City Council last year, questioned what the city would do if it commits the new hotel tax revenue to rail, and then discovers it needs the money for something else.

“Why should you consider giving them all of that — or a portion of it — when they can’t even manage their money?” asked Say, who is now the council’s budget committee chairman. “They can’t even manage their project if they have a $3.5 billion shortfall.”

Honolulu City Council member Calvin Say sits masked during city council meeting held at Honolulu Hale.
Honolulu City Councilman Calvin Say is skeptical of the HART revenue plan. Cory Lum/Civil Beat/2021

Say suggested the council might give a small portion of the hotel tax revenue to HART, but suggested the rail authority ought to go to the Legislature for the rest.

He said state lawmakers could raise more money by extending the existing half-percent general excise tax surcharge on Oahu as well as the existing 1% hotel tax surcharge. Those two taxes together are already providing the bulk of the funding for rail, but they are scheduled to expire in 2030.

But House Finance Committee Chairwoman Sylvia Luke said the approach Say is suggesting is “actually kind of not a responsible approach by the council members, only because this is a city project, and we have always made it clear that it was a city project.”

“I think the Legislature is not inclined, especially if now there is a permanent source (of funding) that they could rely on,” she said, referring to the new option of a city hotel room tax. “I would be surprised if the Legislature will take a look at this issue again.”

Besides, state lawmakers approved two previous bailouts of rail when it veered over budget, delivering an extra $1.8 billion to support rail in 2015, and another $2.4 billion in 2017 to rescue the project.

Luke, who was a key player in both rail bailouts, said it became more challenging each time.

“It was difficult the second time,” Luke said. “I think even the rail proponents in the Legislature are becoming more skeptical, and for the council to think that this is the state’s problem, I think they will be met with a chilling response.”

She also said the city needs to “provide all these answers that the public is looking for” that clearly explain how rail has blown though billions of dollars while falling years behind schedule. No portion of the rail line has opened to the public yet.

A portion of the rail line is under construction on Ualena Street. Slapping a new city tax on hotel rooms to shore up the finances of the rail project may be politically appealing in some quarters. Cory Lum/Civil Beat/2021

On the other hand, using the city’s new authority to levy a hotel room tax for rail may be a politically deft move.

If the city must pony up still more cash for rail, local voters will probably prefer to have visitors pick up the tab. That may be particularly appealing at a time when many Hawaii residents seem to have soured on the impacts of mass tourism.

From that perspective, imposing a new city hotel room tax to raise more money for rail works well politically.

“Absolutely, it does,” said Mufi Hannemann, president of the Hawaii Lodging & Tourism Association. “It makes the tourism industry again the whipping boy.” Hannemann is a former Honolulu mayor who knows the Oahu political landscape well, and he was a driving force for rail as mayor in the formative years of the project.

Hannemann lobbied the Legislature more than a decade ago to win authority for the city to impose the half-percent excise tax surcharge for rail on Oahu, which is now the backbone of funding for the transit project.

President and CEO of the Hawaii Lodging and Tourism Association, Mufi Hannemann.
Former Honolulu Mayor Mufi Hannemann, president and CEO of the Hawaii Lodging and Tourism Association, says rail should continue to rely on excise tax. Cory Lum/Civil Beat/2021

He said he still believes that is the right way to fund the project because the excise tax is a broad-based levy paid by both visitors and residents. Hannemann worries that any move to shift rail funding to the hotel room tax would encourage lawmakers to claw back the excise tax surcharge even before it is scheduled to expire in 2030.

The tourism industry has also been “clamoring” for the city to crack down on the illegal vacation rental industry to raise money, rather than tapping legitimate hotel operators once again, Hannemann said. “There is so much money to be had over there,” he said.

As he tries to fend off a hotel tax increase for rail, Hannemann may find he has allies among City Council members who have been critical of the transit project in the past.

Councilwoman Carol Fukunaga pointed out the state increased the hotel room tax as part of the rail bailout in 2017, and hotels have also seen an increase in their assessed property valuations that help determine their property taxes.

“It’s kind of a spooky time” for hotels, she said, especially after the pandemic caused the tourism industry to crash last year.

As for rail, “we know so little about what is actually do-able and possible, and there has not really been a very open discussion about what the alternatives are, and what each alternative costs,” she said. She said the council ought to delay any vote on increasing the hotel tax for rail until HART produces a recovery plan.

The rail authority expects to produce that recovery plan for review by the Federal Transit Administration shortly after the end of the year.

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