A bill to levy a new 3% transient accommodations tax on Honolulu hotel rooms and other visitor rentals won easy approval from the Honolulu City Council Wednesday despite objections from critics of the city’s rail project, which will receive much of the money from the new tax.

About one-third of the revenue from the new tax will be directed to rail during the first two years, and rail will receive half of all the money raised from the tax thereafter. But that will still not be enough cash to cover rail’s huge budget shortfall, which the city now estimates is about $2 billion.

State tax officials estimate the city will receive a total of nearly $86 million from the new tax in the year that begins July 1, with collections ramping up from there to more than $99 million in the fiscal year that begins July 1, 2027.

However, tax officials warn actual collections may vary depending on performance of Hawaii’s tourism industry.

After two years, half of all the revenue raised by the new Oahu hotel room tax will be committed to the Honolulu rail project. Cory Lum/Civil Beat/2021

Council member Heidi Tsuneyoshi, who voted against the bill, argued the extra money from the new tax should be used to shore up the city budget, fix city parks and invest in other initiatives such as hiring additional lifeguards and police officers.

“Just because this tax is coming from visitors doesn’t mean it’s throwaway money,” she said,  moments before the final vote. “This is money that we are supposed to be using to address the many, many concerns of our city. We have so much to deal with.”

Tsuneyoshi warned there will now be pressure on the city to raise other taxes and fees to meet those other needs, adding: “It’s is a sad day for the city and county of Honolulu.”

Bill 40 now goes to Honolulu Mayor Rick Blangiardi, who is expected to sign it. City Managing Director Mike Formby told the council that Blangiardi supports the bill in the form that won approval in a 6-3 vote on Wednesday.

The new hotel and tourist accommodation tax will be on top of the state’s existing 10.25% hotel room tax.

The final draft of the measure divides up the revenue from the new tax to deposit a bit more than 58% of the money it will raise into the city’s general treasury, and provide more than 33% of the money to the rail project.

The remaining 8.3% of the revenue will be committed to “natural resources,” including Oahu’s parks and beaches.

After two years, those percentages will shift to provide half of the money collected to the rail project in perpetuity, and deposit 41.6% of the new tax collections to the city’s general treasury. The share earmarked for natural resources and parks will remain the same.

Council members Augie Tulba, Carol Fukunaga and Tsuneyoshi voted against the bill.

Voting in favor of it were council Chairman Tommy Waters along with Council members Andria Tupola, Esther Kiaaina, Calvin Say, Radiant Cordero and Brandon Elefante.

The state historically has given the counties a sizable share of the existing 10.25% hotel room tax, but that changed this year. Last spring the Legislature scrapped the old revenue sharing arrangement, and instead opted to divert all of the counties’ share of the hotel tax revenue into the state treasury.

That maneuver cost the city about $45 million a year, but to compensate for the loss the Legislature  authorized the city and counties to levy their own, entirely new 3% county hotel room tax.

That new taxing authority arrived as the city has been struggling to cope with an enormous budget shortfall for construction of the unfinished 20-mile rail line from East Kapolei to Ala Moana Center.

The Honolulu Authority for Rapid Transportation initially estimated the rail project was short about $3.5 billion, but last month announced the shortfall was actually about $2 billion.

Rail station construction located at the intersection of Ualena Street and Lagoon Drive.
The rail project still faces a $2 billion shortfall but new money from hotel room taxes will make up for some of it. Cory Lum/Civil Beat/2021

The City Council’s decision on Wednesday to commit one-third to half of the new hotel room tax to rail will help close the rail budget gap, but it is not expected to entirely solve the problem.

The revenue stream from the new tax can be leveraged by issuing bonds to borrow cash, and then using the hotel tax revenue to repaying that bond debt. But rail officials estimate a revenue stream of about $50 million per year would only support about $1 billion in bonds.

It is still unclear how HART will make up the rest of the rail budget shortfall, and the city is supposed to produce a new “recovery plan” for the project near the end of this year that will include a new financial plan.

The latest projections put the total price tag for rail at $11.4 billion, but the rail authority board of directors is suggesting it may be possible to further reduce that cost.

HART board member Kika Bukowski said he and other board members are available to discuss any concerns the council may have about the project, but said the board has a mandate to complete the project.

The rail project has already required two financial bailouts by the state, and Bukowski told the council that the current HART board “is very much mindful and aware of the need to gain the trust of the community and of this body, and of the transparency.”

He added: “I think if this projects succeeds, this community succeeds.”

But Natalie Iwasa, a HART board member who said she was speaking on her own behalf, said HART has not yet made public a plan to cover the $2 billion shortfall, and said there needs to be more discussion before the council approves more funding for the project.

“So, please, do not hand HART extra tax money on a silver platter without digging into the details and assumptions that will reduce the shortfall,” she said. “I oppose the county (hotel tax) going to rail construction.”

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