Aloha! Now Pay Up

Published February 26, 2013

Are Hawaii lawmakers killing the golden goose and the golden egg?

Hawaii relies on tourism, its most lucrative industry, to fuel the economy. There was a record 8 million visitors in Hawaii last year who spent a collective $14 billion in 2012. Most spend an average of $196 per person per day or $1,800 per trip.

But now Hawaii lawmakers are considering a proposal that would increase the hotel room tax known as the transient accommodation tax (TAT) by 2 percentage points from 9.25 to 11.25 percent. Lawmakers say they want and need the money for the general fund to subsidize budget items like social services and education.

Tourism officials and those who work in the industry are warning lawmakers the added tax could severely damage the industry and drive visitors away.

Mike McCartney, president and CEO of the Hawaii Tourism Authority and a former legislator, said the industry opposes the increase because it will be bad for business.

‘Market Is Price-Sensitive’

“Hawaii is a leisure destination, where the visitor’s spending is discretionary. As such, our visitor market is price-sensitive, and any increase could drive a traveler to a competing destination. An increase to the TAT will only diminish Hawaii’s ability to compete in a price-sensitive market,” McCartney said.

Some lawmakers claim Hawaii’s room tax rate is lower than other destinations. But McCartney points out the TAT increase to 11.25 percent does not include another tax imposed on all transactions and services in Hawaii, the general excise tax.

Lowell Kalapa, president of the Tax Foundation of Hawaii, has testified against the proposed increase at the state legislature. He agrees if lawmakers are going to compare rates and say Hawaii’s tax on hotel room rentals is low, they need to consider the combined impact of the TAT and the general excise tax.

Excise Tax Adds to Costs

“Unfortunately, or perhaps intentionally, what lawmakers forget is that the 7.25 percent — currently 9.25 percent — rate is over and above the 4.16 percent general excise tax which is also levied on hotel room rentals. Thus, the current tax rate on hotel room rentals nears 12 percent or 13 percent depending on whether the rental is in Honolulu, where the general excise tax rate is 4.5 percent, or on the Neighbor Islands where the general excise tax rate is 4 percent,” Kalapa said.

Lawmakers also have to compare room rates to other locations, because Hawaii’s hotel room rates tend to be higher than other leisure destinations, he said.

“The lower hotel room tax rate combined with the general excise tax generates substantially larger per day costs for the visitor,” Kalapa said.

The TAT has already been increased “temporarily” from 7.25 percent to 9.25 percent, an additional tax that is supposed to sunset in 2015.

“Three years ago in the midst of the worst economic meltdown since the Great Depression, state lawmakers turned to the hotel industry and asked them not to stand in the way of a rate increase of the state’s hotel room tax or transient accommodation tax to help bail out the state general fund as the budget short fall was forecasted to top $1 billion,” Kalapa said.

“Now both the administration and some legislators would like to hang onto that money and have proposed making the two percentage point increase permanent. The administration also has a proposal in to increase the rate yet another two percentage points to 11.25 percent.”

Money Spent On Other Things

The TAT tax was originally adopted to build a state convention center in 1986 because tourism officials believed a convention center was key in attracting conventions, Kalapa said. The industry originally agreed to a 2 percent rate but at the end of the 1986 session, lawmakers increased the rate to 5 percent and did not earmark the proceeds for building a convention center.

When a convention center site was selected five years later, Kalapa said lawmakers had spent much of the money set aside for the convention center on other programs and services, so they increased the tax again to 6 percent.

A task force recommended the rate be increased to 7.25 percent so legislators could decrease the state income tax, but lawmakers increased both the TAT and income tax rate.

Hawaii’s convention center largely sits empty on the edge of Waikiki. And lawmakers are looking for ways to make what amounts to a 4 percent increase to the TAT permanent.

Tax Makes Visitors ‘Big Target’

Kalapa said the TAT has always been a “big target” for lawmakers because visitors pay the tax.

“Making that 9.25 percent rate permanent reinforces the perception that neither the administration nor the legislature can be held to its word. Guess when it comes to ‘easy’ money, it is difficult to keep one’s word,” Kalapa said.

McCartney is concerned about the impact any increase would have on the 166,000 visitor-related jobs.

“Currently, the visitor industry supports more than 166,000 jobs and we anticipate this number to grow this year. However, we are still well below the peak of more than 178,000 jobs in 2005, and the TAT increase could cause a loss of jobs in the tourism sector,” McCartney said.

Malia Zimmerman ([email protected]) is editor and co-founder of Hawaii Reporter. Used with permission of