Funding the Hawaii Tourism Authority: TAT vs General Fund…Or?
by James Mak, UHERO, June 28, 2021
A majority of the states in the U.S. have a government tourism office (also known as Destination Marketing Organization, DMO) that markets their state. The National Council of State Legislatures (NCSL) notes that the most common way for states to fund their tourism offices is by appropriation from their general fund.[1] According to the U.S. Travel Association, fourteen state tourism offices are funded either partly or entirely by a statewide lodging tax. The Hawaii Tourism Authority gets virtually all of its funding from the state’s transient accommodation tax (TAT).
In the recently-concluded thirty-first legislature (2021), Hawaii state lawmakers passed HB 862 CD1 which would change the way the Hawaii Tourism Authority (HTA) is funded.[2] Since its creation in 1998, HTA has been receiving “dedicated funding” from a portion of the revenues generated by the state’s transient accommodation tax (TAT).[3] If the bill becomes law HTA would no longer receive money from the TAT. Instead, HTA would have to go to the Legislature to compete for appropriations from the general fund against all other state programs. The purpose of this proposed change is to make HTA more accountable to Hawaii taxpayers.[4] Star-Advertiser editors argue that if the change in HTA’s funding source is enacted, it “will impede its ability to respond nimbly to industry challenges.”[5]
The president and CEO of the Grassroots Institute of Hawaii disagrees, arguing that subsidizing tourism is not fair to other industries, and it has contributed to overtourism and lack of economic diversity; hence, “now is the perfect time for the state to save money while allowing Hawaii’s tourism industry to make it on its own.”[6] This implies disbanding the HTA model and creating a new one funded by the industry. However, studies show that destinations that have tried to rely solely on visitor industry efforts to raise revenue to fund their tourism offices are likely to fail.[7] In 1993, Colorado became the first state to eliminate public funding of tourism marketing; funding has since been restored.[8]
Why Is Government Funding Tourism Promotion?
Before Hawaii enacted its transient accommodation tax in 1986, money for the Hawaii Visitors Bureau (HVB) (subsequently renamed the Hawaii Visitors and Convention Bureau (HVCB)—a private destination marketing organization contracted to promote the state—was raised through membership subscriptions and legislative appropriations. HVB was essentially a voluntary trade association. Soliciting contributions was difficult work and did not produce the desired results. While there were many who wanted to see more money spent on tourism promotion, there weren’t enough of them who were willing to dip into their own pockets to pay for it. The incentive is to let someone else pay and the non-contributor still benefits as a free-rider. In 1985, 78% of the airlines serving Hawaii, 66% of the hotels, 32% of the lending institutions, and 24% of the restaurants belonged to HVB.[9] It is a classic example in economics of “market failure”. Citing the need for more money to market Hawaii, the industry turned to the State for help. Over time, the State’s share of HVB/HVCB’s annual budgets grew. By the early 1990s, legislative appropriations comprised more than 90% of the bureau’s annual income compared to less than 50% in 1959.[10]
One way to overcome free-riding is to tax every business in the industry that stands to benefit directly and use the revenue to pay for travel bureau expenses. That’s not easy because the tourism industry is a heterogenous industry made up of businesses from a variety of industries such as hospitality, transportation, souvenir and clothing stores, visitor attractions, food and drink that don’t always share the same interests/goals.[11] Thus, figuring out how to get the businesses to pay their fair share of taxes is complicated. For example, California and Hawaii use different approaches to fund their DMOs.
California’s Private-Public Partnership in Tourism Promotion
Until 1994, California’s destination marketing budget was entirely funded by appropriations from the general fund. In 1995, the California legislature passed SB158, the California Tourism Marketing Act, which directed the state’s tourism industry to come up with a scheme to require tourism businesses to assess themselves to fund marketing. To carry out marketing, a new 501(c) nonprofit corporation, the California Travel & Tourism Commission, doing business as “Visit California”, was created; its board members comprised of travel industry leaders.[12] The self-assessment scheme, overseen by the state government’s Office of Tourism, adapts a model (commonly referred to as a “marketing order”) that’s widely used in the agriculture industry. For example, the Florida citrus industry employs self-assessment to raise money from producers to pay for generic product promotion.[13] A key feature of a marketing order is that it is backed by legislation enabling grower associations to levy assessments on every grower in the industry. Under the tourism marketing order, a California business that has been identified as potentially assessable is sent the Tourism Assessment Form by the Office of Tourism. To complete the form, the business needs to have information on the gross revenue for each physical address for the most recently completed tax year and the percentage of that revenue derived from travel and tourism.[14] Currently, there are more than 21,000 assessed business locations.[15] Every six years, participating businesses take a vote on whether or not to continue these assessments. Since July 1, 2015 assessment rates in California have been as follows: (a) accommodations (.00195% of California gross receipts), (b) restaurants & retail (.000975%), (c) attractions & recreation (.000975%), (d) transportation & travel services (.000975%), and passenger car rental (3.5% of monthly revenue).[16] Payments are made to the California Travel & Tourism Commission (i.e. Visit California). In FY2018/19, accommodations accounted for 38% of its budget; rental cars, 52%; retail, 4%; restaurants, 3%; attractions, 2%; transportation, 1%; and state funding accounted for 0.2%.[17] Thus, in California, money for tourism promotion is raised by the industry and controlled by the industry. There is no question about who is paying for tourism marketing. And the revenues collected cannot be redirected to fund state programs by lawmakers. But assessing 21,000+ business locations annually is costly especially since it is difficult to verify what percent of each business location’s gross receipts is derived from tourism.[18]
Funding the Hawaii Tourism Authority
Hawaii currently employs a different funding model. The public has been told that HTA gets “dedicated” funding from the TAT. A more accurate word is “earmarked”; i.e. where some specific revenue source is earmarked for specific expenditures/funds.[19] TAT revenues are not only allocated to HTA. Besides HTA, TAT revenues also fund other state functions as well as provide unrestricted grant-in-aid to Hawaii’s four county governments. Since FY2016, over half of the TAT annual revenues have been allocated to the general fund that can be spent on any state service. Today, most of the TAT revenues are not earmarked “for specific expenditures”.[20]
Since only visitor accommodations are taxed under the TAT, the tax base is narrower than if all the businesses in the tourism industry are taxed. That may seem unfair to lodging suppliers. But it is not a serious problem because the lodging tax is largely passed on to consumers as are sales taxes on other vacation goods, and lodging and other vacation goods are jointly consumed. Hence, whether we tax lodging only or lodging and other vacation goods consumed by visitors, it is the tourist (the ultimate beneficiary) who pays.
Hawaii’s tax approach is preferable to California’s self-assessment approach for several reasons. First, TAT tax base is easy to verify since gross receipts from rental of accommodations are directly observable. Second, tax administration is less costly than if all tourism businesses were taxed. Tourism marketer Frank Haas argues that the most important reason for public funding of DMOs is that “the private sector players would market the destination on their own terms without regard to what the destination [residents] necessarily values. That’s the key argument in support of state-funded marketing.”[21] Residents may prefer spending more money on destination management and less on tourism marketing while the industry may prefer more dollars for marketing.
Advantages and Disadvantages of Earmarking Versus General Fund Financing[22]
There is concern that a shift from TAT financing to general fund financing will make it more complicated to secure funds for long range planning.[23] Governor Ige noted that HTA had developed destination management plans that are supported by residents, but “How do you create programs if you’ve got to come back for money every year?”[24]
Economists explain that the most important economic advantage of earmarking is that it represents a benefit system of taxation where those who benefit from a public service is matched to the taxes they pay. For example, it is the rationale for earmarking highway fuel taxes. In strict earmarking, money earmarked for highways can’t be transferred to pay for other unrelated public services. In theory, earmarking provides revenue certainty to the recipient. The main disadvantage of earmarking is that it potentially reduces budget flexibility for the state government, since revenues from the earmarked tax are tied up for specific uses. As well, a tax that is earmarked to fund a program can either generate too little or too much revenue (and spending) desired by residents. In practice, neither the theoretical advantage nor its disadvantage of earmarking tax revenues applies to TAT financing of HTA. To explain, consider the following.
Each biennium HTA receives an appropriation from the TAT for the next two years (referred to as the Tourism Special Fund); the appropriation is a fixed dollar amount and not some percentage of total TAT revenues. Between FY2014 and FY2018, state lawmakers appropriated $82 million per year from the TAT to HTA and $79 million per year in FY2019 and FY2020.[25] Appropriations can go up or down at the discretion of state lawmakers. Between FY2000 and FY2020, current year appropriation was less than in the previous year in 5 of the 20 years[26] and was unchanged in 6 of those years.[27] After adjusting for inflation, HTA has had to operate with fewer financial resources over time. In FY2009, HTA received $72.03 million from TAT revenues; ten years later, the $79 million that was appropriated to HTA amounted to only $64.5 million in inflation-adjusted (2009) dollars. Since total TAT revenues have been rising because of tourism growth and tax rate increases, HTA’s annual appropriations have declined as a percentage of total TAT tax collections. In FY 2019, HTA received 13.2% of total TAT revenues while 56.6% of total TAT revenues was distributed to the general fund.[28] Ten years earlier HTA received 34.2% of total TAT revenues while the general fund received only 6.4%.[29] Has the current model of funding served HTA so well that it is being touted as superior to general fund financing?
I would argue that it really doesn’t matter which pot of money HTA money comes from. If lawmakers are unhappy with HTA’s performance, they are likely to cut HTA’s budget by the same amount whether the money comes from TAT revenues or from the general fund. The claim that “dedicated funding” Hawaii-style makes it easier for HTA to secure funds for long-range planning is weak. It is noteworthy that research seems to suggest that earmarking taxes apparently has little effect on either the level or mix of spending than if the spending were financed with general fund revenues.[30]
Ultimately, for Hawaii, it is not about choosing between funding HTA using TAT revenues or general fund revenues. After several negative audits by the State Auditor and continued displeasure of key state lawmakers over its performance,[31] HTA may do itself and its funding the most good by gaining the confidence and support of Hawaii’s state leaders and the public.
Looking to the Future
A recent report on how DMOs should be funded in the future offers the following advice: “a review of funding starts with a review of your role, responsibilities and structure as a DMO.”[32] Across North America, many DMOs are looking to play a bigger role in destination management. Destination Marketing Organizations are becoming Destination Management Organizations with the same acronym, DMO. Count HTA among them. In his recent (June 18) Honolulu Civil Beat op-ed, Frank Haas asks whether HTA, in its current form, is the best governance structure to take-on the responsibility of managing the destination.[33] Should HTA be replaced with a new model of governance with broader authority? Or, should it be “scaled back and refocused?”[34] Other destinations have created new, and separate (from their existing DMOs), institutions with broader resident representation to steer and manage desired changes. Depending on what we decide, it could well be that a better funding model for Hawaii is one that doesn’t depend on revenues from a single tax but a more diverse portfolio of taxes, user charges and fees.
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LINK: FOOTNOTES
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