State tourism policy truly a mish-mash

by Keli'i Akina, Ph.D. President / CEO, Grassroot Institute

If you want to find something that perfectly captures Hawaii’s schizophrenic tourism policy, you couldn’t do much better than House Bill 862. 

The bill sends an inconsistent message about tourism, suggesting that the industry shouldn't have government funding while simultaneously making it more vital to state revenues. It was one of the bills vetoed by Gov. David Ige earlier this month, but the Legislature overturned his veto on Tuesday and the bill now is state law.

Vaguely titled “Relating to state law,” the final draft of HB862 was actually a “Frankenbill,” which says a lot about the lawmaking process in our state. It was originally about abolishing Hawaii’s office of aerospace development, aerospace advisory committee and unmanned aerial systems test site, and some other issues as well. Its tax and tourism elements were added late in the session after being taken up by the Senate.

In its new incarnation, HB862 called for, among other things, restructuring the funding of the Hawaii Tourism Authority and ending the state’s sharing of its 10.25% transient accommodations tax revenues with the counties. To make up for the latter, the bill permitted the counties to tack on their own TAT surcharges — up to 3 percentage points each.

Given the bill’s messy history and content, it is fitting that its enactment into law leaves those of us concerned about Hawaii’s economic recovery in a conflicted mood. 

On the one hand, the decision to defund the HTA is worthy of praise. The Grassroot Institute of Hawaii has long opposed using taxpayer money to prop up favored industries. In the case of the tourism industry, which can afford to pay for its own promotional efforts, continuing public funding of the HTA during an economic downturn is especially questionable.

To be clear, this is not to suggest that we oppose tourism or any private efforts to boost visitor arrivals. Whereas the Honolulu Star-Advertiser seemed to interpret the bill’s enactment as a sign of resistance to increasing tourism, we tend to view it as fiscal prudence. Tourism can stand on its own without public funding.

On the other hand, the idea that this bill signifies an intent to reduce government dependence on visitor dollars is undermined by the new TAT provisions. Allowing the counties to add 3 percentage points to the state’s existing 10.25% is effectively a 29% hike in the TAT. 

In one stroke, the state took away from the counties their TAT allocations and gave them the ability to create their own TAT of up to 3%. Given their dependence on those revenues, it is unlikely the counties will charge less. Thus, the total TAT probably will be 13.25%. Combined with the state general excise tax, visitors will be paying a tax of about 18% at hotels and vacation rentals in Hawaii, giving our state the highest overall tax on accommodations in the country. 

Oh, and let’s not forget that the hotel tax was originally supposed to be a temporary tax of 5% to fund the construction of the Hawaii Convention Center. Now it’s permanent at a minimum of 10.25% and a potential to reach 13.25%. Remember this the next time lawmakers talk about a “temporary surcharge.”

When Ige announced in late June he intended to veto HB862, I generally applauded his action because it would prevent the counties from imposing surcharges on the state TAT.

I noted that it also would put an end to the effort to defund the Hawaii Tourism Authority, and expressed hope “that the much-needed debate on taxpayer-funded tourism marketing continues in a future session.” But in terms of taxes, I said, “the veto prevents the creation of a county-level transient accommodations tax, which is an unnecessary burden on the recovering tourism industry.”

That was then. Now the bill has become law after all, and the threat of more taxes looms over local businesses that already are overtaxed. The HTA is facing cuts in its funding, but increasing the tax burden on the struggling tourism industry is unlikely to aid in our economic recovery. 

Sky-high visitor taxes will harm Hawaii’s international competitiveness, and likely have a spillover effect onto the economy as a whole, as tourists tend to “save” the money spent on higher taxes by spending less on dining, entertainment and other activities. The higher taxes will be especially difficult on residents who travel interisland.

Ironically, it isn’t hard to imagine a scenario in which an ever-increasing TAT eventually hurts the tourism industry so badly that, before you know it, someone will propose increasing government funding for the HTA so it can go back to … using scarce state resources to promote tourism.

In other words, HB862 is sending mixed messages. If we want Hawaii to be more prosperous, with a stronger, more diverse economy, we need a more straightforward policy toward the visitor industry.

E hana kākou! (Let's work together!)