Begging for a Piece of the Hotel Room Tax Pie

by Tom Yamachika, President, Tax Foundation Hawaii

On Friday, April 1, April Fool’s Day, a respectable delegation of county politicians gathered in the House Finance Committee hearing room. At issue was the fate of SB 2987, relating to the transient accommodations tax (TAT). Specifically, that bill would determine how much of the TAT is shared with the counties.

The TAT actually dates back to 1986, when the State wanted to build a world class convention center in Honolulu and needed money to do it. It was then decided to impose a TAT, at the rate of 5%, with the intention, as stated in the conference committee report, “that a portion of such revenues be appropriated for the promotion, stimulation and development of visitor assistance programs [including] the development of a convention center, the Hawaii Visitors Bureau for increased promotion of the visitor industry, and grants to the counties for the construction of recreational and other infrastructure to enhance visitor satisfaction.”

The law that shared the TAT revenue with the counties was adopted in 1990. Then, the Conference Committee explained, “Increased pressures of the visitor industry mean greater demands on county services. Many of the costs of providing, maintaining, and upgrading police and fire protection, parks, beaches, water, roads, sewage systems, and other tourism related infrastructure are being borne by the counties.” For a while the counties were content with their share.

Squabbles between the county and state governments started in earnest in 2013, when the temporary TAT rate increase, to 9.25%, was made permanent but the counties were given a fixed $93 million amount to share rather than a percentage of the total collected. The following year, a state-county functions working group was formed to evaluate the respective responsibilities of the state and counties, and to recommend an appropriate allocation of the TAT revenues. At that time, the counties were allocated an extra $10 million to share. The working group submitted a report, focusing almost exclusively on the impact of tourists to the counties, and recommended that the TAT revenues be split 55% to the state and 45% to the counties, which is similar to the allocation that existed before 2013.

The report annoyed the Legislature’s money chairs. The House chair complained in January 2016 that the report didn’t deliver what was asked: “We gave them $50,000,” she said, “so someone owes us $50,000 back.”

The Senate chair’s comment was similar: “We got a portion of what we asked for.”

Probably as a result, the bills embodying the working group’s recommendation got nowhere. The Senate pushed out a bill to continue the $103 million until another working group could be formed six years in the future, and the House tossed out altogether the idea of a future working group. Is it possible that something else is going on? If the report were deficient, why shouldn’t the working group be allowed to fix it sometime sooner than six years hence?

“I’m afraid we’ve gone through this exercise too many times, too many years and the results have always been the same,” Rep. Bertrand Kobayashi was quoted at the time.

In the meantime, the counties are not without some alternative funding sources such as: (1) adding a 0.5% surcharge to the GET, under last year’s law; (2) property tax, including adoption of different tax classifications; (3) county fuel tax; (4) county vehicle weight tax; (5) county user fees, including impact fees for land development. Let’s see how this all shakes out.