Jerking the Hotel Industry Around, You Can’t Trust Lawmakers

by Lowell L. Kalapa, Tax Foundation of Hawaii

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 (TAT) to help bail out the state general fund as the budget short fall was forecasted to top $1 billion.

Recognizing the need to help the state balance it books, the hotel industry agreed to a temporary increase in the TAT rate which was increased two percentage points from 7.25% to 9.25%. The temporary increase is supposed to expire on June 30, 2015. All of the revenues from the two percentage point increase went into the general fund while the convention center and the tourism promotion programs and grants-in-aid to the counties continued to benefit from the collections of the 7.25% rate. 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%.

The hotel room tax, or TAT, has always been a BIG target for lawmakers as they view the tax as being paid by folks who do not vote for them and therefore don’t have a means of retaliating at the ballot box. Lawmakers believe that the TAT is a tax paid by someone other than constituents and, therefore, they can raise it as much as they want. They also believe that Hawaii’s 7.25% rate is uncharacteristically low by comparison to other destinations on the mainland.

Unfortunately, or perhaps intentionally, what lawmakers forget is that the 7.25% - currently 9.25% - rate is over and above the 4.16% general excise tax which is also levied on hotel room rentals. Thus, the current tax rate on hotel room rentals nears 12% or 13% depending on whether the rental is in Honolulu, where the general excise tax rate is 4.5%, or on the Neighbor Islands where the general excise tax rate is 4%. So if lawmakers are going to compare rates and pronounce that Hawaii’s tax on hotel room rentals is low, they need to look at the combined impact of the TAT and the general excise tax.

That said, the other mismatch is to look only at the rate and not the base of the hotel room rate against which the tax rate is applied. Remembering that Hawaii is a leisure destination no matter how promoters of the industry try to convince meeting planners that Hawaii is a place to do business, hotel room rental rates are substantially higher here in the Islands than they are in most other leisure destinations within reach of North America. Because Hawaii’s hotel room rates tend to be higher than other leisure destinations, the lower hotel room tax rate combined with the general excise tax generates substantially larger per day costs for the visitor. The point of the matter is that one cannot compare hotel room tax rates without also checking out the room rates.

More importantly, lawmakers should remember that the TAT was originally adopted for the purpose of building a state convention center. The hotel industry believed that it was necessary to build a convention center in order to attract business travelers that would complement the leisure market. The industry originally agreed to a 2% rate but at the end of the 1986 session, lawmakers slapped a 5% rate on those rentals without earmarking the proceeds for building a convention center as a site had not been selected. When a site was selected five years later, lawmakers had given a large part of the proceeds away forcing lawmakers to raise the rate to 6%.

Later, in the midst of another economic slowdown, a task force recommended that the rate be increased to 7.25% so that a decrease in income tax rates could be realized. And, of course, more recently to help bail out the general fund the rate was incrementally increased to the current 9.25%.

Now that the taxpayer is being told that things are better, you would think that the state could do without the added revenue from the two percentage points they tacked on three years ago. What is even more disturbing is that the attempt to keep the TAT rate at 9.25% comes along with a raft of other measures to impose new taxes and fees or raise the rates of existing taxes. Seems like this session is all about finding more money.

Making that 9.25% 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.

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