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Time to get state out of tourism promotion?
By Grassroot Institute @ 11:06 PM :: 2320 Views :: Tourism

Time to get state out of tourism promotion?

It has always been the right thing to do in principle, but shifting public opinion is making it more politically viable

by Melissa Newsham, Grassroot Institute, April 16, 2021

Since the launch of the Safe Travels program in October 2020, Hawaii’s tourism industry has been making a comeback.

Perhaps due to pent-up demand, visitors have been making their way to the islands in increasing numbers over the last several months. Reports show that travel bookings for the fourth quarter of this year are outpacing that of 2019, before the coronavirus pandemic and lockdowns.1

However, despite the hopeful economic prospects of a rebound in tourism,2 local sentiment toward tourism’s resumption has been mixed. Not only is there the fear of health risks3 that reopening the state to travelers could bring to the state’s population of 1.4 million,4 many Hawaii residents are just plain reluctant to welcome back millions of tourists, with some even conducting “Take back our beach” protests.5 In 2019, total visitor arrivals reached an all-time high of more than 10 million, which was up more than 5% compared to the previous year.6

A recent Omnitrack survey found that 67% of Hawaii residents agreed with the statement that “the island is being run for tourists at the expense of local people,” while only 54% of residents thought “tourism has brought more benefits than problems.”7

Of course, just because some people might not like the tourism industry doesn’t make it bad. It is, after all, Hawaii’s No. 1 private employer, and does indeed provide many economic, social and cultural benefits.

But that doesn’t mean we should be using state funds to promote it. In the interests of fairness and economic efficiency, subsidizing private businesses has never been a good idea — unless you believe it’s the government’s role to pick winners and losers and favor some industries over others.

Meanwhile, we are seeing growing public disenchantment with the industry, leading to a convergence of principle and consensus that makes it increasingly politically viable to consider dismantling the network of subsidies and other government activities that regularly favors it.

How the state promotes tourism

The state and counties subsidize the visitor industry in many ways, both directly and indirectly. It is difficult to measure precisely the costs and benefits of every government function that has a nexus to tourism. But among the ways in which tourism is subsidized directly, the Hawaii Tourism Authority stands out.
HTA is the state’s primary tourism-promotion agency. It derives its funding from the state’s 10.25% transient accommodations tax.
8 The tax ostensibly is paid by the operators of any living accommodation rented out for periods of less than 180 consecutive days,9 but ultimately it is paid mostly by tourists who stay in those accommodations.10

In fiscal 2019, the year before COVID-19 restrictions decimated Hawaii’s tourism industry, TAT revenues totaled $600.3 million, with HTA being allocated $95.5 million or 15.9%. As shown in the chart below, half of that went to HTA per se (“Tourism Special Fund”) and the other half to the Hawaii Convention Center, which HTA oversees through two private contractors, one to manage it and the other to help promote it.11

The remaining TAT funds were distributed to the counties, 17.2%; to the “Mass Transit Fund” (i.e. Honolulu rail), 9.6%; Turtle Bay Special Fund, 0.2%; the Land & Development Fund, 0.5%; and the state General Fund,” 56.6%.12

Source: “Annual Report 2019-2020,” Hawaii Department of Taxation, Dec. 10, 2020, p.15. 

Since last May, the agency has not been receiving any money from the TAT. With tourism arrivals just a small fraction of what they were prior to the coronavirus lockdowns, all TAT revenues have been going to the state general fund. 

HTA officials have been pleading for more funds, but in the current economic climate, the governor’s office has been claiming there are more pressing needs for the TAT revenues than tourism promotion.

And over the years, HTA hasn’t helped its own cause. A “scathing” audit in 2018 identified “lax oversight, deficient internal controls, and, ultimately, less accountability” at the agency,13 prompting the state Legislature in 2018 to propose reducing its combined $108.5 million budget by as much as 44%.14 However, after heavy opposition from the HTA and the governor’s office,15 HTA emerged with most of its budget intact.16

Meanwhile, along came the Great Lockdown Crash of 2020, and now the agency is operating on a shoestring. Moreover, there is a movement to keep it that way.

#defundHTA becomes an issue

Despite begging from HTA, Gov. David Ige has yet to reinstate TAT funding to the agency. Therefore, the agency is funding its $41 million fiscal year 2021 operating budget through its reserves from prior years. 

At the same time, Gary Hooser, a former state senator and vice chair of the Democratic Party of Hawaii, is among voices pushing for the state to “#defundHTA.”17

“Why is the state of Hawaii spending money to promote an industry when the industry itself is fully equipped to promote itself?” Hooser asked during a recent interview with the Grassroot Institute of Hawaii.18

Marketing certainly serves a critical role in business. But is it prudent for local governments to spend scarce tax dollars promoting a particular industry, especially when the industry is fully capable of promoting itself? 

HTA officials apparently think the answer is yes and continued to “invest”19 millions of dollars in an effort to attract visitors, even after the state and county coronavirus lockdowns began.20 But as travel restrictions were put in place and visitor arrivals collapsed, the return on these “investments” began plummeting to the point where, as of last April, the agency was spending upwards of $15,000 dollars on marketing per Japanese visitor.21

As part of its oversight of the Hawaii Convention Center, HTA contracts with the nonprofit Hawaii Visitors and Conventions Bureau to promote the islands throughout North America. The HVCB, in turn, has chapters for each county,22 which receive HTA funds as well as county grants.23

Maui County in particular has faced a backlash for its spending on the bureau’s Maui chapter, the Maui Visitors Bureau. The Maui Cost of Government Commission’s 2020 report on the county’s grants to the bureau discussed how in fiscal 2018 the bureau received a $4 million dollar subsidy from the county on top of the $3.7 million allocated from the HTA.24

Th report estimated that at least $43.5 million a year is spent on marketing Maui as a tourist destination by large hotels and resorts, tour companies, airlines, activity operators and sporting event organizers. It concluded: “There is more than enough money spent on marketing Maui as a destination.”25

For fiscal 2021, county funding for the MVB was reduced from a proposed $3.5 million to $1.5 million, but that is still arguably $1.5 million more than is necessary. 

In fiscal 2018, Hawaii and Kauai counties granted $325,000 and $215,000, respectively, to their county visitors bureaus. This was in addition to the $6 million distributed to Hawaii County and $4.7 million distributed to Kauai County by the HTA.

The City and County of Honolulu is the only county that does not fund its visitors bureau beyond its HTA distributions, which in 2018 totaled $3.7 million. 

HTA’s mission creep and questionable ventures

Aside from promotional expenses, HTA has been spending money on other questionable ventures. For example, it recently allocated $250,000 to explore the development of a virtual concept for the Center for Hawaiian Music and Dance.26 Typical of public-sector projects, the museum has been in the works for over a decade and has already spent $800,000 in consulting fees. 

One state legislator critical of the initiative is Glenn Wakai, chairman of the Senate Committee on Economic Development, Tourism and Technology. 

“This isn’t the time or the place,” he said to the Honolulu Star-Advertiser in December about the plans. “We’ve already wasted a bunch of money for this museum. Now they want to spend $250,000 on a hula game. I don’t see how that’s going to bring more people to Hawaii.”27

Given HTA’s questionable spending of scarce resources, the Legislature is seriously considering stripping the agency of some of its current responsibilities and funding. As it stands, the fiscal 2022-23 budget would cut HTA’s funding to just over $48 million.28

At the same time, in its version of HB862, the Senate is proposing to reduce the scope of HTA’s duties. The bill, now in conference committee, would shift HTA’s focus away from environmental and cultural activities to mainly marketing efforts.29

Reducing TAT would be a form of promotion

On one hand, the state’s desire to promote tourism is understandable given the vital role the industry plays in the island economy. But there are ways to promote tourism that do not involve government subsidies.  

For one, the private sector already spends a considerable amount of money on marketing Hawaii to the world. As mentioned above, large hotels and resorts, tour companies, airlines, activity operators and sporting event organizers spend at least $43.5 million a year to promote tourism to Maui alone.30 Statewide, a 2002 survey by the state Legislative Reference Bureau of just 59 tourism-related companies put the total at about $165 million over a five-year period (1997-2001), for an average about $33 million a year.31 Adjusted for inflation, those amounts today would equal about $242 million and $48.5 million, respectively.32

Another way to promote tourism to Hawaii would be to eliminate or reduce the TAT — perhaps at least by the amount that goes to the HTA.

Initially imposed in 1986 as a 5% tax to finance the construction of the Hawaii Convention Center, the tax has more than doubled and become the go-to tool for legislators to cover budget shortfalls for costly projects such as rail. It is considered a politically advantageous revenue source, as it is a tax on nonresidents. But it isn’t without consequences. 

The ability and willingness of visitors to travel to Hawaii are not limitless. After all, policymakers justify state promotional spending on the basis that high competition in global tourism necessitates government involvement. At the same time, legislators seem unconcerned with the impact of an excessive hotel room tax on Hawaii’s ability to compete in the tourism market. 

Making Hawaii a more affordable vacation destination would be a form of tourism promotion itself. 

To the extent that the TAT is continued, its funds probably should be focused on mitigating the negative impacts of tourism on the state’s infrastructure and natural resources — and some of its current allocations do seem geared toward that.

Fundamentally, like the many thousands of  businesses and families who have had to make sacrifices to make ends meet, especially during the past year, our legislators need to cut their spending to balance the state budget. State-funded tourism promotion would be an ideal candidate for budget cuts. 

State promotion of tourism hinders diversity

Getting the government out of tourism promotion also would signal that Hawaii officials really do care about fostering economic diversification. State officials should not be in the business of picking winners and losers, and in terms of protectionist theory, tourism in Hawaii is certainly no longer an ‘infant industry’ needing government support.

Ultimately, if tourists want to visit Hawaii, to enjoy its natural beauty and aloha spirit, let them. If private businesses want to spend their own money to help entice them here, let them.

The policy should be to keep the government at arm’s length and let Hawaii’s tourism industry develop and evolve according to its own dynamics.

LINK: Footnotes

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