‘Tourist tax’ surcharges threaten Hawaii recovery

by Joe Kent, Grassroot Institute  (published originally in the Hawaii Filipino Chronicle on Dec. 18, 2021.)

In their zeal to “save” the state budget, Hawaii’s lawmakers created new monsters — the county TAT surcharges — which threaten to drag down Hawaii’s economy

Are more taxes on tourists really what Hawaii’s economy needs right now?

Honolulu, Maui and Kauai counties recently added 3% surcharges to the state’s 10.25% transient accommodations tax (TAT), and Hawaii County is expected to follow soon.1 That will have tourists looking at 13.25% of their visitor accommodations expenses going toward taxes. 

Combined with the state’s general excise tax of 4%, plus the 0.5% county GET surcharges on Kauai, Oahu and Hawaii island, which tourists also pay, the Aloha State now has the highest tourist taxes in the nation, topping out at 17.75%.2

All this comes at a time when Hawaii’s economy, especially its tourism sector, is struggling to survive — even after the state was granted billions of dollars in federal aid, which should have relieved the state and counties of the need for more taxes.

So how did this all come about?

Well, for one, there was the Great Lockdown Crash of 2020, which wrecked Hawaii’s economy and left state lawmakers wondering in early 2021 how they were going to make up for the resulting loss of tax revenues.

One thing they decided was to stop giving the counties their usual $103 million share of the state’s TAT revenues. This left Honolulu County short $45 million; Maui County, $23 million; Kauai County, $14 million; and Hawaii County, $19 million.3 As a concession, the lawmakers allowed the counties to impose their own TATs, up to 3%, which by now they almost all have.

But lo and behold, it turns out the state’s TAT grab wasn’t necessary after all, since the federal government had already infused at least $1.6 billion from the American Rescue Plan Act into Hawaii’s economy, and since then has allocated an additional $2.8 billion as part of the recently approved infrastructure bill.4

Meanwhile, it turns out the counties are not doing so badly financially, either. From fiscal 2019 to fiscal 2022, operating revenues grew in Honolulu County by 12%,5 Kauai County by 11%,6 Maui County by 14%7 and Hawaii County by 18%.8

That revenue growth occurred despite the counties already operating without any TAT revenues since April 25, 2020, when Gov. David Ige snatched the money for the state via one of his many COVID-19 emergency proclamations.9

Of course, county lawmakers still say they “need” the 3% TAT surcharge.10 Honolulu County stands to gain $86 million;11 Kauai County, $18 million;12 Maui County, $15 million;13 and Hawaii County, $19 million.14

But their new TATs will come at a high price. And it won’t be for just tourists. Locals traveling to neighboring islands, whether on vacation or for business, will now have to pay more for lodging, which will raise the cost of living and the cost of doing business in the islands. 

Similarly, more money spent by locals and tourists on lodging taxes will leave them with less money to spend on other Hawaii products. The higher taxes might even discourage them from staying at Hawaii hotels altogether. 

Sadly, some of the money that is being siphoned away from Hawaii’s private economy will help support government bloat. Honolulu County, in particular, intends to initially divert one-third, and after two years, one-half, of its new TAT revenues to its wildly over-budget and behind-schedule rail project. 

This seemingly endless boondoggle — the most expensive megaproject per capita in the world15 — will receive between $28 million to $49 million annually from the new tax, despite widespread agreement that it will hardly make a dent in its $2 billion to $3.5 billion budget shortfall.16

This is money that could have remained in the hands of tourists to spend in the private sector, helping businesses and their employees recover and prosper, and boosting Hawaii’s overall economy. Instead, Honolulu is going to squander its new revenue source on a project that has devolved into an enormous blunder..

In their zeal to “save” the state budget, Hawaii’s lawmakers created new monsters — the county TAT surcharges — which threaten to drag down Hawaii’s economy in perpetuity. 

Considering that the state TAT started out in 1987 at 5% and was supposed to be only temporary, our state lawmakers have a lot to answer for, especially now that the tax has grown to 10.25% and has spawned mini-TATs as well. If only they could undo it all, Hawaii’s economy would be the better for it.