by Lowell L. Kalapa, Tax Foundation of Hawaii

Many readers will probably have to remember the Greek myth about the Trojan Horse bearing gifts or perhaps the saying of “never look a gift horse in the mouth” to understand the slight of hand that can be found among the legislative proposals in this year’s session.

For example, one measure that was sent to conference committee for debate between senators and representatives would extend a hotel construction and remodeling tax credit for the cost of renovating those structures between January of 2013 and the end of December of 2018. That part of the proposal probably was hailed in the hotel community as hotel owners and operators would benefit from another round of tax incentives to help renovate aging properties. It would be “another” round of incentives for hotel renovations, the first of which was granted at the turn of the 21st Century as Hawaii struggled to emerge from another lengthy economic malaise.

Supported by the hotel owners and construction workers who were then again on the bench for years, the tax break did, in fact, rejuvenate activity to the point where demand was so high that it was often difficult to find sufficient workers to do all the work as the tax incentive was time limited and the work needed to get done within the specified period if it was to qualify. As a result of the tax incentive, renovation and construction activity was accelerated into the specified time period and when the incentive expired, so did the work activity. Thus, the tax incentive did nothing more than skew the economic cycle and created the feast and famine of construction activity.

One of the lasting effects of that tax incentive and the ensuing frenzy of activity is that it artificially accelerated the cost of labor as the demand for labor during that period was unusually high and the labor demands for compensation were artificially accelerated. The result is that the cost of construction, whether new or renovation, has soared putting the financial feasibility of many projects in question. In other words, like the agricultural workers of the sugar and pineapple industries of yore, they priced themselves out of reach to the point where it is difficult to make the numbers pencil out.

Thus, many projects which were still underway after the tax incentive expired were faced not only with the lack of the tax incentive, but rising labor costs and suddenly the lack of financing as the credit markets froze in late 2008.

Like many of the other tax incentives adopted in recent years, lawmakers learned that state officials made no effort to evaluate the impact of these tax incentives both in creating jobs and work activity but also how the incentives created artificial response on the part of those who wanted to avail themselves of the tax incentive. Nor was any research done into what might have occurred had the incentives not been adopted and made available. Would construction activity have evened out over a longer period of time, providing a continuum of employment rather than spiking the job creation into the brief period that the incentive was available?

Oh yes, and let us not forget the downside of the legislative measure still being considered by conference committee negotiators and that is the same measure would delete the sunset date on the two additional percentage points that increased the tax rate of the transient accommodations tax, or hotel room tax, from 7.25% to 9.25%. The higher rate was adopted by the 2009 session of the legislature to help balance the ailing state general fund. Adopted in two steps beginning on July 1, 2009, the increased rate of 9.25% is supposed to expire at the end of June 30, 2015. However, the same bill that provides the tax incentives for hotel construction and renovation would make the increased rate permanent by repealing the 2015 sunset date.

It would indeed be a heavy price for the hotel industry and the Hawaii visitor to pay. It is also hypocritical for lawmakers to profess the importance of the visitor industry and the need to promote Hawaii as a visitor destination and then to turn around and make this “temporary” tax increase permanent.

As we have all come to learn, there is no such thing as having your cake and eating it as well. For hotel owners and visitors, it would be far better to do without the temporary renovation tax incentive than to endure the higher TAT rate forever. Beware of Greeks bearing gifts!

- 30 -