Three years ago, in the midst of the worst economic meltdown since the Great Depression, lawmakers turned to the hotel industry — asking it to not stand in the way of an increase to the state’s transient accommodation tax — to help bail out the general fund as the budget shortfall was forecast to top $1 billion.
Recognizing the need to help the state balance its books, the hotel industry agreed to a temporary increase in the TAT rate, from 7.25 to 9.25 percent. This temporary increase is set to expire June 30, 2015. The revenues from the increase went into the general fund, while convention center and tourism promotion programs and grants-in-aid to the counties continued to benefit from the original 7.25 percent rate. Now, the administration and some legislators would like to hang onto that money and have proposed making the 2 percentage point increase permanent. The administration has also proposed another increase, to 11.25 percent.
The TAT has always been a big target for lawmakers since it is paid by folks who do not vote for them and don’t have a means of retaliating at the ballot box. Therefore, they can raise it as much as they want. They also believe Hawaii’s 7.25 percent rate is low compared to mainland destinations.
What lawmakers forget is that the 7.25 percent — currently 9.25 percent — rate is over and above the 4.16 percent general excise tax that is also levied on hotel room rentals. Thus, the current tax rate on hotel room rentals nears 12 or 13 percent depending on whether the rental is in Honolulu, where the GET rate is 4.5 percent, or on the neighbor islands where the rate is 4 percent. If lawmakers are going to compare rates and pronounce Hawaii’s tax on hotel room rentals low, they need to look at the combined impact of the TAT and the GET.
Additionally, lawmakers choose to look only at the tax rate and not the room rate against which the tax 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 than 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 GET generates substantially larger per day costs for the visitor. One cannot compare hotel room tax rates without also checking the room rates.
More importantly, lawmakers should remember the TAT was originally adopted for the purpose of building a state convention center. The hotel industry believed it was necessary to build a convention center in order to attract business travelers who would complement the leisure market. The industry originally agreed to a 2 percent rate but at the end of the 1986 session, lawmakers slapped a 5 percent rate on those rentals without earmarking the proceeds for building a convention center since a site had not been selected. By the time 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 percent.
Later, in the midst of another economic slowdown, a task force recommended the rate be increased to 7.25 percent so a decrease in income tax rates could be realized.
Now that the taxpayer is being told things are better, you would think the state could do without the added revenue from the 2 percentage points they tacked on three years ago. What is even more disturbing is the attempt to keep the TAT rate at 9.25 percent comes along with a raft of other measures to impose new taxes and fees or raise the rates of existing taxes. It seems like this session is all about finding more money.
Making that 9.25 percent 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.
Lowell L. Kalapa is the president of the Tax Foundation of Hawaii.