HILO — A bill requiring the neighbor islands to help bail out Honolulu’s over-budget rail project is roundly opposed by Hawaii County officials, the chambers of commerce, the hotel industry, many Big Island residents and all four of the island’s state senators.
Yet all but one of the county’s seven members in the state House are likely to vote for the bill, a special session compromise between the House and Senate after negotiations broke down in the tumultuous last days of the regular legislative session that saw the ouster of the House speaker and the appointment of a new Senate Ways and Means Committee chair.
Senate Bill 4 levies a statewide 1 percent increase on the transient accommodations tax dedicated to Honolulu rail while setting the share of the TAT to be divided by the counties at $103 million permanently. It also gives counties the option of raising their general excise tax by one-half percent to be used for roads.
All Big Island House members in the regular session voted for a floor amendment that included the 1 percent TAT hike, according to legislative records.
Proponents say county residents and local government shouldn’t feel the pinch of the tax hike, which is paid primarily by tourists. Opponents say the neighbor islands shouldn’t be taxed for a Honolulu project.
The TAT is a state tax, not a county one, said Rep. Richard Onishi, D-Hilo. He said he supports using state TAT funds for the Honolulu rail project. As chairman of the House Tourism Committee, he’s concerned about the impacts visitors have on communities, but he thinks providing funding to the visitor industry to allow it to conduct community projects is preferable to giving it to county government, where it’s deposited into the general fund.
“(The counties) can’t separate what is used for police or fire or EMS,” Onishi said. “To me, the only function of the TAT is to help tourism.”
Sen. Kai Kahale, D-Hilo, said he strongly opposes the bill because it will increase the cost of a hotel room on the island.
Anywhere from 1 percent to 10 percent of hotel rooms statewide are booked by kamaaina, a number that increases to almost half during big holidays on Oahu, according to Mufi Hannemann, president and CEO of the Hawaii Lodging & Tourism Association.
“It will hurt hard working, already struggling local families that stay in our island hotels for staycations, family reunions, youth sporting events, canoe regattas and church functions,” Kahele said. “It will negatively impact small businesses that depend on our already fragile tourism spending economy.”
Opponents of the TAT hike point out that requiring tourists to spend more on their lodging cuts into what they will spend elsewhere on the island, hurting the local economy and requiring hikes in other taxes.
For every 1 percent increase in the TAT, the Big Island could lose $9 million in visitor spending and 77 jobs, according to an analysis Tuesday by the state Department of Business, Economic Development and Tourism. Onishi questioned the analysis, saying previous TAT hikes haven’t been shown to reduce tourism.
Hawaii County officials look at it differently.
“It’s not like we’re not paying our fair share,” said county Managing Director Wil Okabe.
Okabe questioned why so many of the county’s legislative delegation seem to support the bill.
“That doesn’t make sense to me,” Okabe said. “I just don’t understand how anyone representing our island would vote for this, instead of representing their constituents.”
Rep. Richard Creagan, D-Ka‘u, said Big Island construction workers are getting high-paying jobs from working on the rail. He said the early flight from Hilo to Honolulu is half full of construction workers heading to their jobs.
“The rail itself is more of an Oahu benefit,” Creagan said. “But at least it gives something back to the neighbor islands.”
Legislative leaders on both sides were working late into the evening Friday trying to ensure they have enough votes to pass the measure.
Sen. Josh Green, D-Kona, said he is fighting to get the TAT hike applied only to Oahu.
“This seems to be the fundamentally more fair approach,” he said.
The TAT is less regressive than the GET, said Rep. Joy San Buenaventura, D-Puna. That means it won’t hit the poor the most by taking a greater percentage of their income. She and other supporters said extending Honolulu’s GET, the only other funding source being considered for Honolulu’s problem, would hurt more people, especially those who buy online and will be taxed at the higher Honolulu rate.
“The TAT affects people who can afford an increase,” San Buenaventura said. “I don’t like the fact that this has become a neighbor island versus Oahu dispute.”
Rep. Nicole Lowen, D-Kona, agrees that the TAT increase is less harmful to the economy than a GET increase.
“The TAT doesn’t affect the county budget in any way,” Lowen said, adding the combination of the statewide TAT and the GET extension for Honolulu is a “creative solution.”
Both Lowen and San Buenaventura said their stances aren’t ironclad and they may vote differently, depending how the final bill looks.
The increase takes the TAT to 10.25 percent of the hotel bill, plus general excise tax.
But the TAT, often colloquially called the “hotel tax,” doesn’t just tax hotels. Every landlord in the state renting to tenants for less than 180 days also is required to pay it.
That’s a concern for Sen. Russell Ruderman, a Democrat representing Puna. He said families in his district offer their homes as vacation rentals as a way to supplement their income.
“My district is 99 percent opposed to it, and vehemently,” Ruderman said. “Financing this project sucks the air out of the room for everything else we need. … In representing my district, I can’t support this plan.”
Ruderman feared taxing neighbor islands to pay for Honolulu rail would set a precedent, allowing the state to earmark money for a specific project and then be on the hook for what now becomes a state project.
The TAT increase means the neighbor islands will give a significant donation to Honolulu’s rail, according to Maui County Council Chairman Mike White, a longtime hotelier who has also worked in Waikiki and on the Big Island. According to his calculations, the neighbor islands together generate 51 percent of the TAT, compared to Oahu’s 49 percent.
The state Department of Taxation said it doesn’t break down the TAT by island. The hotel industry does report it that way to the agency, however.
Lawmakers favoring the measure say the bill increases the $93 million TAT cap for counties to $103 million and makes it permanent. That raises Hawaii County’s share from $17.3 million to $19.2 million.
That still falls far short of the amount the counties used to share before the amount was “temporarily” capped during the Great Recession. The Legislature’s intent at the time was to return to the original formula once the economy stabilized.
The purpose of the cap was to “temporarily increase and preserve the amount of state revenues derived from the transient accommodations tax and is a necessary component of the package of legislation aimed at addressing the state’s current economic crisis,” according to a 2011 conference committee report signed by former money committee chairmen Rep. Marcus Oshiro and Sen. Donna Mercado Kim.
Under the old formula, Hawaii County would have received $37.2 million for the 2015-16 fiscal year, according to calculations based on the state Department of Taxation’s 2016 annual report.
In response to a $20 million budget shortfall, the Hawaii County Council and Mayor Harry Kim raised both property taxes and gas taxes this year.
“We’re going to have to tax the public even more, and that’s something we don’t want to do,” Okabe said. “It’s not fair.”
A 13-member State-County Functions Working Group established in 2014 by the Legislature recommended a formula allowing county TAT revenues to grow as the visitor industry grows, rather than being capped at a set amount. The Legislature set up the working group after conceding that the TAT allows the counties to better provide for public safety, parks, road maintenance, and visitor-related services.
“The increase and permanent cap on Hawaii Island’s share of the TAT is an insult to our island families and is a pittance from the state,” Kahele said.
Rep. Chris Todd, D-Hilo, had previously voted along with his colleagues on the TAT increase but is now having second thoughts. Todd, appointed in January to fill the seat of the late Rep. Clift Tsuji, has yet to face his first election.
“As of right now, I don’t believe I can support it, but I am going to wait until the final measure,” Todd said.
SB 4 extends Honolulu’s current half-percent general excise tax for three years, and reduces how much the state takes as administrative fees. And, it requires an audit and more oversight for the rail project. The measures come as the cost of the project burgeons from $5.26 billion in late 2014 to about $8.2 billion.
“Uncomfortable as it is to point out, the shortfall is primarily the result of management decisions made by an agency of the City and County of Honolulu. Neighbor islands were not part of either the management or the process,” said William Walter, president of the Hawaii Island Chamber of Commerce, in a Thursday letter to Big Island legislators. “Asking the residents and visitors of the neighbor islands to pay for this process gone awry is not reasonable.”
“Our organization would like to see the county of Hawaii receive their fair share of the TAT as we deal with the impacts of the visitor industry and strengthen our local economy,” said Kona-Kohala Chamber of Commerce Executive Director Wendy Laros.
Hawaii ranks third of the 50 states in lodging tax, with a total lodging tax of 13.25 percent, including TAT at 9.25 percent plus general excise tax at 4 percent, according to the DBEDT report. That’s behind Connecticut, with 15 percent, and Maine at 13.5 percent, the report said.
Some other states also allow municipalities to charge lodging taxes. Including lodging taxes at all levels, the maximum is 17.93 percent, the minimum is 8 percent and the median is 13.53 percent.
Rep. Cindy Evans, D-North Kona, is the House majority leader who’s charged with, among other things, helping House leadership corral votes on the House position.
Evans, along with Rep. Mark Nakashima, D-Hamakua, declined comment for this article, but they have previously supported the increase.
The Senate Ways and Means Committee has scheduled a meeting for 3 p.m. Monday to hear SB 4.
The public may comment at the hearing, or by email at least 24 hours before the hearing.
• WAM-WrittenOnly@capitol.hawaii.gov if you are only submitting written comments and will not be testifying in person
• WAM-InPerson@capitol.hawaii.gov if you are also going to testify at the hearing in person
