LIHUE — For almost three decades, a tax to most visitor accommodations statewide has generated millions of dollars in revenues intended to offset impacts from Hawaii’s main economic driver: tourism.
But things took a sudden turn when the economic downturn hit in 2007, prompting state and county officials to trim their budgets.
As visitor arrivals and spending in Hawaii waned, the Legislature in 2011 placed a cap on the amount of money counties could receive from the state’s transient accommodations tax, commonly known as the TAT.
Rep. Derek Kawakami, D, Wailua-Hanalei, who served as a Kauai County Council member when the TAT cap was established, recalled that the move “was a compromise to having the TAT totally scooped away from the counties.”
“As a council member during that time, we were satisfied with the cap instead of the complete loss of TAT revenue,” Kawakami wrote in an email. “As far as I am aware, the cap was meant as a temporary means to balance the state budget during one of the worst fiscal climates that Hawaii as seen since the Great Depression.”
Those tax rates, last changed in July 2010, are currently set at 9.25 percent.
Now that the economy is starting to rebound, and visitor arrivals and spending is picking up, county officials and some state lawmakers are pushing to remove the tax cap to bring in more revenue.
“The intent of the modern TAT was that it was to be a shared tax revenue with the counties, and we believe that common sense and fairness dictate a return to an equitable sharing of these monies with the counties,” Hawaii Association of Vacation Rental Managers member Dan Monck wrote in a letter to lawmakers.
Other lawmakers, state tax officials and tax experts, however, are not so sure.
They say that the tax is not intended to offset county budget shortfalls or supplement revenues for public services generated by taxes already imposed by counties, such as real property taxes.
“We must all remember that TAT revenue is not intended to pay for all the costs perceived county burdens of providing services for visitors,” State Department of Budget and Finance Director Kalbert Young wrote in a March 28 letter to state lawmakers. “The TAT revenue merely supplements what is already extracted by the counties from visitor industry businesses.”
Doling out revenues
Under a formula spelled out in state tax laws, TAT revenues collected each month are currently doled out to a number of specific state funds every year.
Those monies, according to state tax documents, are imposed on gross rental income collected by accommodation providers who rent and furnish hotel rooms, apartments, condominiums, houses and beach houses for people staying on island for less than 180 consecutive days.
A total of $284.5 million in transient accommodations taxes were collected during the 2011 fiscal year alone, according to Hawaii Tourism Authority documents.
A fund to specifically cover the promotion, maintenance and upkeep of the Hawaii Convention Center in Honolulu receives $33 million from these taxes.
Another $82 million, according to state tax laws, is deposited into a special fund for the Hawaii Tourism Authority to “market, develop and support Hawaii’s tourism economy.”
About $1 million of that amount, according to state tax documents, is specifically allocated for operating “a Hawaiian center and the museum of Hawaiian music and dance at the Hawaii Convention Center.”
The state’s four counties then receive a proportional share of a $93 million allocation cap established in 2011: 14.5 percent for Kauai County; 18.6 percent for Hawaii County; 44.1 percent for the City and County of Honolulu; and 22.8 percent for Maui County.
For Kauai County, this amounts to nearly $13.5 million in TAT allocations each year.
The remaining amount of whatever is not distributed, according to state tax documents, is deposited into the state’s general fund.
A fair share of the pie
After waiting and watching from the sidelines as visitors slowly returned to the islands and tax revenues increased, with no increase in allocations, state and county lawmakers say they are now asking for their fair share.
“If tourism is truly beneficial for Hawaii, it must pay its way,” Councilwoman JoAnn Yukimura wrote. “It is logical and just that the TAT monies be granted to the counties to offset visitor impacts on the community.”
In a series of letters sent to state lawmakers, Kauai County Council members asked them to support a bill now being worked out in the Legislature to lift the TAT cap on county allocations, House Bill 1671. The bill, which was approved in the House and is now being considered in the Senate, is scheduled to be heard by a Conference Committee Monday.
Before the cap was established in 2011, counties in the state received 44.8 percent of the revenues collected for TAT.
“The counties bear the brunt of providing the services and infrastructure that accommodate visitors: police, rescue, lifeguard, emergency services during times of disaster, as well as parks, water, roads, solid waste, and public transportation, to name a few,” Yukimura wrote. “The present allocation of TAT revenues to the counties is helpful but not enough by a long shot. In order to properly provide for our visitors while not short-changing our residents, we need the additional assistance.”
In all, the County of Kauai spent about $44 million on visitor-related expenses, including public safety, parks and road maintenance, during the 2011-2012 fiscal year alone, according to a Kauai County Council analysis conducted last year.
Currently, the County of Kauai receives $13.5 million of TAT revenues from the state.
If the cap for the counties is removed and the TAT rate remains at 9.25 percent, the County of Kauai will receive about $10 million in additional revenue for county services.
Council Chair Jay Furfaro said this new revenue would also help offset a $8.9 million shortfall projected for the county’s general fund during the 2014-2015 fiscal year.
“As visitors comprise approximately 21 percent of the population on Kauai each day, it is important to meet their expectations in order to maintain our loyal visitor base,” Furfaro said.
Growing beyond means
Although some state and county officials are calling for more fairness, others say the current distribution of taxpayer money is generous enough.
“The original intent of allocating state TAT revenues to the counties were to provide the counties with funding for services and impacts of the visitor industry,” Young explained. “Since the implementation of the TAT, the expenditures of TAT revenues by both the counties and the state have not been explicitly identified or noted as to what exact services or programs TAT revenue funds. Instead, TAT revenue for both the counties and the state are simply additional revenues of their general funds.”
Counties, Young said, already collect real property taxes from hotels and businesses that are intended to fund services provided to visitors and residents.
Removing the cap, he added, could also “result in significant general fund losses on the state’s financial plan.”
“What this proposal underscores is the fact that county governments have grown well beyond their means and are searching for more available revenue,” Tax Foundation of Hawaii President Thomas Yamachika wrote. “The search for more and higher taxes has to stop somewhere. Both levels of government need to resize their operations and set priorities for what limited resources taxpayers can share with government.”
Rep. Daynette “Dee” Morikawa, D, Koloa-Niihau, said the proposal is also being criticized because state employees paid more for their medical insurance during the economic downturn, while counties did not do the same.
“Although counties may have become too dependent on this revenue to offset budget shortfalls, we don’t want residents to bear the burden of higher user fees and property taxes,” Morikawa wrote in an email. “The county will need to reign in their spending, too.”
Many Oahu legislators, she added, “want to control what funds are sent to the counties and may feel that controlling the distribution of TAT will accomplish that.”
Doing so, Morikawa explained, would allow more money to go into the schools, housing and fund more social services.
“It’ll be interesting to see what will come out of conference because just lifting the cap will affect funding for many other programs, whereby setting a percentage will allow excess amounts to stay in the state budget,” Morikawa wrote.
