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Hope Runs High That Visitors Will Come with More Promotion

posted in: Weekly Commentary 0
By Lowell L. Kalapa

One of the measures that lawmakers had to grapple with was an increase in the Transient Accommodations Tax (TAT) so the visitor industry could be assured a dedicated source of funding for visitor promotion of the state’s largest industry.

The proposal has its genesis in the Economic Revitalization Task Force which recommended that the TAT rate of 6% be increased to 7% and the allocation of the proceeds be restructured. This latter proposal elicited howls of foul play from the counties as the proposal would have reduced the county share by nearly $40 million. On the other hand, it would have insured that the industry could rely on a dedicated source of funding for promotion of Hawaii to the tune of nearly $60 million.

And as the industry grew, it was reasoned that the counties, as well as the promotion fund, would benefit from increased tax collections. However, Task Force members seemingly overlooked the fact that the TAT was originally adopted for the purpose of funding a state convention center as no change was made to accommodate the increasing cost of the center’s debt service. The collections from the remaining percentage point would continue to go to pay for the convention center’s debt service.

That one percentage point generates about $20 million; however, it is expected that the annual debt service cost for the convention center will reach more than $34 million in its highest year. That being the case, then the one percentage point will be insufficient to generate the needed bucks to pay back the debt service.

This remained a constant concern of the hotel industry as the Task Force proposal made its way through the legislative process. If the counties opposed the proposed new allocation formula and the proposal also did not address the convention center debt service, the possibility that the increase in the tax rate would go far beyond the one percentage point was an ever present possibility.

As a result, a coalition of visitor industry interests came forward with a counter proposal. That idea was based on the criticism that the current 6% TAT understates the true cost of taxes on visitor lodging. When the 6% rate is combined with the 4% general excise tax, which is also imposed on hotel rentals, the tax charged on the hotel room rises to 10%. Visitor officials reasoned that if critics realized how high the tax on hotel rentals was, there would be more acceptance of spending a great deal more on visitor promotion and for services provided to visitors while they are here.

Thus, the coalition recommended exempting hotel rentals from the 4% general excise tax while increasing the TAT rate to 10% and adding the agreed upon 1% rate increase for a total of 11% on hotel room rentals. As a result, coalition officials reasoned, the counties could continue to receive their $100 million, while the industry could tap into $60 million for the dedicated promotion fund and the convention debt service requirements could be met.

One small problem – the general fund would be $80 million poorer with the exemption of hotel rentals from the 4% tax. The net effect on the general fund after accounting for the visitor promotion that is currently paid with general funds would be a loss of $35 million. While the legislature bought into this idea, the administration did not, realizing that it would mean less general funds for other programs.

The result is the package that the legislature produced at the end of the session. An increase in the TAT rate by 1.25%; however, the counties would see a net reduction in their share of the TAT by as much as $33 million in the first year, but the dedicated promotion fund would reap nearly $57 million. The sad result is that the convention center dilemma would still be unresolved as only about $26 million would be set aside to pay the debt service.

While industry officials are hopeful that increased visitor promotion will bring more visitors to Hawaii, it seems that further increases in the TAT can only have a counter productive effect as the cost of a Hawaii vacation is driven even higher.

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