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Judgement Clouded by Artificial Picture

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By Lowell L. Kalapa

     A reader recently raised the question of what can be done to stimulate the economy other than what the Economic Revitalization Task Force proposed. Readers will recall that the crown jewel of that proposal was the <big bang> that the dramatic cut in income taxes would have on Hawaii’s economy.  


  …anyone doing business in Hawaii knows that the general excise tax is a major contributor to the high cost of living in Hawaii.        While income taxes continue to be very high in Hawaii, putting more money back into residents’ pocketbooks is not going to make Hawaii any more attractive if something is not done about the high cost of living in Hawaii. That’s the very reason why the Task Force proposal failed, because anyone doing business in Hawaii knows that the general excise tax is a major contributor to the high cost of living in Hawaii.

Imposed on every transaction that takes place in the state, the general excise tax, either at its wholesale rate of 0.5% or the full 4%, becomes a part of the cost of everything we buy or sell in the state. It is paid without regard to the profitability of the transaction. In other words, you could be selling something at a price less than what you paid for it or what it cost you to make and the 4% tax would still be due. That’s unlike the net income tax which isn’t due if one doesn’t make a profit in his business.

While Hawaii’s families struggle to make ends meet, some of the recent retail competition appears to have brought better prices into the marketplace. Such is not the case for Hawaii’s number one industry, tourism. There is no doubt that at least for the next few years, Hawaii will continue to rely on the visitor industry for its economic well-being. However, that effort will be a struggle given the high cost of doing business in Hawaii.

On the other hand, residents sometimes question whether a Hawaii vacation is all that expensive. After all, Hawaii residents can take off for that neighbor island respite for a hundred plus dollars a night with air, room and car included. Unfortunately, (or fortunately as the case may be) Hawaii residents enjoy deeply discounted Kamaaina rates on their rooms and auto rentals as well as interisland air tickets. The same room that a resident enjoys for his weekend stay may cost the mainland or Japanese visitor two or three times as much. Thus, the perception that a resident has is far different from reality.

The rooms sold to residents are rooms that couldn’t be sold to visitors, thus rather than not making any money at all on an empty room, the hotel sells it for a discounted price. After all, the housekeeper and the maintenance people still have to be paid, so why not get something for that empty room. On the other hand, the hotel is not “ripping off” the visitor. No, in fact, the rate that is charged is what it really costs to recover all of the expenses of building and operating that room.

A recent study conducted by a national accounting firm reported that Hawaii took first place in the annual operating cost of a hotel room anywhere in the world. It cost more than $48,000 to maintain and operate a single hotel room in Hawaii. The next highest annual operating cost was for a room in Hong Kong where the cost is $37,000. Those destinations which are direct competitors for the kind of visitors Hawaii attracts, like Mexico and the Caribbean, list their annual operating costs at nearly half or about $20,000 to $22,000 a year.

With that kind of comparison, it is no wonder that Hawaii is having a very difficult time attracting visitors. On top of the time and distance as well as the cost of travel, the cost of lodging in Hawaii also presents a formidable barrier. Hawaii also has a pretty hefty room tax on top of that. While some would argue that the combined rate of 6% plus 4% general excise tax is reasonable compared to the 15% or 17% they paid somewhere else, they should remember that either the room rate was lower or they were not at a leisure destination.

Sometimes we forget how expensive it is to vacation in Hawaii because we, as residents, enjoy substantial discounts on the lodging and services that our visitors usually pay. It is an artificial, if not distorted, picture we have of the visitor industry. If we understood what it cost to vacation in Hawaii, we would have a better understanding of why the visitor industry is struggling in this economy.

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