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Elusive Convention Center Drives Room Tax Adoption

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By Lowell L. Kalapa

As interest rates climbed during the late 1970’s and the early part of the 1980’s, Hawaii’s visitor industry hit a slump.

Many in the visitor industry blamed lawmakers for not putting enough money into the advertising and promotion of Hawaii as a visitor destination. Although the 1973 Commission on Operations, Revenues, and Expenditures (CORE) had discussed the possibility of levying a tax on the rental of hotel rooms, it recommended that such a levy only be adopted if the state was in dire financial straits.

So it wasn’t surprising when some Waikiki merchants floated the idea in the early 1980’s. However, the hotel industry held fast in opposing the drive to adopt a hotel room tax. But the complaint that the state wasn’t doing enough to promote the visitor industry persisted and in 1984 a Tourism Congress was convened to look at all aspects of the visitor industry including a dedicated stream of funding to promote Hawaii as a visitor destination.

Since the hotel industry was widely represented at this Congress, discussion of levying a special tax on the rental of hotel rooms was almost a moot point. Thus, it came as no surprise that discussion of a stable funding stream for visitor promotion focused on raising the general excise tax and earmarking the proceeds of the increase for visitor promotion. However, to make it palatable to voters, the plan would provide a tax credit for local residents that would be designed to offset the additional burden of the general excise tax rate hike.

This particular idea had long been touted by a university professor who argued that the tax burden would be “exported” to visitors who could not claim the credit and therefore the impact on local residents – read “voters” – would be negligible. However, when the proposal reached the legislature, lawmakers remained skeptical as it was argued that the general excise tax rate was being raised to benefit the visitor industry at the expense of residents even though residents would get a tax credit to offset the cost of the increased rate. The proposal barely saw the light of day and died in the darkness of the legislative back room.

However, the visitor industry continued to struggle through the mid-1980’s. Visitor industry leaders, primarily hotel operators, felt that Hawaii needed to be more than a destination for leisure travelers and wanted to round out the mix of visitors to the islands. The solution was to build a convention center to attract business travelers to Hawaii.

So beginning in the early 1980’s, visitor industry leaders made the journey to the legislature to persuade lawmakers to invest public funds to build a “world class” convention center. They told lawmakers that other major cities throughout the nation were building convention centers to attract businesses to meet in those cities and Hawaii needed to compete head-on with these destinations for some of the convention business pie. 

But money was tight and lawmakers were already being urged to defer spending on many worthy projects. So lawmakers were not ready to spend public dollars on a convention center that would benefit primarily the visitor industry. After a couple sessions of defeat, the visitor industry was ready to think outside the box. 

As the 1986 session dawned, visitor industry leaders approached the legislature willing to pay for the proposed convention center themselves by imposing a hotel room tax. The proposition was that hotels would be willing to imposed a room tax at a rate of 2% provided the proceeds would be earmarked for the construction and operation of a “world class” convention center. Lawmakers were beside themselves as the hotel industry had consistently opposed a hotel room tax for nearly three decades.

This was a crack in the dam that lawmakers were not about to pass up. By the time the lights were turned off at the end of the 1986 session, lawmakers had adopted a “transient accommodations tax” (TAT) of 5%. Reasoning that there was no need to earmark the funds until a site had been selected for the proposed convention center, lawmakers approved the tax without earmarking the proceeds.

It would take more than seven years for a site to be selected, at the cost of an additional one percent hike in the rate in order to pay for the convention center. But what happened to the proceeds from the original five percent rate? Well, for the first three years the receipts of the TAT flowed to the general fund, adding about $300 million to the state’s bottom line contributing nearly half of the surplus realized by the end of fiscal year 1989. At that point, the embarrassment of riches led the legislature to share the wealth with the counties. Since lawmakers didn’t want to incur the wrath of the counties, they hiked the TAT rate to 6% in 1993 to pay for the convention center.

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