KEALAKEHE, Hawaii – Councilmembers discussed Hawaii County’s diminishing share of the Transient Accommodations Tax (also known as the TAT, or hotel room tax) during a recent committee meeting in Kona.

The TAT is a state tax on hotel stays and rental vehicles. A portion of what is collected goes to the counties and is the second largest source of revenue for Hawaii County after real property taxes. However, the percentage of the revenue that is distributed to the counties has decreased over the years.

On April 14, the Hawaii County Council Governmental Relations and Economic Development Committee discussed a recent meeting of the State — County Functions Working Group, which focused on the TAT and related state legislation. Kohala councilwoman Margaret Wille – an advocate for the county’s retention of an equitable share of the funds – attended the meeting and provided a report to the council, setting the stage for the talk.

Here is the report Wille filed:

REPORT FROM THE STATE — COUNTY FUNCTIONS WORKING GROUP
April 1, 2015

BACKGROUND: The County’s share of the Transient Accommodation Tax (TAT) revenues is the County’ s second largest source of income, after real property taxes. This tax on hotel stays and rental vehicles was established in the early 1990’s with the objective of funding the Counties’ tourism related costs. Once fully implemented, the County’s share of the TAT revenues was 95% with the State receiving a 5% administrative fee.

Granting the TAT revenues to the Counties as its source of funding for tourism related expenditures was based on an extensive study by the Tax Review Commission. That study determined that approximately 53% of all public outlays for tourists are made by the counties, versus expenditures by the state. The Tax Review Commission also found that approximately 64% of the Counties’ expenditures benefited tourists while only 14% of the State’s expenditures benefited tourists. (The major services provided by the State largely benefit residents, for example expenditures for education, public welfare and social services, public hospitals, and housing.) The study pointed out that failure to provide independent taxing authority for the Counties results in excessive centralization of power, an inefficient allocation of resources, less responsive government, and a loss of accountability. The study also noted that the TAT is a more appropriate vehicle for the Counties to have as taxing authority than a portion of the General Excise Tax (GET), since the GET falls more on the residents than the visitor population.

The Tax Review Commission went on to recommend that the Counties have taxing authority (control) of the TAT, rather than have a State tax with a portion of which is shared with the Counties. As pointed out by the Commission, a tax sharing arrangement puts the State in a paternalistic role requiring that the Counties continually petition the State for funds, thereby creating an adversarial and unstable relationship. However because the administrative costs with centralized administration would be less, the recommendation was for the state to administer the tax, with the TAT revenues going to the Counties.

The Counties’ portion of these TAT revenues has been reduced over and over again. First to fund the Honolulu located Convention Center and then to fund the State’s Hawaii Tourism Authority (Tourism Special Fund). By about 2001 the Counties’ portion was reduced from 95% to 44.8%. Beginning in 2009, State legislators further targeted the Counties’ TAT rather than figure out ways to secure its own new streams of income or curb its spending. In 2009 and again in 2010 the State raised the TAT rate by 1% each year, increasing the total TAT rate from 7.25 to 9.25. None of that 2% increase was distributed to the Counties. Then in 2011, the State also placed a cap on the County’s portion of the base 7.25% portion of the tax, first at 93 million and later at 103 million for fiscal years 2015 and 2016. That cap is set to revert back to 93 million in 2017. The Counties’ portion is now only 23.5%.

Effectively since 2008, the State has increased its allocation by over 2000%, while the Counties’ allocation increased by only 2.2%. Had the State removed the cap, as had been promised (and even memorialized in a 2011 Conference Committee Report), the Counties’ share last year would have been in excess of $170 million.

The Counties’ portion of the TAT revenues is split between the Counties in a manner that theoretically reflects the number of tourists. Between 2011 and 2013 Hawaii Counties’ share has been between 12 – 13%, with Honolulu receiving around 47- 48%, Maui around 30%, and Kauai between 9 and 10%. Hence the County of Hawaii’s portion of all TAT revenues is now only around 3% of the total TAT revenues.

THE STATE — COUNTY FUNCTIONS WORKING GROUP: The State legislature has now formed a State — County Functions Working Group to recommend what portion of these TAT revenues should be allocated to the State versus to the Counties. That report is due prior to the 2016 legislative session. More specifically the Working Group is responsible to evaluate the division of public services related duties and responsibilities between the State and the Counties, and submit recommendations to the Legislature on the appropriate allocation of the transient accommodation tax revenues. There are 13 members in the Working Group, with one from the County of Hawaii, Finance Director Deanna Sako. The Group’s meetings are held on the third Wednesday of the month, which date usually conflicts with our Council meetings.

I attended the Working Group’s April 1St meeting. At the meeting, the State Department of Taxation reported on the above referenced Tax Review Commission Report and stated that the principles contained therein are still generally applicable. (A copy of the Department of Taxation’s April 1St report will be provided in a separate communication.) The Working Group has formed subcommittees to research the relative duties and responsibilities of the State and Counties with respect to public services. There is also an Industry subgroup that will tend to stress State tourism related infrastructure.

Other than one other private individual, I was the only member of the public present. In my public testimony, I suggested the Working Group forgo further researching of the division of duties between the State and the Counties and permanently allocate 50% of the TAT revenues to the Counties, or at least the previous 44.8%, and remove the cap.

My overall impression of the working group is that the State is the major player and likely to recommend a disproportionate allocation to the State. It is clear to me that unless the neighbor islands play a more pro-active role in these Working Group sessions, we will continue to receive an unduly small portion of the TAT revenues that were originally intended to go entirely to the Counties.

Other Related Comments: Governor Ige is also taking a pro-State stance. According to one Big Island legislator, on April 1St he met with the Hawaii Island delegation, and made clear that if the Counties want additional state monies the Counties will first need to take on more of the State’s financial responsibilities. That legislator also stated concern regarding the absence of a Hawaii Island representative at the Ways and Means Committee when County funding issues were being discussed.

There was one bill this session, HB 197, supported by HSAC that would have removed the cap. Testifying on this measure, the Governor’s Director of Finance, Wesley Machida, testified against the legislation claiming that the State would lose over $74 million in FY16 and over $84 million, if the bill were to succeed. I testified at the House Finance Committee and the Committee reversed the Chair’s initial negative recommendation and voted in favor of the Bill. The legislation however failed in the Senate. Given the existence of the State — County Working Group, this outcome was not surprising.

State legislators are also pursuing other TAT related measures to benefit the State and Oahu based projects such as SB284 SD2 HD1, which would allocated $3 million a year of TAT revenues to cover the debt service for the North Shore Turtle Bay conservation easement.

On a related note, the Legislature is also currently considering passing a bill to allow the Counties the option of a .25% surcharge on the State’s GET tax, provided this surcharge is approved by December 31, 2015. This legislation has been supported by the mayors.

Respectfully submitted,

Margaret Wille