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County TAT surcharges a threat to Hawaii recovery

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The founder of ThinkTech Hawaii hosts the institute’s executive vice president to talk about the new county taxes on tourism, and much more besides

The rush by Hawaii’s counties to add 3% surcharges to the state’s 10.25% transient accommodations tax has raised red flags about the future of Hawaii’s tourism industry, which already is struggling to recover from more than a year and a half of ever-changing coronavirus lockdown regulations.

Among those worried about the impact of such surcharges is Jay Fidell, founder of the ThinkTech Hawaii broadcasting network and host of his own program, “Community Matters.” 

Fidell reached out to the Grassroot Institute of Hawaii to discuss the issue after reading testimony submitted to the Honolulu City Council on Oct. 19 by Joe Kent, institute executive vice president, who warned the Council against imposing such a surcharge.

Adding the surcharge, Kent said, would give Hawaii “the highest tourism taxes in the nation,” and  the Council should “carefully consider the state of the economy before proceeding with yet another tax increase.”

During the interview, Fidell made the point that the counties were virtually forced to enact the surcharges, since the Legislature took away all the money they used to receive as their share of the state TAT revenues.

 “The counties, who are saddled with lots of obligations, have significantly less money,” he said. “They’re really forced to raise the TAT because the state took away the TAT. Would you agree with me that all the counties are going to fall in line, they’re all going to do this?”

They all will do this,” Kent replied, “although I’m not sure they all need the money. There’s a lot of money that’s wasted. The Grassroot Institute of Hawaii tries to catalog all the different ways that money could be better spent, or more efficiently spent.”

In addition, Kent said, “A lot of the counties — actually, I think all the counties — lived without the TAT in 2020, [which I] imagine was a scary year for budgeters and a scary year for the government, wondering if the money is going to come in. [But] the counties already lived for a year without that TAT money, and this means they would be living without that money again. I think they could survive.”

Watch this fascinating and highly informative interview in its entirety below. A complete transcript also is provided below.

10-27-21 Jay Fidell with Joe Kent on “Community Matters”

Jay Fidell: We’re talking about the TAT today with Joe Kent of Grassroot Institute. This is ThinkTech Hawaii. I’m Jay Fidell. It’s a one o’clock block on a given Wednesday. Hi, Joe.

Joe Kent: Aloha. Thanks for having me.

Fidell: Absolutely. We saw your newsletter a couple of weeks ago about the TAT and how it actually threatens the economy. But let’s first talk about the newsletter itself.

Kent: Sure.

Fidell: Grassroot Institute has developed over the past few years a really fabulous newsletter. I know you’re involved in that. Can you talk about the newsletter and its general area of coverage, the content it provides and to whom?

Kent: Sure. We view Hawaii’s news landscape as suffering a little bit. It used to be you’d see investigative beat reporters going to things and covering everything. If you read the newspaper, you could get a real good sense of what was going on.

Lately, that’s gone downhill, as newspaper staffs have been cutting. We like to view our newsletter as buttressing the local news and giving another opinion or some more investigative research. So it’s a good supplement to the news.

If you’re not reading our newsletter, you can find it at grassrootinstitute.org. We oftentimes will catch things that everyone else misses.

Fidell: That’s true from my own personal experience. Very valuable, because I think the larger media will be looking for crime, automobile accidents, weather and sports, and it stops there.

Just like ThinkTech, we’re on a mission to raise public awareness about things that people should know, rather than what they would like to know about sports and weather and crime and automobile accidents.

You’re really doing the same thing, and I admire you for that. Every time I look, the newsletter is better, it has more content. Opinion is very important.

[There] used to be a time when the media [were], “Just the facts, mam. Just the facts.” But that time is gone now. A lot of what you write about is opinion, isn’t it?

Kent: It’s a lot of opinion. But we always look at it through a lens of the taxpayer — the watchdog citizen who wants to hold their government accountable. There’s a lot of things that they do in the night behind the scenes that citizens need to know about, and so we try to cover that.

Grassroot Institute is an organization that tries to advance and educate about individual liberty, economic freedom and accountable government. We often are a new voice in the state.

Fidell: You have sacred cows, Joe? We had a media conference at ThinkTech a couple of years ago. Ian Lind was there. He made some really touching remarks, incredible remarks about sacred cows and about [how] the media in Hawaii had a certain group of sacred cows that it never ever wanted to talk about.

Do you have sacred cows, Joe?

Kent: No. We are independently funded. We don’t get any money from the government or unions or anything like that. All bets are off, and we aim our target at everyone.

 [Laughter]

Fidell: Do you allow comments? Do you allow people to disagree with you?

Kent: Oh, absolutely. We love it, actually, when people read our email and respond to us. We get a lot of comments who are opposing our opinion, and we’ll publish those comments, actually, in our next newsletters.

We just appreciate the debate and discussion, and sometimes we don’t have all the answers and maybe you do.

Fidell: [laughs] We like having you on the show, “Hawaii Together,” on Mondays. It’s always great stuff, and it runs parallel to your newsletter and to our other content.

Let’s talk about TAT for a minute. Can you tell everybody what TAT is right now, what it does, what’s it intended to do, the amount of it and how it affects the state?

Kent: Absolutely. Hawaii has a transient accommodations tax that is levied at 10.25% on all transient accommodations. That’s basically tourism activity.

Now, the Council is wanting to increase that by 3% more. 

It’s a little wonky at the state Legislature last year. Lawmakers have for decades been salivating over the TAT money, because typically the TAT money is given to the counties; about $100 million gets spread out amongst the counties.

The lawmakers have wanted that money for years but haven’t found the opportunity to take it until this year, when we saw a big drop-off in the budget, that the budget fell off a cliff, and lawmakers said, “Oh, I know how to get the budget back. We’re going to take all of that TAT money for ourselves in the state budget, and you, counties, if you want to, you can increase it by 3% more.”

Now, all the counties are facing this question of whether or not to increase it more by 3%. Again, it’s at 10.25% right now, which is already the highest tourism tax in the nation, and they want to increase it 3% more on top of that.

Fidell: This doesn’t sound very good. It makes it sound like the counties will be/are in a crisis.

Kent: Yes, the counties have seen their budgets in question, as the pandemic has levied fiscal downfalls on the state and county budget, so everyone’s scrambling.

The counties are all gung ho to increase the tax. In fact, the tax has already been increased in Kauai and Maui counties, and it’s being enacted in November. It’ll kick in.

Fidell: We have this happening in Honolulu. You’ve been down there in front of the budget committee and the city government, expressing the views of Grassroot Institute. Would you say that the views you expressed for Grassroot Institute represent the views of a certain constituency? If so, what constituency is that?

Kent: We are funded and supported and followed by people across the political spectrum: Democrats, independents, Republicans, Libertarians, but all who believe in a more accountable government and lower taxation so that we can better afford the cost of living in Hawaii.

If you look at our newsletter, for example, we were talking about that. We send that out to thousands of people, about 20,000 right now and growing.

We’re even on TikTok, by the way. We have reached millions of people that way.

It’s really people just across the board who look at our stuff and say, “We really agree with you. We may not agree on everything, but we agree on most things.”

With this TAT tax, a lot of people are split on it. Some people think that we should have a TAT tax in order to pay for the environmental costs of tourism. Other people say that the tourism industry is struggling right now. That it’s fallen off a cliff, along with everything else, and it’s going to take some time to get our legs back, so now is the worst time to increase the tax.

For Grassroot Institute, we, from an individual rights perspective, say we oppose the tax just because it makes it more difficult for businesses, and it’s a burden on our economy.

Fidell: I want to examine that. Going back to what you said a minute ago, are you publicly supported by your readership, your TikTok or whatever it is?

Kent: [Laughs]

Fidell: Do they send you contributions? Are you supported by grants? I know you had a grant in the paper recently with Hawaii Community Foundation — quite substantial — and sponsors, mainland organizations.

Where does it come from, and what’s the total amount of money that comes in to permit you to do the research, to go out there to government to express and to write the newsletter?

Kent: Our organization is funded mostly, the vast majority, over 90%, by just small donations, individuals in Hawaii. We actually just ask people individually, “Will you support us?” We do a lot of work every single day to try to keep that going. We want their support to go towards bettering the state.

If you’d like to support us, you can visit us at grassrootinstitute.org, or just sign up for our newsletter and learn more.

Fidell: That’s a lot; you’re pretty big. I would say you’re probably bigger than ThinkTech in your ability to fundraise. That’s impressive.

Kent: Thank you. Yes, we work really hard at that.

Fidell: Let’s go back to the TAT. One thing you mentioned that you mentioned in your testimony and in the article that appeared … where was it? In Civil Beat, I think. There’s a really good summary of your position there, [which] is that increasing the TAT, whether it’s in Oahu or other islands, has an effect on the state economy.

I want to explore that with you. If I make a tax and I give money, essentially, I guess, really, it goes to the state government. That’s where this increase would have a reverse effect and allow the state government to do what it’s done and take the TAT. Then it would help the counties make up for what has been taken, right? Something like that.

Kent: Right.

Fidell: That means that the state government has already swept that money into the general fund. It means that the counties maybe get less, but they get something if they increase the TAT on their end.

Can you walk me through … I guess you have to talk about the governments first, but how it affects the governments and then how it affects the economy in general?

Kent: Absolutely. The state Legislature, again, was terrified in 2021 about the budget. In fact, they announced that they were going to actually, for the first time ever, make cuts, if you can believe it.

They were surprised to see a big bag of Christmas money coming down from the federal government, the ARPA funds — the recovery funds. It was billions and billions of dollars that got injected into the state economy. That papered over the problem to the point where, today, they’re flushed with cash.

They’re surprised by how much money they have, actually. The state Council on Revenues is saying they’re going to have way more money than they thought, than they had projected.

That begs the question about then, “Why did you take the TAT money?” Remember, they wanted to take that TAT money because it was an emergency. Now the emergency is over, but they still have the TAT money.

Fidell: They didn’t talk about reversing that and not taking it because they got money elsewhere from the federal government. That’s interesting.

Kent: That’s right, yes.

Fidell: That’s like taxes: They always increase, but they never decrease.

Kent: Exactly.

Also, if you look at the TAT itself, it started as a temporary 5% tax to fund the convention center. It was only going to last for a few years, and today, it’s morphed into a permanent 10.25% tax, on its way to 13.25%.

It goes back to that old saying, “There’s nothing as permanent as a temporary government law.” [Laughs]

Fidell: Or a temporary government tax. 

Kent: Tax. Right, exactly. 

Fidell: Now the government, that is, the state government, has more money in a general fund and queries whether it really needs to take this. If it takes this away from the counties and leaves the counties with less, really, what happens? I guess the state has more money.

[crosstalk]

Kent: Actually, what happened [is], they passed the law, it got vetoed by the governor, and then they overrode the veto.

Job done. They get the TAT; $100 million of TAT money will now go to the state, and that takes away money from the counties. Specifically, $45 million is now taken out of the Honolulu County funds, so they have a puka.

Fidell: The counties then, they need money. Although, in this state, the state performs a lot of functions that the counties perform in other states, I must say. But the counties, who are saddled with lots of obligations, have significantly less money. They’re really forced to raise the TAT because the state took away the TAT.

Kent: In a way, yes.

Fidell: Would you agree with me that all the counties are going to fall in line, they’re all going to do this?

Kent: They all will do this; although, I’m not sure they all need the money. There’s a lot of money that’s wasted.

The Grassroot Institute of Hawaii tries to catalog all the different ways that money could be better spent or more efficiently spent. I’m not in total agreement that they need more money, but it’s true:​​ They say they need more money and they do have a puka in what they want.

Fidell: How does that affect the counties? I guess I’m thinking of the neighbor island counties. How does it affect them? Because they have — we don’t realize it — a high degree of poverty. They’re below the curve, really, in that way. 

They have trouble with infrastructure, they have trouble with homelessness, in many ways, percentage-wise, more than Oahu. The question is, how does it affect them?

Kent: It’s true. A lot of the counties — actually, I think all the counties — lived without the TAT in 2020. [I] imagine 2020 was a scary year for budgeters and a scary year for the government, wondering if the money is going to come in.

The counties already lived for a year without that TAT money, and this means they would be living without that money again. I think they could survive.

I know it’s easy to think that, “Oh, this is a crisis and everything,” but actually, I think they could survive without the money.

To your point, the TAT is paid by tourists, for the most part, and the tourism does have an environmental impact on many of the counties. A lot of people are thinking that the money should be used for environmental purposes. Let’s use it to clean up the beaches and the parks, and to restore our oceans and everything.

Fidell: Right. You know what I mean? Right, because it goes into the general fund, whether it’d be the state or the county. From thence, it’s a long road from the general fund to identifiable environmental projects, and half the time, that money gets lost on the way, doesn’t it?

Kent: That’s right.

Also, there was an interesting idea that someone made: What if the TAT were given as a lump sum to taxpayers for the costs of the industry imposing the burdens on the islands?

This has been done in other places, with, for example, the oil industry in other states. Actually, I think in Alaska, [they] will give a lump sum to citizens, and the citizens get over $1,000 every year if the oil industry has windfalls. That’s an interesting idea, too.

Fidell: At the same time, the state is always complaining we don’t have enough money, and we don’t. You and I may not agree exactly on that, but the state is slowly but steadily going into backwater.

Just look at the roads. Look at the roads on all the counties. Why can’t we have first[-rate] county roads? Why can’t we have decent roads?

Kent: That’s right. There’s a lot of potholes, absolutely. Hawaii spends more on its roads per capita than any other state in the nation. We spend more on transportation bureaucracy than any other state.

Before throwing good money after bad, I always like to see what’s wrong. Could this be more efficient in the first place? After you exhaust that, then you should look at new sources of revenue.

Right now, they’re talking about increasing taxes — not to pay for environment, but to pay for the rail. That means tourists will be paying more for public infrastructure, which is disconnected.

The argument that’s being used is tourists will ride the rail. I’m not so sure about that. Even if the rail goes to Ala Moana, the tourists are trying to get to Waikiki, so I’m not sure how many tourists are going to be riding the rail.

Fidell: The other thing I want to mention, before we leave the subject, is the storms are coming: Climate change is coming. One of these days, Oahu, especially, is going to have a big storm. I wouldn’t wish it on us, but I think it’s a likelihood.

We’re going to have to, A, prepare for that, and, B, be resilient when it happens. I don’t say if and when; I say when it happens. That costs money, too.

I don’t think you’d find a lot of people out there in government or in the street that say, “Oh, yes, we’re fine. No problem. This will be fine. We’re not worried about that.” I worry about that.

I don’t know exactly what the solution is, but I know that it costs money to have a sustainable society, and a resilient infrastructure and so forth, which we don’t have. Giving it away or spending it on something that it was not intended for, like rail, just seems to me to be completely inappropriate.

We have very high priority things to do in state and county government. If we’re going to collect more taxes, we should put those taxes there. This is not a free-for-all to grab what’s out there, what’s available to the government. It always happens that way, doesn’t it?

Kent: There was a study done a few years ago by the Hawaii Executive Conference that looked at all the liabilities in the state. If you look at pension costs, the debt, the infrastructure, the deferred maintenance, the climate change, if you add up all of these liabilities and ask, “OK, what is the final price tag?” It was over $88 billion.

They calculated that in 2019. Now, those numbers have all gone way up because of inflation. Just look at rail itself: The cost has risen there $3 billion since.

Fidell: Oh, yes. It’s tripled since the beginning. It was $4.67 [billion] when they first started telling us what it would cost.

Kent: That’s right.

Fidell: I agree with you totally. We looked at that at a conference a few years ago. We talked to some of the budget guys, and they said it was $40 billion, $50 billion. Looks like it’s doubled already since then.

We have no way of raising that money, and yet, those are unfunded but clearly identifiable liabilities. We’re in a serious problem, not necessarily in the economy as it currently exists, but in the liabilities that we know we will incur, and our kids will have to pay in the years to come.

Kent: That’s right.

Fidell: This is pretty serious.

Kent: Yes. If you look at all the liabilities, they’re going up. What’s going on is they’re pushing it off into debt. They can’t tax enough to pay for it, so they’re incurring record amounts of new debt.

What that does is it pushes it onto our children. Also, it increases how much money, because there’s debt service on top of that, remember, and so that means more money is going to debt than is going to parks, roads, bridges and everything else.

Fidell: Wow. Can I say this? Grassroot, as a general matter, like the Tax Foundation of Hawaii, wants government to be responsible [and] doesn’t want government to impose taxes that are just there because they can, because they have the power, “OK, let’s do another tax,” kind of thing. Some agency wants it, [for] some purpose, some project they want; “OK, let’s make more taxes.”

I suspect that your vision of this, your view of it, is pretty similar to Tax Foundation. If it’s going to be a tax increase, we better know why, and it’d better be fully justifiable. Am I right to say that about you?

Kent: Yes, absolutely.

If you look at the past decade, taxes have raised every single year over the past decade. If you look at the budget, we’ve gotten more and more money. We have record amounts of revenue coming in every single year, yet there’s always the call for more taxes. I’ve never heard a politician say, “It’s enough already with the taxes.”

The only people that can say that are good-government groups, like us and the Tax Foundation, and groups, like you or your viewers, who agree with us. It really just takes the Fourth Estate of people who are willing to hold the government accountable.

Fidell: Let’s go back to a really important point that you touched on a minute ago, and that is the profound, possibly elusive, effect of an increase in the TAT on tourism itself.

Regardless of what projects those funds are being used for, regardless of the domino game at the budgetary level, what effect does it have to increase the tax that is imposed on tourists at a time when tourism is so fragile?

What I mean by that is, it’s fragile on both sides. It’s fragile on the side that we’re not sure that people are going to come back because of COVID. Some really want to come back, others are not so sure. Asia may be not so sure; Europe may be not so sure.

Then, on the other side, you have local people who, because of COVID, have gotten very sensitive to the issue about how many tourists we can afford to have as a cultural matter, as a society.

What effect does an increase in the TAT have on those two competing considerations?

Kent: We got a call from one of our viewers, one of our readers, who said she owns a small visitor accommodations on Kauai. Now that they’ve enacted the TAT, the contracts for all of the clients that she has that are coming into Hawaii, they don’t want to pay the new tax; they agreed to the old tax.

Now, this is going to be paid for by that person, the business owner. It’s going to be more than $1 million that she has to fork over right out of pocket, right at a time when she’s just starting to get her business back. A lot of small tourism businesses like that took out loads of debt to keep on going. It’s the only thing they know how to do, and now, they are on the hook for paying those taxes.

Not only that, residents, kamaʻāina, use hotels, too. When we go to the other islands, sometimes for a business trip or to see auntie and uncle, we will stay in visitor accommodations as well, and so we end up paying those taxes.

The Honolulu Council was actually sensitive to that. They said, “Could we put some kind of exemption, if you can show that you’re a kamaʻāina?”

Apparently, the answer is, “No,” from the lawyers.

Fidell: Not legally.

[Laughter]

Kent: That’s right.

Fidell: I wanted to ask you one other thing. We have this controversial contention — it’ll be with us for a long time — about short-term rentals/vacation rentals. I’m thinking of Kailua, but there are many other areas that have vacation rentals.

I’m not sure exactly whether they comply with the TAT tax law. I wonder if you have any thoughts or whether you had any conversation with the Council or the committee about how this affects those people who are earning a substantial amount of money, really, from vacation rentals?

Kent: My understanding is that Airbnb gives a bag of TAT money to the state, so they actually just levy it that way. Vacation rentals do pay the tax. Yes, this would fall on those people as well.

Fidell: The bottom line is what’s going to happen here in Oahu, which has probably the biggest part of the tourism industry and the biggest chunk of change on the TAT.

You went before the budget committee a couple of weeks ago, you testified, you wrote the piece for the Grassroot Institute newsletter, it appeared in Civil Beat. You had a certain amount of influence right there. Since then, the committee passed the bill out anyway.

Kent: That’s right. They passed it on the budget.

Fidell: Were you alone, or were there other people testifying the same way?

Kent: There were many other people. 

Most of the developers and labor unions, carpenters union — stuff like that — they all testified in favor of the bill.

A lot of the tourism interests testified against it. There are a lot of residents who are really focused on the rail issue of it.

If you’re going to pass the tax, it should not go towards rail, because, again, that’s just digging a deeper hole.

The comments were across the board, but rail was the main issue.

Fidell: Is there anything in the bill that differentiates or provides that it will go and not go to rail?

Kent: They have blank spaces in the bill. They say this blank space will go to the budget, this blank space will go to the environment, and this blank space will go to rail. They haven’t filled in any of the blanks yet. Maybe at the next one, they will.

Some of the Council members actually asked the HART, which is the rail administrators, “What should go in the blank space?” They refused to answer the question. I guess they want to keep it open.

I’m sure they want it as high as possible. Even if it’s as high as possible, even if they get all $48 million, it’s still going to take over a hundred years to recoup all of the money for the shortfall that we have.

It’s a $3.5 billion shortfall. It’s still going to take, excuse me, over 80 years to recoup all that money. If they get a fraction of it, it’ll take more than a hundred years. Even this won’t pay for the rail.

Fidell: Weren’t we told at the outset, Joe — I’m thinking back to my nostalgic memory … Weren’t we told at the outset that rail would be funded by the federal government, and funding would not be a problem? Certainly has turned out to be a huge problem, hasn’t it?

Kent: That’s right. They made a promise. In fact, they wrote the promise into law that said they will not use city funds to fund the rail. They’ll only use it from the feds and from the state, and so it’d be the state GET and the state TAT, and that they wouldn’t float city bonds to use it for the rail either.

Then, they broke that promise. This is now breaking that promise. They’re talking about using city TAT money to fund the rail. Also, the TAT money would go to fund bonds as well.

They’re breaking the promise on two counts.

Fidell: Tragic how many promises we have been forced to break on rail.

Kent: Sooner or later, they break so many promises, and the costs go up and up and up that you have to ask, do people still want this? Do the citizens of Honolulu, and the state, by the way, since they’re paying for some of this, do they want this?

If they put it up to a vote and said, “If you want the rail, we still have to tax you to pay for it,” I’m not sure how many would vote for that.

Fidell: I think that’s probably changing all the time. What I mean is, fewer people would vote for it all the time. It’s really an awful mess, and probably going to be an increasingly awful mess going forward.

Last question. Now this goes to the City Council because committee passed it out, passed the legislation, so to speak, even with the pukas on how the money will be distributed. It goes to the City Council.

What are your plans and prospects for dealing with it at the City Council? Can you, will you testify again? What will be the public pushback on this? Do you think, Joe, that the City Council will pass this here in Honolulu?

Kent: I think chances are very high that they will pass a 3% tax hike. Whether or not that goes to rail is still up in the air. It’s very likely the mayor is for it; most of the Council is for it.

One thing that hasn’t come out is the new cost estimate; that should come out on Nov. 17th. They are getting an independent cost estimate of the rail. The rail itself says it’s going to be $12.5 billion. If the cost estimate is way off the charts, then that might change the conversation. Barring that, I think it might sail through.

Fidell: Sail through is really a terrible thought. You never like to see legislation sail through, especially if there are people opposing it.

We’re done, really, but I’d like to ask you for your message to our viewership. What would you leave them with about the discussion of this topic?

Kent: When you’re in a hole, stop digging. We are definitely in a hole, and it’s time to stop digging.

The rail has reached Middle Street now. That begs the question: Do people still want to go through the most litigious state in the nation, where costs are easily probably going to rise?

We’re talking about $12.5 billion today, but it’s unknown how much the real cost is.

If you like what we’re saying or want to get more information from us, you can always sign up for our newsletter at grassrootinstitute.org.

Fidell: Joe Kent of grassrootinstitute.org. Thank you so much, Joe, for coming on ThinkTech.

Kent: Thanks so much.

Fidell: Aloha.

 

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