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HB2081’s proposed TAT hike would hurt local economy

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committees on Tourism and Water and Land on Feb. 8, 2024.
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Feb. 8, 2024, 11:15 a.m.
Hawaii State Capitol
Conference Room 430 and Videoconference

To: House Committee on Tourism
      Rep. Sean Quinlan, Chair
      Rep. Natalia Hussey-Burdick, Vice Chair

      House Committee on Water & Land
      Rep. Linda Ichiyama, Chair
      Rep. Mahina Poepoe, Vice Chair

From: Grassroot Institute of Hawaii
           Ted Kefalas, Director of Strategic Campaigns

RE: TESTIMONY IN OPPOSITION TO HB2081 — RELATING TO TAXATION

Aloha Chairs Quinlan and Ichiyama, Vice-Chairs Hussey-Burdick and Poepoe and Committee Members,

The Grassroot Institute of Hawaii would like to offer its comments in opposition to HB2081, which would increase the current state transient accommodations tax rate to 11.25%, including a $50 minimum TAT per transient accommodation if the application of the TAT rate turns out to be less than $50.

No portion of that $50 minimum TAT tax would be considered “excess revenue” under section 237D-2(e), and it would therefore be deposited to the general fund.

This proposed tax increase is intended to be used for the protection of the state’s natural resources. That is a laudable goal, but that must be balanced against the damage that this tax increase would cause to Hawaii businesses and the state’s economy as a whole.

Support for a TAT increase is often based on the notion that the tax hike will fall more heavily — or even exclusively — on tourists. However, the TAT also directly affects Hawaii residents who need to stay in local transient accommodations when traveling interisland or simply seeking to enjoy a “staycation.”

Beyond that, a large body of research demonstrates that increasing taxes on tourists can also affect both the competitiveness of Hawaii’s tourism industry and the health of local businesses that depend upon tourism dollars — which means the tax affects most, if not all, Hawaii residents, albeit in some cases indirectly.

A 2017 European Union study on the impact of taxation on tourism in Europe found that high tourism taxes, passed on to tourists through higher prices, affected the competitiveness of particular destinations.[1] Coastal and leisure destinations in particular were most adversely affected by increases in tourism taxes, especially compared to locations that were more focused on business travelers.

In addition, occupancy taxes such as Hawaii’s TAT were singled out as inequitable and especially frustrating to tourists. The EU study recommended that countries that depend heavily on tourism should reduce their tourism taxes in order to increase competitiveness.

Even unique destinations are not immune from the effect of taxation on international arrivals. A study of the Maldives, a country that earns as much of 70% of its revenue from tourism taxes, found that a 10% increase in tourism taxes reduces demand by 5.4%.[2]

To put it plainly, increasing tourism taxes decreases the number of visitors. Moreover, policymakers cannot assume that tourism taxes will not have an additional effect on visitor spending. It is only common sense to assume that tourists will compensate for higher tourism taxes by adjusting their budgets and spending less on dining, activities or shopping.

This is borne out by a study of the effect of an air passenger duty on the budget allocations of United Kingdom tourists. The study found that tourists compensated for the higher taxes by decreasing destination expenditures on items such as accommodations and food.[3]

Thus, increasing tourism taxes will ultimately hurt Hawaii’s restaurants, stores and hotels, as tourists decrease their expenditures to compensate for the state’s higher taxes.

This is on top of the fact that Hawaii already has some of the world’s highest tourism taxes,[4] making any additional hike a threat to the continued health of the industry and the businesses that depend on it.

Tourism is such a critical part of the state’s economy that even industries that are not directly linked to tourism are linked to businesses that are.

In addition, as mentioned above, we should not ignore the fact that tourists are not the only ones who pay the TAT. For example, neighbor island residents who stay on Oahu for medical care and families in need of a temporary dwelling after a natural disaster must book either a hotel or a short-term rental. Likewise, medical professionals must stay somewhere while practicing in Hawaii.

In other words, a TAT increase and minimum charge will have a negative effect on the health of the state’s tourism industry, its economy, and the cost of living in general.

Hawaii residents have suffered enough from endless tax hikes and fees. This is not the time to make Hawaii a more expensive place to live and do business.

Thank you for the opportunity to testify.

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] PricewaterhouseCoopers LLP, “The Impact of Taxes on the Competitiveness of European Tourism,” European Commission, Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, October 2017.
[2] Festus Fatai Adedoyin, Neelu Seetaram and George Filis, “The Effect of Tourism Taxation on International Arrivals to a Small, Tourism-Dependent Economy,” Journal of Travel Research, Vol. 62, Iss. 1, pp. 135-153.
[3] Haiyan Song, Neelu Seetaraum and Sunh Ye, “The effect of tourism taxation on tourists’ budget allocation,” Journal of Destination Marketing and Management, March 2019, pp. 32-39.
[4] Alison Fox, “These Cities — Including 3 in the U.S. — Have the Most Expensive Tourist Taxes in the World, Study Shows,” Travel + Leisure, Aug. 12, 2022.

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