HB2778 HD1 poorly justifies need for piling on TVR fees

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Finance on Feb. 23, 2024.

Feb. 23, 2024, 11:30 a.m.
Hawaii State Capitol
Conference Room 308 and Videoconference

To: House Committee on Finance
      Rep. Kyle T. Yamashita, Chair
      Rep. Lisa Kitagawa, Vice Chair

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


Aloha Chair Yamashita, Vice-Chair Kitagawa and Committee Members,

The Grassroot Institute of Hawaii would like to offer its comments in opposition to HB2778 HD1, which would add a surcharge to the state transient accommodations tax for transient vacation rental units located outside of resort-zoned areas.

According to the bill, “transient vacation rental” means “short-term rental home,” “short-term vacation rental,” “transient vacation rental” or “transient vacation use,” as defined by county ordinance.

Also according to the bill, the surcharge is being proposed because “the Legislature finds that the operation of transient vacation rentals in areas that are not zoned as resort areas creates adverse impacts in the affected areas,” and that “additional funds are necessary to mitigate these adverse impacts.”

The bill presents no evidence to justify its allegation that TVRs cause “adverse impacts” in areas not zoned as resort areas.

It also fails to address how those adverse impacts would be mitigated. For example, would the state be in charge of spending this mitigation money, or would it be disbursed to the counties responsible for the maintenance, policing and infrastructure in those areas? The bill doesn’t say.

Nor does the bill provide any estimate as to how much those alleged adverse impacts might actually cost.

Nevertheless, it proposes that the surcharge on such rentals should be equal to the greater of $25 per day or  5% of the gross rental or gross rental proceeds derived from furnishing transient accommodations.

From one perspective, this bill seems like just another way to raise taxes while using a popular scapegoat — TVRs, short-term rentals, or whatever one might wish to call them — as the convenient justification.

However, whether the stated rationale for this surcharge is legitimate or not, this bill is also problematic for a very different reason, which is that it poses a threat to Hawaii’s broader economy.

For example, a 2020 study commissioned by the Hawaii Tourism Authority found that STRs added $6 billion to the state’s economy and sustained 46,000 jobs.[1]

The survey also found that “30% respondents reported that if there was not a home and vacation rental option during their recent stay in Hawaii, they would not have made the trip.”[2]

The idea that a tax such as the one proposed in this bill will fall more heavily — or even exclusively — on tourists can be attractive, but a large body of research demonstrates that increasing taxes on tourists can affect both the competitiveness of Hawaii’s tourism industry and the health of local businesses that depend upon tourist dollars.

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.[3] 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 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%.[4]

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.[5]

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,[6] 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.

Adding a surcharge to the state’s TAT as it applies to an unpopular segment of the transient accommodations sector might seem like a good idea superficially, but it would come with great risks to our economy as a whole.

For that reason, the Grassroot Institute recommends that this committee defer HB2778 SD1.

Thank you for the opportunity to testify.

Ted Kefalas

Director of Strategic Campaigns
Grassroot Institute of Hawaii

[1]Hawaii’s Home and Vacation Rental Market: Impact and Outlook,” prepared for the Hawaii Tourism Authority by JLL’s Hotels & Hospitality Group, April 20, 2020, p. 4.
[2] Ibid, p. 10.
[3] 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.
[4] 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.
[5] 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.
[6] 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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