Special fund proposal another reason to reject HB2406 HD1’s TAT increase

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 HB2406 HD1, which would impose a $25 tax on transient accommodations, to be deposited to a special fund with a broad scope of purposes related to climate and the environment.

This $25 tax would be levied in addition to all other state and county transient accommodations taxes.

There are multiple areas of concern in this bill, starting with the creation of yet another special fund that might fail to meet the legal requirements for such a fund.

In the most recent analysis from the State Auditor, not a single one of the 84 special or revolving funds proposed during the 2023 legislative session met the criteria for special funds set forth in HRS Section 23-11.[1]

In HB2406 HD1, as in the other bills analyzed by the auditor, there appears to be no clear nexus between the imposition of an additional transient accommodations tax and the wide range of climate and environmental goals listed in the bill.

Rather, the goal of this special fund appears to be the creation of a special source of funding outside of the normal budget and appropriation process. This is a clear violation of the Legislature’s efforts to clean up special funds and reduce their negative impact on state budgeting and finances.

This is not a criticism of the special fund’s goals. Yet, that goal, no matter how laudable, must be balanced against the damage that this tax increase would cause to Hawaii businesses and the state’s economy as a whole.

The theory behind this additional transient accommodations tax is that it 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.[2] 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%.[3]

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.[4]

Thus, increasing tourism taxes would 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,[5] 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 it is not only tourists who pay taxes on transient accommodations. For example, neighbor island residents who stay on Oahu for medical care, or families in need of a temporary dwelling after a natural disaster, must book either a hotel or a short-term rental. Likewise, visiting medical professionals must stay somewhere while practicing in Hawaii.

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

[1] “Report No. 23-05: ​​Analyses of Proposed Special and Revolving Funds 2023,” Office of the Auditor, State of Hawaii, March 2023.
[2] 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.
[3] 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.
[4] 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.
[5] 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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