The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Judiciary & Hawaiian Affairs on Feb. 12, 2025.
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Feb. 12, 2025, 2 p.m.
Hawaii State Capitol
Conference Room 325 and Videoconference
To: House Committee on Judiciary & Hawaiian Affairs
Rep. David A. Tarnas, Chair
Rep. Mahina Poepoe, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: TESTIMONY IN OPPOSITION TO HB604 HD1 — RELATING TO TAX REVENUES
Aloha Chair Tarnas, Vice-Chair Poepoe and other members of the Committee,
The Grassroot Institute of Hawaii would like to offer its comments in opposition to HB604 HD1, which would increase the current state transient accommodations tax rate by 1 percentage point, from 10.25% to 11.25%, or by 9.75%, with the revenues from the tax increase to be deposited into the Hawaiian Home General Loan Fund.
The goal of increasing the amount of money available to the Hawaiian Home General Loan Fund is laudable and worth discussing in the context of state budgeting. However, in the context of a significant tax hike, a laudable purpose does not negate the damage that this tax increase could inflict on Hawaii businesses and the state’s economy as a whole.
Support for the TAT is often based on the notion that the tax falls most heavily — or even exclusively — on tourists. However, it 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 as 70% of its revenue from tourism taxes, found that a 10% increase in tourism taxes — approximately the same increase contemplated in this bill — 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 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 I mentioned earlier, 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, or 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 temporarily practicing in Hawaii.
In other words, a TAT increase 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 must already make ends meet while living in the state with the highest cost of living. This is not the time to make Hawaii a more expensive place to live and do business.
As a final thought, please remember that Hawaii’s TAT started out in 1986 as a temporary tax at 5% to help fund the Hawaii Convention Center.[5] Its original purpose has long disappeared, but we still have the tax, and it has only continued to increase through the years. And now we are talking about maybe increasing it again.
It is this kind of tax policymaking that breeds cynicism among Hawaii voters regarding the notion that there is really such a thing as a temporary tax — as you have heard in your discussions concerning other taxes, such as the general excise tax surcharge. Increasing the rate for this formerly so-called temporary tax will only exacerbate that cynicism.
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.
[5] Tom Yamachika, “Erasing An Error of the Past in the Transient Accommodations Tax,” Tax Foundation of Hawaii, Oct. 26, 1997.
