The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Senate Committee on Ways and Means on Feb. 27, 2025.
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Feb. 27, 2025, 10:30 a.m.
Hawaii State Capitol
Conference Room 211 and Videoconference
To: Senate Committee on Ways and Means
Sen. Donovan M. Dela Cruz, Chair
Sen. Sharon Y. Moriwaki, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: TESTIMONY IN OPPOSITION TO SB1396 SD1 — RELATING TO ECONOMIC DEVELOPMENT
Aloha Chair Dela Cruz, Vice-Chair Moriwaki and other members of the Committee,
The Grassroot Institute of Hawaii would like to offer its comments in opposition to SB1396 SD1, which would increase the current state transient accommodations tax rate by approximately 17%, from 10.25% to 12%, with the revenues from the tax increase to be directed to special funds intended to focus on climate, resiliency and economic revitalization projects.
Support for a TAT increase is often based on the faulty notion that the effect of the tax hike will fall 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 many cases indirectly.
For example, 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 similar to 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 — an amount significantly lower than the increase contemplated in this bill — reduces demand by 5.4%.[2]
To put it plainly, increasing tourism taxes decreases the number of visitors.
In addition, 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.
The worthiness of the purpose of this proposed tax increase would not negate the effect of that increase. If anything, it should prompt more careful analysis of the programs that would benefit from the tax revenues. Initiatives that use taxpayer money to support programs to help the environment or promote revitalization should be open to the scrutiny and accountability that accompany direct allocation from the general fund.
Finally, there is a certain irony in funding government programs aimed at “economic revitalization” via a tax that will burden Hawaii businesses and residents. The last thing Hawaii’s economy needs is more taxes, regulation or special funds.
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.
