March 25, 2026, 9:40 a.m.
Hawaii State Capitol
Conference Room 415 and Videoconference
To: Senate Committee on Commerce and Consumer Protection
Sen. Jarrett Keohokalole, Chair
Sen. Carol Fukunaga, Vice Chair
Senate Committee on Economic Development and Tourism
Sen. Lynn DeCoite, Chair
Sen. Glenn Wakai, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: TESTIMONY OPPOSING HB2575 HD1 — RELATING TO TAXATION
Aloha Chairs, Vice Chairs and other Committee Members,
The Grassroot Institute of Hawaii opposes HB2575 HD1, which would apply the retail general excise tax rate to the purchase of rental cars.
This legislation would increase costs for both residents and tourists, stunting business growth across the state.
Right now, companies that purchase vehicles to be used as rental cars in Hawaii pay the state’s 0.5% wholesale general excise tax rate. This is the same rate that applies to any other business that owns equipment it leases out to customers, such as construction or agricultural equipment rentals. Thus, it is unfair to single out the owners of rental cars for a tax hike when their business model is identical to that of many other businesses.
Not only is it unfair, it would increase costs for anyone who rents a car — construction workers traveling interisland for work and tourists visiting the state for a week would both be affected. These higher costs could have real impacts on the people who now have a little less money of their own to spend.
For context, increasing the tax rate on rental car purchases from the 0.5% wholesale rate to the 4.5% retail rate would represent a $2,000 tax increase on a $50,000 car. If the rental car is used in Hawaii for 12 months, that amounts to nearly $5.50 a day in extra charges that would likely get passed on to the customers renting the car. And that $5.50 charge would represent a roughly 10% price increase on a car rented at $50 per day.
This increase would exacerbate the fact that Hawaii already has some of the world’s highest tourism taxes[1] and would come on the heels of the state raising its transient accommodations tax last year from 10.25% to 11%.
To put it plainly, increasing tourism taxes will decrease 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 UK tourists. The study found that tourists compensated for the higher taxes by decreasing destination expenditures on items like accommodations and food.[2] Thus, increasing tourism taxes will ultimately hurt Hawaii’s restaurants, stores, and hotels, as tourists decrease their expenditures to compensate for the state’s high taxes.
Higher taxes on tourists could also hurt Hawaii’s competitiveness as a vacation destination.
A 2017 EU study on the impact of taxation on European tourism found that high tourism taxes, passed on to tourists through higher prices, affected the competitiveness of a particular destination.[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. The report recommended that countries heavily dependent on tourism 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]
Thank you for the opportunity to testify.
Ted Kefalas, Director of Strategic Campaigns
Grassroot Institute of Hawaii
1050 Bishop St. #508 | Honolulu, HI 96813 | 808-864-1776 | info@grassrootinstitute.org
[1] 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.
[2] Haiyan Song, et. al, “The effect of tourism taxation on tourists’ budget allocation,” Journal of Destination Marketing and Management, March 2019, pp 32-39.
[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, et. al, “The Effect of Tourism Taxation on International Arrivals to a Small, Tourism-Dependent Economy,” Journal of Travel Research, 62(1), 135-153.
