Governor proposes increase in hotel room tax

Gov. Neil Abercrombie has said he does not need tax increases to balance his two-year budget draft, but the governor has proposed a significant boost in the hotel room tax to start a conversation about the state’s long-term revenue needs.

The governor’s bill would increase the hotel room tax to 11.25 percent in July, up from 9.25 percent, a potential tax hike that caught some in the tourism industry — and a few of his own allies — by surprise.

State lawmakers gradually raised the hotel-room tax to 9.25 percent from 7.25 percent starting in 2009 to help close budget deficits caused by the recession. The higher tax rate was meant to be temporary, however, and is scheduled to expire by July 2015.

Kalbert Young, state budget director, said the administration would like to keep the 9.25 percent rate in place beyond July 2015 along with caps on the amount of revenue distributed to counties and the tourism special fund. He said the hotel room tax hike suggested by the governor is more of a long-term discussion about how much money is necessary to maintain the state’s tourism infrastructure and marketing brand.

Such a tax increase, Young said, could also be part of the debate over how the state will address multibillion-dollar unfunded liabilities in the public worker health care and retirement funds, as well as the costs of new contracts for public-sector labor unions.

"But it’s not critical in terms of revenue for the next biennium or for the governor’s budget proposal," Young said.

Abercrombie, appearing before state senators Wednesday to discuss early childhood education, said his administration would be presenting "possibilities beyond this next two years in terms of the revenue picture for the long run."

Tourism’s stellar rebound has led the state out of recession. A record number of visitors — nearly 8 million — came to the islands in 2012 and spent a record $14.3 billion.

The transient accommodations tax — popularly known as the hotel room tax — generated $323.9 million last fiscal year, according to the state Department of Taxation.

Many in the tourism industry had fought the increase in the hotel room tax during the recession, just as they had opposed previous increases, yet the market was able to absorb the higher rate.

But tourism industry leaders warn that another increase would be too much of a burden. Destinations with high hotel room taxes, such as New York, attract many business travelers who expense their hotel bills, they say, adding that Hawaii is primarily a leisure destination, so visitors feel the tax in their pocketbooks for what is already an expensive vacation.

"We’re going to get to the point of what I like to think of as diminishing returns, where you get to that price point, and that visitor on the mainland or anywhere else is going to look at Hawaii and say, ‘Here’s my threshold,’" said George Szigeti, president and chief executive officer of the Hawaii Lodging & Tourism Association. "It’s something we need to be very, very careful of. And we’re getting to that point and I just think you can’t recklessly and all of sudden, because things are good right now, tack on additional taxes on the visitor."

Keith Vieira, senior vice president and director of operations for Hawaii and French Polynesia at Starwood Hotels and Resorts, said that, ideally, the 9.25 percent hotel room tax rate would expire as scheduled in 2015. But he said he understands the financial pressures facing the state and could support keeping the rate in place, especially if a greater share of the revenue was given to the Hawaii Tourism Authority for tourism promotion.

But Vieira, like Szigeti and others in the industry, opposes another tax increase.

"It may not be that concerning today, but in a year or two, when cycles shift and change, you don’t want to be in that situation," he said.

Rep. Tom Brower (D, Waikiki-Ala Moana-Kakaako) chairman of the House Tourism Committee, called Abercrombie’s hotel-room tax increase — House Bill 971/Senate Bill 1202 — a "tough call."

"But legislators should give it a reasonable hearing and weigh the options, because everything needs to be on the table," he said.

Senate Majority Leader Brickwood Galuteria (D, Kakaako-McCully-Waikiki), chairman of the Senate Tourism and Hawaiian Affairs Committee, predicted the tourism industry will have a strong reaction if it appears a tax hike is a possibility.

"They are going to come out screaming," he said.