House and Senate negotiators tentatively agreed to a plan to increase the state hotel room tax to 12 percent to raise an additional $1.3 billion for the Honolulu rail project, and also inject an extra $50 million a year into Hawaii’s public education system.

The agreement appears to resolve this year’s contentious rail tax debate, but Honolulu Mayor Kirk Caldwell said it will still leave the city nearly $1 billion short of the amount it needs to complete the rail project.

House Transportation Chairman Henry Aquino proposed Friday that lawmakers abandon a proposal to extend the half-percent excise tax surcharge that now provides most of the funding for the rail project, and instead increase the transient accommodations tax by 2.75 percent for 10 years starting January 2018.

The hotel room tax is currently 9.25 percent, and the House proposal would increase it to 12 percent for the next decade. House and Senate leaders hailed the decision as an innovative way to resolve the latest rail debate over funding, and to shift more of the financial burden of building the 20-mile rail line to visitors.

Caldwell said he’s grateful for the new proposal and will accept it, but it only “gets us two-thirds of the way there.”

The city administration and the City Council now need to crunch the numbers to see how best to cover the shortfall, including the big issue of whether it will require further property tax rate increases beyond what the administration is already planning.

Caldwell’s administration could leave that shortfall for future city leaders to make up, and “let some other mayor and Council members worry about that,” he said. “But under my tenure, I don’t want to see a burden being placed on people who are not yet born because I just want to get rail done no matter what the consequences are.”

The last-minute proposal to raise the hotel room tax for rail may also be legally questionable because it was never debated in a public hearing and did not comply with the lawmaking process that is set out in the state Constitution, according to state Sen. Donna Mercado Kim.

“The industry had no input, nobody had any input on this, so at this hour to come out with an increase in the (hotel room tax) that was never discussed, never went to a public hearing, to me, is not legal,” said Kim (D, Kalihi Valley-Moanalua-Halawa).

She said the bill will be vulnerable to a legal challenge if it passes because “the law says it has to have three readings, and it didn’t go through three readings.”

Senate President Ron Kouchi disagreed, saying the debate this year included “all the different iterations and broad-ranging discussion,” adding, “I’m confident the bill will be fine.”

Mufi Hannemann, president and CEO of the Hawaii Lodging & Tourism Association, said lawmakers need to be cautious about repeatedly asking for more from the visitor industry.

“I can appreciate how difficult that decision was, but at the same time we’re facing constant challenges to remaining in business and to be competitive,” Hannemann said. If state lawmakers go through with the hotel tax increase to 12 percent, Hannemann said he will press the city to abandon its plan to raise property taxes on hotels.

“This is going to force us to sort of reassess where we’re at,” he said. “It’s going to put us in an extremely difficult situation competitively. Some have even said that we’re going to be much more expensive to visit than New York.”

Hannemann, who was the driving force behind launching the rail project when he was Honolulu mayor, added, “I’m hoping also that if they’re going to take this money from the industry … that we have better accountability on how that money is being spent to build rail.”

Hannemann said when he was advancing the rail project as mayor, he never envisioned it being financed using the hotel room tax.

George Szigeti, president and CEO of the Hawaii Tourism Authority, said in a written statement that Hawaii needs to be careful not to price itself out of the global tourism marketplace.

“Our hotel partners will be impacted most by this TAT increase and that seems unfair to place such a burden on a single sector of our business community,” Szigeti said.

House Finance Chairwoman Sylvia Luke said: “We’ve been told time and time again that the tourists should pay for the rail, and that’s what the mayor has continued to say. That’s why today, we’re ensuring the elderly and working poor are not taxed anymore with this new proposal,” which instead would tap tourists.

The Honolulu rail project is funded mostly from the half-percent excise tax surcharge imposed on transactions on Oahu, which generates about $290 million a year and will remain in place through 2027. The new hotel tax proposal would provide about $130 million extra annually, for a total of about $420 million a year.

The Legislature extended the excise tax surcharge in 2015 at Caldwell’s request to cover cost overruns in the rail project, but the city disclosed last year that the project is again over budget. The estimated price tag for the partially built rail project has increased from $5.26 billion in late 2014 to nearly $10 billion today, including financing costs.

That forced Caldwell to return to the Legislature this year to seek another excise tax extension, but his request was poorly received. The Senate initially passed a bill that would have provided for no excise tax extension, while the House offered a draft measure that would have extended the surcharge for two years.

Caldwell said neither bill provided enough money to complete the rail project and warned the city might have to raise property taxes to bail out the project unless lawmakers provided more help.

The new draft bill that won preliminary approval from House and Senate negotiators Friday would divide up revenue from the extra hotel room tax collections, with most of the money going to rail and $50 million a year deposited into a “New Start Education Special Fund,” Aquino said. Lawmakers would determine the use of that money next session, he said.

The bill won praise from Corey Rosenlee, president of the Hawaii State Teachers Association. The teachers lobbied hard this year to put a proposed constitutional amendment on the ballot to use property taxes to provide more funding for education but were unable to get that proposal passed.

“We’re excited. Anytime we can get more money for education, it’s a good thing, and this bill in combination over 10 years will bring in $500 million for education,” Rosenlee said of the new proposal. “I know there’s many ways that we could use that money to help kids.”

Aquino said the state will bank the money for the time being, and lawmakers will decide next year exactly how those funds will be used to assist the public school system.

Currently the city receives about $41 million a year from the hotel room tax, and the new bill would reduce the city’s share of that tax by $13 million a year and apply that money to the rail project as well, said Senate Ways and Means Committee Chairwoman Jill Tokuda.

Aquino also said the proposed bill “would prohibit the City and County of Honolulu from overextending itself fiscally by using public funds to reconstruct or redevelop the Neal S. Blaisdell Center, which is expected to cost nearly $500 million.”

Senate Bill 1183 now goes to the full House and Senate for further consideration. For it to pass, lawmakers would need to approve it before the scheduled adjournment week.

Senate Majority Leader J. Kalani English called the bill a “grand compromise” that was developed Thursday night.

English said a group of senators met in Kouchi’s office before the new proposal was made public to discuss the measure, and said it likely has the votes to pass in the Senate. House Majority Leader Scott Saiki said the House Democrats have not yet been briefed on the proposal, so it is not certain they will support it.

If the House and Senate do approve the bill, it will be sent to Gov. David Ige, who will have the option of signing it into law, vetoing it, or allowing it to become law without his signature.