Trouble for tourism

LIHUE — There are people who wait most of their lives to visit Hawaii, so Modesto, California, resident Bobi McCalley said she feels fortunate to have visited Maui, Oahu and Kauai with her family.

But doing so, she admits, comes at a steep price.

“I think, for most people from the Mainland, it’s more of a once in a lifetime opportunity to come to Hawaii — very few people can afford to come on a regular basis,” said McCalley, who is visiting the island for the first time.

Visitor industry officials on Kauai say they are worried that recent property tax rate hikes approved by the Kauai County Council will deal a blow to one of the island’s main economic drivers: tourism.

And what that could mean, they say, are higher room rates and fewer visitors over time as some opt for cheaper vacation spots.

“Increase in real property taxes has a direct effect on our visitor industry,” Denise Wardlow, board president of the Hawaii Lodging and Tourism Authority chapter on Kauai, wrote in an email. “For the most part, hotels, resorts and vacation rentals will work this additional expense into their pricing to offset the expense.”

During this past budget session, the Kauai County Council approved a wide range of tax rate hikes for most island properties, except for owner-occupied homes with existing homestead exemptions.

Hotels and resorts experienced the highest jump in real property tax rates, increasing to $10.85 from $9 per $1,000 net assessed value.

Real property tax rates for vacation rental properties, meanwhile, increased from $8 to $8.85 per $1,000 net assessed value.

“The dollar amount may look small when you are talking about $9 or $10, but when you calculate against the value of the hotel or resort, you are looking at increasing the cost of doing business by hundreds of thousands of dollars for each hotel and resort, and in many cases, is well over a half a million dollars increase over the two-year period,” Wardlow said.

When Mayor Bernard Carvalho Jr. released his initial budget proposal for the 2014-2015 fiscal year in March, he asked the County Council to raise the real property tax rate for hotels and resorts from $9 to $11 per $1,000 in assessed valuation.

Doing so, he said at the time, would have generated about $4.3 million in additional revenue and brought the County of Kauai’s tax rate for hotels and resorts up to par with other counties in the state.

By comparison, statewide hotel and resort tax rates for the 2013-2014 fiscal year were: $12.40 for the City and County of Honolulu; $10.85 for Hawaii County; and $9.40 or $10.43 for Maui County with a timeshare weighted average.

County Finance Director Steve Hunt said the County Council’s decision to raise the tax rate on hotels and resorts from $9 to $10.85 is expected to generate about $4 million in additional revenue.

“The County of Kauai has very limited powers of taxation,” Hunt wrote in an email. “Real property taxes is one of the few general fund revenue sources where the county actually can control the outcome.”

But hotel and resort officials say the increases may eventually come at a higher price for both residents and tourists.

Vacationing on Kauai, Wardlow said, is already an expensive option for visitors, who must fly to the island and then pay a total of 13.41 percent in state taxes — 9.25 percent in transient accommodations taxes and 4.16 percent in general excise taxes — on top of their room rates.

“At some point, we will get too expensive for visitors,” Wardlow wrote in an email. “Those who come every year may change their pattern to come every other year or every three years. Groups will choose other destinations where they can stretch their dollars further. There will be a trickle-down effect as our visitors frequent our local restaurants, activities, local retail stores, farmers markets, gas stations, etc. As with many businesses needing to look at contingency plans to reduce expenses, there may be effects on employment by hotel/resorts and the many other businesses that the visitors impact directly or indirectly.”

Although hotels, resorts and timeshares were given larger share of the tax rate increases this fiscal year, County Councilman Tim Bynum said the seven-member board did their best to ensure that the costs weren’t too burdensome. Bynum said one of his main concerns during this year’s budget session, as well as others in the past, was to provide fair and equitable tax relief for island residents.

“Yes, we’re increasing this for hotels, and I have those concerns, but they have a way to deal with this — most folks (residents) don’t have somebody to pass this onto,” Bynum said.

Still, McCalley said the high costs of visiting Hawaii alone wouldn’t stop her family from returning.

“They (hotels) are already so expensive,” McCalley said. “You just muscle it into the price.”

Another major contributor to “having to make tough decisions on tax rates,” Hunt said, is the county’s unsuccessful attempt, during the last legislative session, to lift a cap placed on the amount of transient accommodations taxes allocated to the state’s four counties.

In all, the state collected about $368.5 million in transient accommodations taxes, commonly known as the TAT, during the 2013 fiscal year.

That number, according to the Hawaii Tourism Authority documents, is expected to balloon this year to $403 million. The cap on those taxes, which are imposed on the gross rental income collected by visitor accommodation providers, were increased during the last legislative session from $93 million to $103 million for the next two years.

The County of Kauai’s proportional share of those revenues, in turn, increased from $13.5 million to $14.9 million.

That increase, however, still fell short of the nearly $24 million in additional revenues that county officials had hoped for.

“Given our current level of obligations, including funding collective bargaining agreements, paying into the underfunded retirement and health benefit system, and keeping up with general inflation, it would be inaccurate to say that merely getting the additional TAT revenue would have resulted in no tax rate changes,” Hunt said. “However, these much needed rate reforms could have been phased-in rather than having such large year-over-year jumps for 2015 fiscal year.”

Though lifting the tax cap will not solve the county’s financial woes, Wardlow said, it may help to allay the need for future fee and tax increases.

“We need all businesses, not just the hotel and lodging industry, to engage in lobbying the state to fairly distribute the TAT taxes to the counties and oppose the continued tax increases,” Wardlow said. “If we are successful at getting the counties their fair share of the TAT, there may be less of a need for the counties to raise real property taxes.”

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