Rethinking HTA’s “Regenerative Tourism Fee”

Robert Ebel, James Mak, Blogs, Economics of Taxation, Economy, Tourism


By James Mak and Robert D. Ebel

Hawaii Tourism Authority’s (HTA) Oahu Destination Management Action Plan (DMAP) proposes to “Establish a ‘Regenerative Tourism Fee’ (RTF) that directly supports programs to regenerate Hawaii’s resources, protect natural resources, and address unfunded conservation liabilities.”  The proposed RTF is more commonly referred to as a “visitor green fee.”  The fee would be imposed on tourists and not on local residents. None of the other islands’ action plans have proposed such a fee, so the RTF would only apply to visitors to Oahu.  HTA still has to decide what kind of fee it woud be and to “Identify how to legally collect this fee (State gives the County the authority to establish such a fee), distribute this type of fee, and develop accountability measures.”

Since the fee is envisioned as a county fee rather than a state fee, HTA must ask the State to grant authority to the City and County of Honolulu to levy such a fee. Local governments in the U.S. are created by the states and states have power over them.  More so than in most other states, Hawaii’s state government guards its taxing/revenue raising powers jealously. Earlier, the County had to seek approval from the State to levy a general excise tax surcharge to fund Oahu’s rail project.  Below, we offer a few ideas for HTA to consider in its quest for a green fee for Oahu.

What Kind of Fee and How to Legally Collect It

First, it is assumed that HTA is looking to add a new fee/tax and not to reallocate existing revenues.  Hence, we don’t address the important question of whether a new fee or tax is even necessary. Second, we agree that the main reason that we tax is to raise revenue to pay for government services we desire.  HTA has not determined how much revenue is needed to protect natural resources and address unfunded conservation liabilities.

To begin, while it may be politically popular, we advise against a “fee” that targets only tourists.  Protecting Oahu’s (and the state’s) natural resources benefits both residents and tourists, so both should pay. A visitors-only fee may also be illegal.  Lt. Gov. Josh Green’s proposal to levy a $50 visitor fee (i.e. a head tax) on visitors to Hawaii to raise revenue to support natural resource management and conservation may run afoul of the U.S. Constitution and federal laws.  In the unlikely event that a carefully designed head tax passes the legal test, the County fee on tourists only would be a nightmare to administer.  (In Alaska, head taxes are levied on cruise ship passengers but use of revenues generated is severely restricted—expenditures must be tied to the marine operations of the ships—to comply with legal constraints.)  We offer three options for HTA to consider (below); none of them target visitors only.

In 2021, the State granted the counties the power to levy their own transient accommodation tax (TAT) capped at 3%; in exchange, the counties will no longer get a share of the State’s TAT (currently at 10.25%).  In the past, Honolulu received $45 million per year from the State’s TAT.  State tax officials estimate that the Honolulu County TAT will generate nearly $86 million in the first year rising to more than $99 million in the fiscal year that begins July 1, 2027.  Honolulu County’s ordinance allocates 8.3% of its own TAT revenues to “natural resources,” including parks and beaches. (Most of the money will go to the rail project and the general fund.) If that’s not enough, the County can ask the Legislature to authorize it to add a per diem tax of x dollars per night (on top of the 3% County TAT), dedicated to natural resource initiatives. Effective tax rates on transient accommodations will go up in Honolulu County (relative to those in the other counties), but it is not illegal since both residents and tourists have to pay, although tourists will surely bear the lion’s share– more than 90%–of the per diem tax.

An alternative is to seek approval from state lawmakers to allow Honolulu County to add a surcharge on general excise tax (GET) collections in the county, with revenues dedicated to natural resource management and conservation.  The County already is collecting a GET surcharge of .5% effective January 1, 2007 to December 31, 2030 to fund the rail project (only Maui County does not have a GET surcharge).  If tax exporting is important to lawmakers, most of the GET surcharge will be borne by residents and not tourists. The State Department of Taxation estimates that about 72% of the county surcharge is borne by local residents. The main complaint against the GET is that it is a regressive tax.

A third option is to raise the real property tax rate.  A study by the Lincoln Institute of Land Policy finds that Honolulu property tax rates and bills are low compared to those in other major cities in the U.S. The property tax is probably underutilized in Hawaii.

Washington State provides an interesting example of how raising the property tax rate can fund natural resource protection and conservation.  In 1971, the State of Washington enacted the Conservation Futures Tax levy (CFT) that allows counties to collect a small levy from property owners to protect open spaces.  Since 1982, King County (which includes Seattle) has imposed a conservation futures tax to fund the protection of forests, shorelines, farms, greenways, and trails for future generations. Currently, the CFT adds about $22 per year to the tax bill of an owner of a median priced house in King County (assessed at $820,000).

For Honolulu County, there are several advantages of tapping into the property tax.  For the present purpose, the most important advantage is that the property tax in Hawaii is fully under the control of the counties. Each county has its own property tax system.  The property tax is also exportable to nonresidents.  The State tax department estimates that around 40% of the property tax (on residential and non-residential properties combined) is borne by nonresidents. (The percentage borne by residents is much higher on residential properties.)  HTA should take a closer look at Washington State’s conservation futures tax levy to ascertain if some version of it can be usefully imported to Hawaii.

Concluding Observations

We wonder why Honolulu County, and not the State, is being asked to take the lead to levy a new fee/tax to support natural resource protection. Perhaps it reflects a limited objective to raise a  modest amount of revenue to provide support for Honolulu County government’s natural resource programs only.  There is nothing wrong with that, except the intent should be made explicit.  (The language of the action that proposed the RTF suggests loftier goals—i.e. to “regenerate Hawaii’s resources…”).  We suspect that it is because the DMAPs are island-specific action plans. Rather than crafting a one-size-fits-all action plan for the state, each island/county has its own plan.  Decentralization allows the residents of each island/county to express and realize their (different) preferences for government services and the revenue system that’s adequate to fund them.

Some government functions are performed better by the State rather than a county since the state is said to have a “high altitude big picture” perspective of an issue.  This is especially true when it comes to a well-managed system of natural resources (forests, wetlands, beaches, coastal waters) that benefits all of Hawaii’s residents and its tourist visitors. This principle is explicitly stated in the State Department of Land and Natural Resources’ (DLNR) mission statement: to “Enhance, protect, conserve and manage Hawaii’s unique and limited natural, cultural and historic resources held in public trust for current and future generations of the people of Hawaii nei, and its visitors, in partnership with others from the public and private sectors.”  (DLNR manages nearly 1.3 million acres of State lands, beaches, and coastal waters as well as 750 miles of coastline.)

But that there is a dominant state role does not preclude the counties from fulfilling their own  care-taker responsibilities.  Eighty-three percent of the respondents in the 2021 National Community Survey (NCS) of Honolulu residents on the “livability of Honolulu” said that it was essential or very important for the county government to focus on the natural environment in the next few years.

There are some who argue that resource management and conservation programs in the state are woefully underfunded. A 2019 study by Conservation International (CI) estimates Hawaii’s underinvestment in the state’s “green infrastructure” at $360 million annually. Assuming that it’s true, the next question is how to raise the additional money required, whether it be through reallocation of existing revenue sources or by enacting new taxes, or some combination of both.

HTA is not the only advocate of a new visitor green fee/tax; other advocates include Conservation International, the 2020-2022 Tax Review Commission, and Lt. Gov. Josh Green (and his proposed $50 head tax).  The proposed fees are state-wide fees, and contrary to our advice, they are meant to be imposed on tourists only.  Hopefully, our essay will help to move the discussion on funding natural resource protection and conservation further along.

Photo by Juo Leung.

Acknowledgements:  Mahalo to Carl Bonham and Paul Brewbaker for helpful comments on earlier versions of this essay.  They are not responsible for any errors that may remain.  The views expressed in this essay are ours.

James Mak is an Emeritus Professor of Economics at UH-Manoa and Research Fellow at UHERO.

Robert D. Ebel is a former member of the University of Hawai‘i Department of Economics and, subsequently, Lead Economist for the World Bank Institute Program on Intergovernmental Relations and Local Public Financial Management.