BLOG POSTS ARE PRELIMINARY MATERIALS CIRCULATED TO STIMULATE DISCUSSION AND CRITICAL COMMENT. THE VIEWS EXPRESSED ARE THOSE OF THE INDIVIDUAL AUTHORS. WHILE BLOG POSTS BENEFIT FROM ACTIVE UHERO DISCUSSION, THEY HAVE NOT UNDERGONE FORMAL ACADEMIC PEER REVIEW.
By James Mak
Since the visitor to the Islands unquestionably
William Baumol
contributes significantly to the State’s
environmental problems, he will no doubt
have to bear a substantial portion of the outlays needed for their solution.
1970
Introduction
More than 50 years ago in 1970 when Hawaii hosted a relatively paltry 1.7 million visitors, Princeton University economist, William Baumol, authored a report, The Visitor Industry and Hawaii’s Economy: A Cost-Benefit Analysis, in which he advised Hawaii to implement measures “capable of discouraging the visitor’s contribution to the problems of pollution, crowding, waste removal, and misuse of the land”; if not, tourism will decline. [1] He continued: “Since the visitor to the Islands unquestionably contributes significantly to the State’s environmental problems, he will no doubt have to bear a substantial portion of the outlays needed for their solution.” Baumol’s view on who pays is simply a restatement of the Matching Principle in state and local public finance—i.e. those who benefit from public services should be matched with those who pay for the cost of the services. Similarly, those who pollute the environment should pay for the cost to fix it. He suggested a “system of taxes” to pay for the solution to these problems.
Fast forward to 2021, the Hawaii Tourism Authority (HTA) recently issued individual island action plans that describe the specific actions HTA would take to “rebuild, redefine and reset” tourism’s direction over the next three to four years (2021-2024). HTA’s Destination Management Action Plan (DMAP) for Oahu calls for the establishment of a “Regenerative Tourism Fee” that “directly supports programs to regenerate Hawaii’s resources, protect natural resources, and address unfunded conservation liabilities.” HTA is still studying what type of fee should be imposed and who should pay; it would be a fee assessed by the City and County of Honolulu authorized by the State Government.
The idea of a fee to raise money from visitors to fund conservation and environmental management programs that benefit visitors and residents alike has been simmering in Hawaii for some time under a different name—a “visitor green fee.” Green fees, in general, are taxes and charges levied on polluters to generate revenues to fund conservation and environmental management and/or to make it more costly for people to engage in behavior that may be harmful to the environment. A green fee has to have an environmental purpose. Green fees represent the market approach instead of command-and-control regulations to manage the environment. A visitor green fee is an environmental levy on tourists.
In its very useful report (Green Passport, Innovative Financing Solutions for Conservation in Hawaii, 2019), Conservation International (CI) explores the legal, economic and political considerations for establishing a visitor green fee program for the State of Hawaii. The CI report influenced two bills that were introduced in the 2021 State Legislature to enact a statewide visitor green fee. Senate Bill SB 666 (and its identical companion House Bill HB805) states that “there is levied and shall be assessed and collected a green fee surcharge of $20 for each guest, either a visitor or resident, of a transient accommodation.” Money raised from the fee would fund “workforce programs and services that promote certain environmental goals. ” The bill died in committee.
Visitor Green Fees Around the World
As visitor numbers continue to climb around the world, tourist destinations are increasingly levying green fees on visitors (“visitor green fees”) to fund programs that manage visitor impacts on destination ecosystems and natural resources. Conservation International (CI) counted 14 destinations world-wide that have visitor green fee programs. It finds the small Pacific island nation of Palau has “one of the most effective green fee programs in the world, a US$100 visitor fee [called the Pristine Paradise Environmental Fee” enacted in 2018] embedded into airline tickets.” Likewise, Ecuador’s Galapagos Islands also imposes a US$100 entrance fee [called the Galapagos National Park Entrance Fee enacted in 1993] at the port of arrival with the revenues directly used to fund “conservation, protection, and management”. It is worth noting that in Palau, of every $100 collected, $25 goes to the operations of Palau International Airport, $12.50 is divided among the state governments, and $22.50 goes to the National Treasury. In the Galapagos Islands, 30% of the revenues collected is distributed to local governments. CI notes that “visitor data demonstrates that implementing the fee did not impact visitor arrival rates.”
In both Palau and the Galapagos Islands, the entry fees are essentially lump-sum (head) taxes that are intended to raise revenue, not to manage the number of visits. A lump-sum tax “is a fixed amount that must be paid regardless of the consumption, income or wealth of the taxpayer.” [2] Head taxes are unpopular among the general population because they are widely perceived to be unfair. In the Maldives, the “green tax” is a more palatable per diem tax (i.e. a flat sum per person per day) and assessed at tourist accommodations.
If Hawaii could levy a lump-sum entry fee like in Palau and the Galapagos Islands, it would be simple to collect the fee at airports from incoming visitors. However, lump-sum entry fees assessed on visitors only are legally problematic in the U.S. as they may be judged to impede travel between states and discriminate against non-residents in violation of the U.S. Constitution and federal laws. [3]
According to CI, no mandatory visitor green fee systems exist in the U.S. [4] Denver (Denver Open Space Sales Tax, 2018) and Georgia (Georgia Outdoor Stewardship Act, 2017) enacted sales tax surcharges to fund environmental programs; both residents and tourists have to pay.
Should Residents Pay?
A 2017 World Tourism Organization (UNWTO) report (Managing Growth and Sustainable Tourism Governance in Asia and the Pacific) made the obvious observation that “Tourists become temporary residents of a destination, use the same services, visit the same attractions and consume the same water and food resources as locals.” In Hawaii, the resident population places far greater demand on the state’s environmental resources than tourists. [5]
If protecting the environment is the principal purpose of a green fee/tax, then both tourists and residents should pay because both contribute to environmental problems. Why should only tourists pay? Arizona State University professor, Jack Kittinger, argues that a visitor green fee can provide Hawaii visitors “the means for a more authentic experience shaped by a more empowered resident community.” I surmise the real reason is politics: raising taxes is politically risky for lawmakers, but the risk is perceived to be lower if tourists are made to pay rather than locals because tourists don’t vote. [6] In Hawaii, bills are introduced during every legislative session to make tourists pay even more; SB 666 is just another example. Hawaii state lawmakers had little difficulty raising the TAT five times after it was first enacted in 1986 (effective January 1, 1987) from the initial 5% rate to the current rate of 10.25%. (Adding the 4% general excise tax on top of the 10.25% raises the combined GET + TAT tax rate on transient accommodations to 14.25%, the third highest among the 50 states and Washington D.C. in 2019. Connecticut had the highest rate at 15%. This doesn’t include the newly authorized county TAT of up to 3% in Hawaii.) [7]
SB 666 would require residents who stay in transient accommodations to also pay the proposed green fee. (Residents currently pay the TAT.) But there is an eye-opening exception to the norm in Hawaii. At Honolulu City’s Hanauma Bay Nature Preserve and at Hawaii’s State parks, residents are currently exempt from paying entrance fees. In 2001, a tourist from San Diego sued the City in federal court alleging that charging an admission fee on tourists at Hanauma Bay and not residents violated the U.S. Constitution because it discriminated against her based on her place of residence. Federal courts sided with the City. Federal District Court judge Alan Kay ruled that because residents already pay taxes that “underwrite” upkeep of the preserve, it is appropriate to exempt them from paying the fee. The decision paved the way for other parks and natural attractions in Hawaii to impose visitors-only admission fees.
The problem with the courts’ logic is that Hawaii’s tourists pay far more tax revenues to State and county governments than what it costs to provide public services to them. [8] Hawaii’s visitors “underwrite” a lot of public services enjoyed by residents. Making both residents and locals pay could generate even more revenues for environmental stewardship. However, there may be equity concerns over a policy to tax visitors and residents at the same rates, as visitors are more affluent than residents and are probably more willing and able to pay. There are ways to address the equity issue, among them a discounted entry fee for locals or through the income tax system.
Designing Visitor Green Fees in Hawaii: CI’s Two Options
Hawaii Tourism Authority’s Hawaii Tourism Product Assessment study (1999) concluded that “Hawaii’s unspoiled natural beauty is the foundation of Hawaii’s tourism product.” In Hawaii, the State Government spends less than 1% of its annual operating budget on natural resource management. Most observers would agree that the current level of funding is woefully inadequate. The 2019 Annual Report from the State’s Environmental Advisory Council (EAC) notes that “State agencies cannot address the significant and increasing environmental responsibilities that they face without adequate funding and capacity. Unsurprisingly, the need for increased funding and qualified employees was identified by all agencies as their greatest needs. Agencies shared how lack of capacity is impacting their ability to respond to their environmental responsibilities which have been made more critical by compounding factors such as (over)tourism and the effects of climate change.” EAC’s report further notes (p.13) that “Impacts related to infrastructure such as roads and bathrooms, natural areas, fresh water resources, and biosecurity due to inappropriate and over use were cited by both DOT [Department of Transportation] and DLNR [Department of Land and Natural Resources] as being critically concerning challenges related to tourism.”
CI estimates the difference between existing and needed funding—the “unfunded environmental liability”—is approximately $360 million each year. If the State could collect $40 from each arriving visitor at the State’s airports, as some have suggested from time to time, that would just about cover the funding gap. An entrance fee to Hawaii, like that in Palau, is not likely to happen. CI suggests two primary ways that Hawaii can erase the funding gap: (1) levy new fees on visitors; and (2) green the fees [notably, the TAT] already collected from visitors.
Few taxes in Hawaii are predominantly borne by tourists. The most prolific state taxes—i.e. the general excise tax (GET) and the individual income tax–are largely paid by residents. That leaves the transient accommodation tax (TAT) and the car rental tax as the principal tourist taxes in Hawaii. CI’s two green fee options means either adding a surcharge on the existing TAT and car rental taxes or reallocate some of the money already collected from these two taxes to be used for environmental purposes. It won’t be a slam dunk to adopt either of these two options.
Hawaii’s state and county governments constantly plead poverty. Greening existing tax revenues paid by tourists means taking money from current non-environmental programs. Since every current public program has its own fierce supporters, good luck with that! This leads to the more likely option—another tax hike on tourists may be coming soon.
One warning about raising taxes earmarked for environmental purposes. There is no guarantee that new revenues may not be diverted for other uses in the future. When the State started collecting the TAT, 95% of the revenues were allocated to the counties; HB 862 diverted the revenues to the General Fund. It is also possible that General Fund revenues that previously went to support environmental programs may be withdrawn as revenues from the new tax flow into these programs.
The Case for Environmental User Charges
The CI report did not discuss environmental user charges as an option. User charges are specific charges for the use of publicly owned or publicly provided facilities or services. An example of an environmental user charge is the entry fee at Hanauma Bay Nature Preserve. Environmental user charges are effective and efficient because (1) they capture the cost of environmental services and damages in the prices of the goods and services to more closely reflect their true costs to society; (2) at higher prices they provide incentives to consumers and producers to become more environmentally responsible; and (3) they raise revenue. But as demonstrated at Hanauma Bay Nature Preserve, even with an entry fee, it may still require command-and-control regulations to reduce congestion because the admission fee couldn’t be raised high enough to bring attendance down to the desired level due to stiff political opposition to user fees. [9]
The application of user charges is consistent with the Matching Principle in state and local public finance. The applicable rule, derived from the principle, is: “Whenever possible, charge.” [10] Looking ahead, smart technology will make it even more “possible” for State and local governments to charge access to Hawaii’s natural resources and to manage them. Currently at Hawaii’s State parks, user charges (entrance fees) are the last revenue option when it comes to planning the Division’s budget. They need to play a more prominent role in funding park services. And it doesn’t mean that the entire budget of the State parks division must be financed solely from user fees. The cost of constructing a park and its facilities (i.e. the capital costs) should be paid by those who benefit from its existence (which is everybody via the General Fund), while the operating costs should be paid by those who use the park and facilities directly (through user fees). [11] In some instances (e.g. at low attendance parks), it is not worth the expense to collect an entrance fee. The same reasoning applies to the funding of other community resources such as hospitals, ambulance services, sports stadiums and convention centers which are supported in part by user chargers and in part by general funds.
In sum, Hawaii needs to spend more money on environmental stewardship and to encourage residents and visitors to care for the Islands’ precious resources upon which so much of our livelihood depends. It should begin by crafting a coherent user fee policy on everyone’s access to Hawaii’s natural resources.
Acknowledgements: I would like to thank Kimberly Burnett, Chris Wada, Nori Tarui, Carl Bonham, Erik Haites, Bob Ebel, and Steve Craven for helpful comments on earlier versions of this essay.
[1] Mathematica, The Visitor Industry and Hawaii’s Economy: A Cost-Benefit Analysis, Princeton, N.J.: February 20, 1970. p.9
[2] Neil Bruce, Public Finance and the American Economy, Second Edition, Addison Wesley, 2001, p. G7.
[3] See the Conservation International report, Appendix 3. Alaska imposes head taxes on cruise ship passengers, but revenues collected must be spent on services which benefit cruise tourism. See James Mak, “Taxing Cruise Tourism: Alaska’s Head Tax on Cruise Ship Passengers,” Tourism Economics, 2008, 14 (3), pp. 599-614.
[4] However, note that both the National Parks and Hawaii’s State Parks have a “system” of entrance fees. At https://uhero.hawaii.edu/charging-higher-user-fees-to-tourists-at-hawaiis-state-parks/
[5] James Mak, Developing a Dream Destination: Tourism and Tourism Policy Planning in Hawaii, University of Hawaii Press, 2008, Chapter 6.
[6] See Bruce (2001), p. 596 for similar view.
[7] HVS, 2020 HVS Lodging Tax Report—USA, October 2020.
[8] https://uhero.hawaii.edu/rethinking-hawaii-tourism-time-to-shift-from-marketing-to-managing-tourism/ As emphasized in this essay, recouping outlays from the public treasury is not the only reason to tax tourists.
[9] Mak (2008), pp.147-153.
[10] Roy Bahl and Richard M. Bird, Fiscal Decentralization and Local Finance in Developing Countries, Edward Elgar Publishing, 2018, p. 169. Also, Robert D. Ebel and Yameng Wang, User Charges to Fund State and Local Infrastructure Services, Andrew Young School of Policy Studies, Georgia State University, International Center for Public Policy Working Paper 18-13, July 2018, p. 6.
[11] Ronald C. Fisher, State & Local Public Finance, Third Edition, Thomson South-Western, 2007, Chapter 8.
11 thoughts on “Should Hawaii Levy a Visitor Green Fee to Protect Our Environment?”
Mahalos for a useful analysis. I’m particularly happy to see that you directly address the fact that revenues may not be used for stated purposes.
I support the user charges ala Hanauma Bay, but was hoping you could clarify this for me. Given that a park/beach/etc. can exclude in this fashion, doesn’t it undermine the argument that it should be treated like, and managed like, a public good?
Separately, I’ll challenge you and Baumol on taxing polluters by citing Coase’s insight that externalities run both ways. Forgive me if Baumol covers this in his Mathematica essay, but it’s just assumed that visitors (tourists or locals) to particular sites/areas should bear the cost of the externality without actually establishing the transaction costs involved, no?
Good points. One thing to keep in mind is that tourists pay GET too. In fact, they pay 20% of GET revenues, which comes out to about $680 million a year. If you combine this with TAT and Rental Vehicle Tax revenues, tourists directly pay more than $1.2 billion in taxes per year. Tourists already pay a significant percentage of Hawaii’s tax liability.
Your comment raises questions (which I’m sure someone figured out).
Hawai’i residents pay GET plus income and property taxes in Hawai’i. If Hawai’i residents plan a staycation, they’ll pay TAT too.
Much of these taxes end up in county or state general funds with precious little allocated to managing environmental resources. A good chunk of the TAT ends up in the general fund.
What percent of each dollar spent in Hawai’i by visitors is taxed? What percent of each dollar earned/spent in Hawai’i by residents is taxed? How long does the average visitor spend using natural resources? How long does the average resident spend using natural resources? Can we index the impacts of the type of use (if we’re applying the Matching Principle, one use might cost more than another)?
How much of each dollar is appropriated to resource management by the legislature?
Implicitly, none of this ultimately is unique to tourists or tourism. Everything about user fees–whether to recoup fiscal support for stewardship (maintenance, operations), for regeneration (planting, cultural renewal), for mitigation (congestion, degradation)–applies to residents. A resource user is a user. As for administration, implementation costs are falling: a smartphone app can manage bookings and collect time-varying user fees. Even a zero fee yields metadata to inform resource management. The main reasons this comes up in tourism are because residents want to free-ride off nonresidents, to discriminate against non-residents, to segregate them with exclusionary zoning. Pathetic bigotry. Forgotten are intertemporal consequences of our uses today on the extent and qualities of future recreational natural resource endowments. All users should bear the social costs of their resource use, including spillovers over space and time.
Yup, thank you for calling out the tribalism that’s so apparent in these discussions. I never cease to be amazed at how blatant and acceptable it is for tourist destinations (not only Hawaii) to create such openly discriminatory policies.
I am so happy to see these thoughtful comments, and hopefully these blogs will elicit exchange among the readers rather than replies from the authors. Thus, just because I do respond directly to each comment, it doesn’t mean that I think the comments are trivial. I am hoping that others will jump in and join the conversation.
On Baumol’s report, he didn’t say, which environmental problems warranted the most attention other than “pollution, crowding, waste removal and misuse of the land.” He did say, “Consequently, to be effective, the costs of such a program must fall on everyone who contributes to the problem. If any special group is permitted to escape the fiscal consequences, whether it be visitors or residents of the Islands, a program for the protection of the environment is bound to fail, for the exempted group will continue to possess a license to despoil the resources of the community at no cost to themselves.”
“Tax exporting” is not unique to Hawaii. Nevada derives most of its public revenues from gaming/gambling. Other states derive revenues from oil, timber, mining, etc. The visitor green fee proposals offered in Hawaii are a politically expedient way to generate revenue. Whether or not that’s good or bad has been much discussed. JR can provide further insights, no doubt.
Fascinating topic. Welfare econ theory says that you should promote exports with “Asia-Miracle” type external economies but underpromote exports with “Dutch-disease” potential, e.g. by charging mining royalties even more than their marginal user cost. Tourism seems to fit in the latter category. The pivot of HTA from promotion to retardation may thus rest of firm foundations. Could it be because John De Fries used to be a fixture in the house of UH Econ chair Burnie Campbell?
Thanks, Jim. I didn’t realize that Baumol had written about Hawaii. Did he say which environmental problems warranted the most attention?
What is the fair share of fees/taxes to be paid by tourists? For most of the 20th century, “fair share,” as explained by Wicksell and Lindahl’s classic articles about “just taxation,” meant that beneficiaries should pay according to benefits received. They had in mind the citizens of a particular jurisdiction paying for public goods and services. But if the role of government is to promote the general welfare of its citizens, taxation of tourists should rest on a different foundation.
If all activities were monitorable, congestion fees could be imposed. Since they are not, we can think of a general tourist tax (TAT/Green-fee) as a tax on the population externality (Dasgupta) imposed by tourists. It wouldn’t make sense to impose the same tax on citizens for their existence inasmuch as the role of government is to promote their welfare. (This does not imply that where use is monitorable, e.g. Hanauma Bay, that tourists should pay higher fees however.)
Could a fee create a negative impact? Some people react differently. If they pay, they may feel entitled to trash the place, and make “the paid workers” clean up the mess. However, maybe if the fee is high enough and we have more respectful people more often than not, then we would be able to divert enough resources to react and catch the trash quickly before it does too much harm?
As somewhat mentioned, a heavy fee for trashing and littering that is properly, consistently, clearly-displayed, and quickly enforced might be needed in addition to a fee for overall facility maintenance.
I don’t believe that it is just that residents don’t want to have to pay even more on top of the high cost of living here; I think a lot of it has to do with a general understanding that residents often “take care of the land” more because we live (breathe, work, eat, play, sleep, etc.) here, but visitors don’t seem to “take care of the land” (whether it is because they really don’t care or because they simply don’t know what it means to take care of it as much as a resident does; they don’t live here, so maybe they do not understand the implications of their actions since they aren’t around long enough to witness the it). This desire to be nice to ones own home is not just an island thing. Who leaves trash in their own yard? I’m sure there are some, but not as many as people that leave trash in a hotel. There would need to be a CLEAR distinction of the difference between them going to a public environmental space versus a hotel and a fee might blur that line to certain people if we aren’t careful.
I met a person once who told me she couldn’t find a garbage can in Japan (because you are supposed to take it home with you) and just LEFT HER TRASH on the side of the road. So I told her to not do that next time, and to take it back to the hotel. It seems unbelievable to me, but really, if someone has grown up in a certain type of lifestyle, they get confused when faced with something that is radically different. It is important to teach people what to do and to explain the consequences of what happens if they don’t do it.
By far the biggest long-term threat to Hawaii will be climate change. To address this in a progressive way that also benefits locals and/or disadvantaged residents, what about a tax/fee on gasoline consumption as a stepping stone to phasing out gas-powered cars? Hawaii is uniquely advantaged relative to the mainland to implement such a vision since each island has a limited number of main roads, miles traveled per day, and possible charging infrastructure central locations. Range anxiety and distance to the next charging station would likely be less of a concern for potential electric car purchasers.
But a truly transformative change could be had with a progressively increasing gas tax, the proceeds of which could fund a climate rebate for Hawaii residents (possibly with enough left over to fund electric car and charging infrastructure incentives or improved public transport). Given that a large portion of cars on the road and fuel consumption is by tourists, such a tax would be paid in large part by non-Hawaiians with a regular “climate dividend” provided to locals. Perhaps it could be crafted to pay only longer term residents, or pay higher dividends to lower income residents.
Car rental agencies could eventually be required to offer an increasing percent of electric cars (as charging infrastructure becomes available in public places, resorts, etc…) And as Hawaii’s many tourists rent electric vehicles in Hawaii, they take this experience home with them and may be more willing to consider an electric car purchase at home (providing additional climate benefits globally).
This could be an opportunity to leverage federal funding, (and tourist dollars) to transition to cleaner, more sustainable transportation, and put Hawaiians first in the battle for a sustainable planet. Given the billions of dollars in climate-related costs Hawaii will bear in future years, and increasing concern about over-tourism, might there be new political willingness for tourists to (indirectly) fund this locally?