Hotel property tax
may be raised

The city considers ways
to make up $12 million it could
lose in room taxes

By Gordon Y.K. Pang
Star-Bulletin

The city stands to lose as much as $12 million under a revised hotel room tax distribution system now poised for passage by the Legislature.

City Council Finance Chairman John Henry Felix and Mayor Jeremy Harris say a likely way to make up the money is through increasing property taxes paid on hotel properties.

The prospect has hotel industry executives and a tax expert fuming.

"It appears we have no alternative," Felix said, noting officials will not increase the residential tax rate.

"However, I am exploring other options," he said.

Legislative leaders say the loss will be made up this year in the form of other revenues.

Among those sources are overpayments in the city's share of retirement system payments and other employee benefits.

Harris said the city has yet to get the calculations from the state to determine how much those sources will save.

Felix noted that he's already slated to use $2 million from the retirement savings to help bring back laid-off city workers.

He said he doesn't know if the new distribution kicks in on July 1 or Jan. 1. A July beginning would mean as much as a $12 million loss to the city while a January start date would mean a $6 million hit, he said.

"We made it clear to the Legislature and the hotel industry that if they tampered with our (hotel room tax) revenue source, that we would have to look at the hotel real property rate," Felix said.

Hotel industry officials say they did their part in lobbying legislators to allow counties to keep their current share of room taxes and now are being asked to absorb a "double hit."

"We are already paying a higher tax rate than any other class in the country," said Murray Towill, executive director of the Hawaii Hotel Association.

Towill said the hotel category's share of property tax has gone up 147 percent since 1987 while the residential share has gone down.

"It's a big hit coming at a time when the industry is not doing well," he said.

David Carey, chief operating officer of Outrigger Hotels, said, "It's fundamentally unfair when you have a discriminatory rate between categories of taxpayers. Differential should be based on value, not on the type of business you operate."

Carey said the city would be shooting itself in the foot by raising hotel rates only.

"As you raise property rates and diminish profitability, you're going to drive (property) values down," he said.

Lowell Kalapa, executive director of the Tax Foundation of Hawaii, said raising hotel property taxes may give cause for hoteliers to form a united front -- possibly in a class-action legal battle.

"The industry for years has been looking at litigation and I think they will probably have a good case for the differential rates being imposed on this particular class of property," he said.

"It's something we've explored in the past," Towill said.

"And I think a lot of properties would seriously have to consider that."

Kalapa said all classes of property should be taxed at the same rate.

"It's somewhat short-sighted for the hotel industry to carry the entire burden of displaced revenues," Kalapa said.