Hawaii is in a tourism bind.
The Aloha State is pulling in more vacation-goers than ever before. But guest spending is flat, even as the influx drives up costs for services.
Left to cover the rising costs are local residents, who have been socked by a recent income tax hike, higher fees and taxes on gas in certain areas, and other burdens. There has also been legislation introduced that would increase taxes on gas and car registration statewide.
For some, the changing dynamic has gone too far.
“For the first time in decades, we are seeing statistics that residents are leaving for the first time in higher numbers than people are being born,” Honolulu City Council member Kymberly Marcos Pine said. “And that’s because they feel that they just can’t make it here anymore.”
Pine pointed to a study released in April, which found that despite “record visitor arrivals,” Hawaii’s cost of living issues were “of greater concern than ever.” It has even caused numerous residents to continue relocating, the study said.
The study found that cost of living was the second-biggest personal concern after affordable housing.
Pine blames flat tourism spending for increasing the cost of living for longtime residents. She chairs the City Council’s Committee on Business, Economic Development and Tourism, which recently heard testimony from an economist who stressed the gravity of the tourism dilemma. A recent AAA report shows that Hawaii’s gas prices are second only to California’s.
Honolulu’s mayor has also implemented several local taxes since taking office, she said. The Honolulu City Council on June 5 approved increases to property taxes on hotels, resorts, residential condos, and non-primary residences worth more than $1 million.
For the first time, a May economic analysis showed that tourists “are paying less to help maintain our island” and outlined continuous tax and fee increases, Pine said.
Paul H. Brewbaker, the principal of Hawaii economics consulting firm TZ Economics, recently talked to Pine’s committee about how total tourism receipts haven’t risen along with tourism itself. The rising number of visitors boosts costs for services, he said in his presentation.
“Social costs of additional tourists rise faster than social benefits once a congestion threshold is breached,” Brewbaker wrote in prepared remarks for the May 21 presentation. “External costs are unintended, uncompensated costs such as congestion and environmental degradation as simple as erosion from over-utilization of public-access natural recreational resources, or the cost of plucking ‘victims’ off mountain peaks for no reason other than Google Maps showed them how to get there and where to fall off.”
Brewbaker said that Oahu visitor arrivals increased to 6 million from about 4 million between 2009—when the Great Recession ended—and 2018. Despite that, he said, constant-dollar tourism receipts “have not grown for thirty years.”
Brewbaker’s presentation used data from the Hawaii Visitors Bureau and other government agencies to show that real visitor expenditures, or overall spending from tourists, were down to $17.8 billion from $18 billion in 1989, when adjusted for inflation.
The falling per-capita tourist outlays over time isn’t all that surprising, according to Brewbaker.
“Productivity growth alone could yield this outcome,” he wrote in the presentation. “Each wave of new tourists from previously untapped origin markets eventually spends less than upon initial discovery.”
Despite the stalled spending-per-tourist figures, Hawaii officials acknowledge that tourism continues to be the main driver of the state’s economy.
Hawaii House Speaker Scott K. Saiki (D) emphasized that tourism contributes about 30% of the state’s revenue, which he says provides stability in the job market. And he is less concerned about stagnant spending than some of his colleagues.
“Even though it is at a slower rate than in the past, the Hawaii Department of Business, Economic Development and Tourism still projects visitor expenditure increases over the next three years through 2022,” he said. “This revenue stream helps Hawaii residents by maintaining Hawaii’s low unemployment rate of 2.4% from escalating much higher than expected.”
Tourism is Hawaii’s top industry, and the rising numbers of tourists combined with the flat revenue from visitors is “troubling,” according to Tom Yamachika, president of the Tax Foundation of Hawaii.
“We’re getting more tourists and we have to spend more to provide them with services, but we’re not getting any more from them in terms of spending, so what do you do?” Yamachika said. “There may be ways to jack up taxes so they have a disproportionate effect on tourism, and that’s what was done” with the transient accommodations tax, which is supposed to be paid by hosts on the gross rental proceeds of any transient accommodation in the state.
Yamachika said that income taxes and estate taxes have also seen increases recently. Hawaii raised certain income tax rates in 2017, and the new law hiked the rate to 11% for all income over $200,000, according to the Tax Foundation.
Those tax increases are part of the reason some locals are moving away, Pine said.
Yamachika said the transient accommodations tax started at 5%, and is now above 10%.
The tax was increased by 1% in 2017 to raise $2.4 billion for a rail project in Honolulu, despite concerns from the hotel industry. The tax rose to 10.25% effective Jan. 1, 2018, and it applies to gross rental proceeds, Hawaii’s Department of Taxation says.
Getting operators for Airbnb and other home-based hotel services to pay the tax has been controversial in Hawaii, where Gov. David Ige (D) previously rejected efforts to allow companies to collect on behalf of hosts because he thought it would protect homeowners who illegally operate vacation rentals in neighborhoods where they are banned. A similar bill is before the governor, but he hasn’t yet indicated whether he will approve it.
Airbnb operators are currently taxable, but there’s “not 100% compliance,” according to Yamachika.
“I certainly do think that we ought to be enforcing the tax laws that we have on the books now, and if we can’t even do that, it’s really not fair to make our law-abiding, tax-paying citizens shoulder even more to make up for the scofflaws,” he said.
The number of visitor units in Hawaii, including hotels, timeshares, vacation rentals, and other accommodations, increased by 1.6 percent in 2017 alone. There were also 38,100 online vacation rentals advertised on sites like Airbnb and HomeAway in Hawaii in 2017, a 17% increase from the year before, according to a study by the Hawaii Tourism Authority. Earlier this year, Airbnb Inc. said it would have collected $64 million in revenue in 2018 had it been authorized to collect taxes on behalf of the state.
Brewbaker isn’t convicted that the Airbnb taxation bill would solve the state’s revenue problem. He said having hosting apps that collect lodging rental payments also collect associated taxes is “logical,” but that it doesn’t have much to do with the actual issues.
“Enforcing the tax code, not to mention the building code, are completely separable and should not be conflated with what is essentially a withholding tax arrangement,” he said in an email. “So, Airbnb collecting Hawaii TAT isn’t the cure to the State revenue inadequacy: a more robust, and unconstrained, economic expansion is required for that.”
Saiki said vacation rental units “should be regulated and taxed.”
“There seems to be a decrease in tourism spending per person even though more tourists are visiting Hawaii,” he said via email. “It’s not clear if unregulated vacation rentals are contributing to this.”
Jim Hepple is an Assistant Professor at the University of Aruba and is Managing Director of Tourism Analytics.