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HomeMy WebLinkAboutCOM 0772.001 2014-2016 Margaret Wille Miv,o�;,� • Phone No. Hilo: (808)961-8027 Council Member v°• �'� '�+.;'.. Phone No. Waimea: (808) 887-2043 District 9-North and South Kohala 11•'- Fax No.: (808)887-2072 *'&:y5'%�:��:• E-Mail: mwille@co.hawaii.hi.us '. .;,s•c-W—•• •...y.....•,,l—' HAWAII COUNTY COUNCIL County of Hawai`i Hawaii County Building Holomua Center West Hawaii Civic Center Bldg.A 25 Aupuni Street 64-1067 Mamalahoa Highway,Suite C-5 74-5044 Ane Keohokalole Hwy. Hilo, Hawaii 96720 Waimea, Hawaii 96743 Kailua-Kona, Hawai'i,96740 TO: Dru Mamo Kanuha, Council Chair -„ And Members of the Hawai`i County Council FROM: argaret Wille, Council Member DATE: April 4, 2016 SUBJECT: Tax Review Commission Report for Communication 772 Please find attached the Tax Review Commission Report for reference during the Communication 772 discussion on April 5, 2016. Thank you. MW/dh att Comm. No. 7 7'Z . I Ref. 7o: ti/IG'c. Ref. Gate APR 0 5 2O). Serving the Interests of the People of Our Island Hawai`i County Is An Equal Opportunity Provider And Employer Department of Taxation Presentation handouts — April 1, 2015 County Revenues The counties' plea for more money is not unique to deteriorate, or (2) property taxes will be increased and Hawaii. Across the country,local governments are looking eventually reach a level that will not be tolerated. to the state for more assistance,and the states in turn are The focus on waiting until the counties arc in distress looking to the federal government for the same. As the is ill considered. An analysis of county revenues should federal government tries to cope with its budget problems, instead focus on the allocation of functional responsibilities it will have a tendency to pass along responsibilities--and and revenue authority between the State and the counties, casts--to the states while at the same time competing with with the goal of ensuring the efficient delivery of public the states for revenues. Local governments are in a services. precarious position because they face growing demands Efficiency in this context can be understood to have two but have limited power. A knowledgeable observer at the general senses. The first relates to the overall level of national level has suggested that the result will be a period economic activity and the role of government when the of"fend-for-yourself federalism" and believes this will be market fails to provide goods and services, and when the issue facing state legislatures in the 1990s. private actions give rise to benefits and costs that are not This has a unique twist in Hawaii because education is taken into account by the market. The second sense of funded at the State level and the amount of power vested efficiency concerns the desire to ensure that public services in the counties is less than is typical throughout the rest of are delivered at minimum cost. the country. That uniqueness has made the debate over Revenue flexibility is an overlooked aspect of efficiency. county revenues in Hawaii more contentious because Unless a local government can finance public services in comparisons are not easily drawn,and it has been difficult a manner that reflects to some degree the cost and to establish suitable reference points for analysis. beneficiaries of the services it provides, there will be There is a recognition across the country that inefficiencies. For example,the trend is to tout user fees state/local relations need sorting out. Recent studies have and benefit charges as the preferred means of financing focused not only on the tax and revenue implications of local government, and to the extent that fees and charges intergovernmental policies but also on the efficiency and can be administered at reasonable cost and do not impose quality-of-life questions that arise because of the changing undue hardship on the poor, they probably ought to be responsibilities and shifting balances between levels of used. In many, instances, however, local governments government. provide services for which fees and charges might not In Hawaii, every committee, commission, advisory always be appropriate, such as for police and fire group,or task force that has looked into the State/county protection. In such cases, much of the financing must relationship has had a limited scope and studied certain come from other sources. issues more or less in isolation. The result has been a With the property tax often likened to a benefit charge, series of partial analyses rather than the comprehensive there is pressure to have the property tax assume the analysis that is needed. A comprehensive analysis would function of financing local services for which fees and cover revenues, spending, and the allocation of functions charges are insufficient or inappropriate. In Hawaii, and responsibilities between the State and the counties, however,the property tax also funds services,particularly The Tax Review Commission's mandate is limited to in support of the visitor industry, that often bear little evaluating the tax structure and recommending tax and direct relationship to benefits received by property owners. revenue policy, so this review should be considered a In addition, given the large percentage of renters in preliminary step in the process of sorting out State and Hawaii relative to other states, the connection between county relationships in Hawaii. public services and beneficiaries is often obscured because renters do not see the direct impact of property taxes. Finally,the property tax is an unpopular tax. It was the County Revenues: A Question of Efficiency and Revenue property tax that sparked the 'Tax Revolt' with Flexibility The debate over county revenues in Hawaii has Proposition 13 in California and Proposition 2-1/2 in been framed in terms of whether or not the counties Massachusetts. To insist that the counties rely solely on 'need'more money, That is not helpful or useful because the property tax and be forced to increase property taxes it amounts to a disagreement over identifying the exact against the protests of citizens, because of a fashion for point at which the counties will be in distress. The two fees and benefit charges,is an unreasonable demand. possible outcomes of the current approach to county revenues are: (1)at some point services will be allowed to Tax Review Commission 51 • County Revenues Balance within Hawaii's fiscal system Fiscal balance, in differing preferences for services among the counties. its various dimensions, is a concept of fundamental importance to the analysis of any state-local fiscal system. Fiscal balance is a precondition for the economic neutrality State/County Relations to Hawaii The question of county of the system. Unless fiscal disparities are fully capitalized revenues in Hawaii can be properly addressed only within in property values--an unlikely prospect--they provide the context of the entire State and county relationship. A purely fiscal incentives for people and businesses to move review of the history of Hawaii's State/county system from one locality to another (or not to move when suggests a number of conclusions. economic considerations call for it). The result is a less First,simplicity of structure has not produced simplicity efficient economy and lower incomes for residents than in or consensus on the division of functional might otherwise have been achieved. responsibilities and revenue-raising authority between the A balanced fiscal system is also important to avoid State and the counties. serious inequities among residents of different ares of the Second, the constitutional and political goals of giving state. Such inequities arise when the tax burdens on the State government sufficient authority and fiscal residents with similar incomes living in different localities capacity to address "statewide concerns" have not been differ for comparable levels of services, addressed satisfactorily. There has been considerable The central issue in evaluating fiscal balance is the debate over what constitute areas of`statewide" concern relationship between revenue-raising ability and the cost and the extent to which that rubric could be used to of the expenditure responsibilities of the governments in maintain control over county decisions. a state. Two important dimensions of fiscal balance are Third,the State Constitution provides neither sufficient vertical balance and horizontal balance. detail on State/county relations nor sufficient home rule A state's fiscal system is vertically balanced when the to ensure stability in those arrangements. Instead, the cost of the expenditure responsibilities assumed by the legislature and, secondarily, the administration and the state government,on the one hand,and local governments supreme court have considerable discretion to tinker with as a group,on the other hand, are roughly commensurate the State/county system,particularly with county powers, with the potential productivity at reasonable rate of the and to intervene directly in county affairs. revenue sources available to each level of government. Fourth,increases in governing authority far the counties The data for fiscal 1987 su d:est that both revenues and have been obtained more often through constitutional expenditures for the State of Hawaii exceed the national revision than through the legislative process,even though average: revenues were around 40 percent above average, local self-government has never been an especially while expenditures were about 30 percent above average. prominent issue in any constitutional convention. County revenues and expenditures, on the other hand, Fifth, the legislative process has generally produced a were both below the national average,at about 40 percent greater centralization of functional responsibilities in the of average. State since 1959. These data suggest that to the extent that vertical Sixth,practically every independent body established to imbalance does exist in the Hawaii focal system,it occurs study the allocation of functional responsibilities and at the State level,where revenues relative to the national revenue-raising authority has,to a greater or lesser degree, average exceed expenditures relative to the national recommended increased local self-government. average. This suggests a paternalistic relationship perpetuated by Horizontal balance exists when the fiscal capacity of State and county officials. Arguments against granting the each county is adequate to enable it to provide some counties additional revenue authority or responsibilities specified levels of services for which it is responsible, frequently rest on the notion that the counties are not without excessive tax rates. Fiscal capacity means the "mature" enough to manage or are not equipped to potential ability of a county to raise revenues from its own administer new responsibilities. The counties, for their sources relative to the costs of its service responsibilities. part, have often contributed to the continuation of The data for fiscal 1987 indicate that there is a paternalism by indicating a preference for either State moderate horizontal imbalance in Hawaii, that is, the grant-in-aid programs or a tax sharing over county taxing counties arc not quite equal in revenue capacity or powers. A continued reliance on State grants or shared expenditure requirements,and State grant-in-aid programs taxes delays the development of county capability for have not tended to improve the situation. Horizontal handling local functions and reinforces the case for not • imbalance may not necessarily be a problem if it reflects expanding county authority and responsibility. 52 Tax Review Commission Division of Service Responsibilities In a market economy, costs,the responsibility of the state is to ensure that those such as that of the United States, decisions about the costs are paid by the locality. Most analysts agree that allocation of resources arc made by individual consumers programs whose major objectives relate to the distribution and investors. In an economy of this type, governments of income and wealth—public welfare,for example—should have important roles to play when markets fail. Among be the responsibility of the federal government,with the most important of these roles are the provision of possible involvement of state governments in adapting goods and sex-vices for which people would be willing to broad national policies to the specific conditions of pay but that are not be available in the market, and individual states. Local governments, however, should ensuring that benefits and costs external to market confine their agendas to the provision of services that do transactions (often referred to as "spillovers," or not have strong elements of income redistribution, and `externalities") are taken into account in private decisions. finance those services to the maximum possible extent in It is also important that governments minimize their accordance with the benefit principle. The simple logic of unintended effects on economic behavior,as when tax and this is that local tax bases and service populations tend to other policies modify relative prices. be too mobile to permit the differences between taxes paid Conceptual considerations offer a powerful rationale and benefits received that are the essence of redistributive for structuring decision-making and the financing and policies to be sustained if they reach significant delivery of public services on a decentralized basis to the magnitudes. maximum possible extent. Decentralization significantly In addition to spillovers, the existence of substantial enhances the effectiveness of the political process. In a fiscal disparities among local governments is also an decentralized system, choices about expenditures are important rationale for action by a state government. This closely linked to costs. A corollary of decentralization is is the heart of the issue of horizontal fiscal balance. the principle of autonomy,which calls for restraint by state governments in their dealings with local jurisdictions. In general, the essence of the allocation of functional Assignment of Revenue Authority The overall efficiency responsibilities among governments lies in an effort to of the economy is impaired when the fiscal system is not assign each to the jurisdiction whose borders most closely "neutral,` that is, when tax (and service) differentials correspond to the range of benefits from a service,so that among jurisdictions influence the decisions of individuals responsibility vests with the smallest unit of government and businesses about where to locate,or induce people to that can efficiently provide the service, Even the most incur substantial costs in efforts to avoid taxes. conscientious effort to assign responsibilities in accord with Differentials could be avoided by imposing a uniform this logic, however, will leave cases where some of the tax structure throughout the state, but this would be benefits or costs of a service will spill over the boundaries inconsistent with the existence of autonomous local of the government providing the service. governments. Autonomy without independent authority to The importance of this in the case of local governments raise revenues is a contradiction in terms. is that these spillovers,or externalities,will be ignored by This being the case,the approach most consistent with local decision-makers. As a consequence, they will economic efficiency is for localities to tax bases with low produce less of the service than would be appropriate if mobility. The base with the lowest mobility is real the demands of all beneficiaries were taken into account, property (land, of course, has no mobility) so it is not thereby reducing the overall efficiency of the economy. surprising that the property tax is universally viewed as the The state government can ensure that the right amount of most appropriate tax for Iocal governments. User charges the service is produced by subsidizing the financing of the are also well suited to local governments because—by service to the extent of the external benefits. linking payments to benefits actually received—they do not In the special case of benefits that are received by create an incentive for people to modify their economic visitors to a locality (an especially important case for behavior. Hawaii, where visitors are major beneficiaries of many Consumption taxes are usually regarded as appropriate local services) the state may be able to ensure that the for state governments but not lorAlities because of the so- right amount of' a service is produced by making taxing called border problem--the ease of avoiding the tax by authority available to the locality that enables it to collect visiting a neighboring jurisdiction with a lower tax rate or from visitors an appropriate share of the cost of the no tax at all. In Hawaii,the border problem is less of an service. obstacle to county reliance on consumption taxes than it When action by a local government creates external is for local governments on the mainland,where shopping Tax Review Commission 53 County Revenues in a lower-tax jurisdiction may be a 10-minute drive rather a State tax. A county supplement is a specified increment than a S100 round-trip flight. to a State tax rate, enacted at the option of the county. Income taxes are generally viewed as appropriate only The policy options considered were county supplements to for the federal government and the states because of the the general excise tax, to the transient accommodations high potential mobility of the base. Most local income tax, and to the individual income tax. taxes are limited to "earned' income earned in the A variation is a tax sharing rather than a tax jurisdiction. Administrative costs are also an important supplement. The distinction is that a county supplement consideration in the assignment of revenue-raising would be imposed by the county as an add on to an authority. Although they differ significantly for some existing State tax—"piggybacking"—and collected by the taxes, the advent of the microcomputer has significantly State along with the State tax. A tax sharing,on the other reduced the differences. hand, is merely an allocation of part of a State tax. (See Volume 2 for the analysis of options not shown here.) POLICY OPTIONS Shifts in Revenue Raising Authority Authorizing(but not requiring)the counties to levy a new tax—or a tax formerly The structure of Hawaii's society and economy is used by the State--is consistent with the principle of changing, and a powerful rationale is developing for accountability that the government that spends public structuring decision making and the financing and delivery funds should be responsible for raising them. of public services on a decentralized basis. Excessive The taxing authority must present a genuine option to centralization of government in Hawaii will lead to an the counties in order to promote accountability. If a inefficient allocation of resources, less responsive county has no choice in the matter,the tax is really a State government, and a loss of accountability. tax, and the proceeds that are 'shared'with the counties Based upon information provided by the public sector are really a grant-in-aid. Clearly,a grant paid by the State and private sector, input at public hearings, national to the counties diminishes accountability because the trends, and the results of a consultant study conducted on counties would be spending funds raised by the State the Commission's behalf(See ACIR study in Volume 2), government. the Commission's conclusion is that the counties should An additional consideration is that a grant maybe a less have additional taxing authority. The property tax is an reliable source of revenue for the counties in the long run. essential foundation of a local tax system and should be Authority to levy a tax, experience throughout the nation urili"rd to best advantage,but the counties need to have seems to suggest, is less likely to be revoked than a grant more flexible revenue structures if they are to maintain the is to be reduced or eliminated--as was the federal Revenue services that residents expect and demand. The revenue Sharing Program in 1986,for example. At the same time, diversification that marks the strength of the State tax the revenues from taxes may be somewhat less predictable system is singularly lacking in the county tax system. from year to year than those.from a State grant program. An effort was made to consider virtually every proposal Another rationale for shifting revenue-raising authority for county financing advanced during the past few years. would be to achieve a better alignment of sources and Among the categories of policy options considered were: service responsibilities, where the services provided shifts in revenue-raising authority between the State and pursuant to those responsibilities lend themselves to being the counties,county supplements to State taxes,new taxing financed by charges or taxes conforming with the benefit authority for the counties,State payments to the counties, principle. revised treatment of purchases by the counties under the general excise tax, and increased reliance by the counties 1. Transfer of alcohol and/or tobacco excises from the on user fees and charges. State to the counties A proposal purporting to transfer Five sources of State revenues have been identified in the State's excise taxes on alcohol and tobacco to the recent discussion as possible candidates for transfer to the counties is contained in House Bill 1858,introduced during counties: the alcohol and tobacco taxes, the transient the 1989 session of the legislature and still under accommodations tax, the State fuel tax for highway use, consideration for the 1990 session. In fact, however,the and the proceeds from fines and forfeitures levied proposal does not contemplate a true transfer of these pursuant to county laws, taxes to the counties, as a transfer of taxing authority is An alternative to a transfer is a county supplement to defined and understood. 54 Tax Review Commission The proposal was termed, and has been discussed as, of significant budgetary consequence benefit visitors a'complete transfer of the liquor and tobacco taxes to the exclusively,it is not possible to estimate what proportions counties. Among its restrictions, however, are provisions of the benefits from these services are enjoyed by visitors, of House Bill 1858 that tell the counties how to increase However,the functions shown in Table VlII.I account for or decrease the tax rates,how to share the tax collections, 64 percent of all county expenditures. and how to spend the money. By comparison, the major services for which the State Even if the proposal were changed to allow a true government is responsible provide nearly all their benefits transfer of taxing authority,there is no evident reason why to residents of the State. The most important of these the liquor and tobacco taxes are likely candidates for services are elementary,secondary,and higher education, transfer from the State to the counties. There is no public welfare, hospitals, and urban redevelopment and indication that either equity or efficiency would be housing. Services directly benefiting visitors are improved as a result of a transfer. responsible for less than 14 percent of State expenditures. It isn't evident what social policies the counties might An additional factor to be weighed in considering have better control over as a result of such a transfer. If, transfer of the TAT to the counties is its close relationship for example,one county wished to discourage smoking and to the real property tax, the cornerstone of the county increased taxes to a prohibitive level, people could easily revenue system. In an important sense, the TAT is a buy cigarettes in another county. If all the counties raised substitute for a property tax targeted to hotels and other taxes to prohibitive levels, a black market would develop. transient accommodations. Further, the information It is also not evident why the counties would be better generated by the process of compliance with the TAT off by having the State grant them the more regressive and should be of substantial value in estimating the market inelastic taxes of the Hawaii tax system, and there are no value of such properties. This being the case,it might well discernable policy considerations that could make these make sense to vest responsibility for both taxes in the taxes preferable to other, more suitable taxes as a source counties. of revenues for the counties. Moreover, the TAT,like the property tax,is peculiarly Finally, there is no clear connection between those suited to use and administration by a county because the taxes and the distribution of the benefits of public services taxed transaction takes place within the physical for which the counties are responsible. In fact,there is a boundaries of the government. Then too, the room rate stronger case for retaining the liquor and tobacco taxes at typically comprehends a substantial element of economic the State level because it is the State that has responsibility (location) rent,which is uniquely amenable to taxation by for the health and welfare functions that are associated local authorities. In other words, there is little risk, at with the costs to society from the use of liquor and remotely competitive tax rates,of migration of the tax base tobacco products. to other jurisdictions. Finally,county control of the property tax and the TAT 2. Transfer of taxing authority for the transient would allow each county to choose its own balance accommodations tax from the State to the counties The between hotel development and residential development primary case for transferring the TAT to the counties and its relative reliance on the associated taxes. To the rests on the proposition that the incidence of the tax is, extent that a county chooses to develop hotel properties, more than any other revenue source in Hawaii's fiscal it can rely on TAT collections; to the extent that a county system, on the visitor. This suggests that, if the benefit chooses to preserve its residential character, it should rely principle is to be accorded high priority in tax policy- on the property tax. making, the TAT is especially well suited as a source of revenue to finance public services from which visitors 3. Exemption of transient accommodations from the benefit significantly. The key question, then,is what are general excise tax coupled with a transfer of taxing those services,and are they predominantly provided by the authority for the TAT to the counties,with an State or by the counties? authorization to set a rate of up to some maximum level The analysis of the budgets of the State and the The Hawaii State tax on transient accommodations is 9.4 counties in Chapter V of the ACIR report indicates that percent,which is within an average range for room taxes approximately 53 percent of all public outlays for services in the largest cities on the mainland. In Hawaii the tax from which visitors to Hawaii directly benefit are made by consists of two taxes: the GET and the TAT. This the counties. (These services are summarized in Table proposal is related to the recommendation to exempt VIII.1 of the report.) Beyond observing that no services residential rentals from the GET and would provide a Tax Review Commission 55 County Revenues simpler, more rational basis for taxing accommodations and the county property tax. From the standpoint of good under a single tax. The major issue is whether the State tax policy,it's questionable whether a separate tax such as would give up the revenues. the PSC should be retained instead of subjecting PSC's to The recommendation to exempt residential property the same taxes as other businesses, namely the general from the GET is intended to equalize the tax treatment excise tax and the property tax. Because the PSC is based of renters and home owners. That rationale does not on gross income, it does have the advantage of simplicity, extend to short term rentals, and the proposed exemption unlike property taxation of utilities, which requires is not intended to apply to transient accommodations assessments of property values that may be difficult to because of the policy objective to export taxes. obtain. The question then becomes a matter of defining what It is in the counties' interest to broaden their tax base, is or is not a residential rental. The TAT already provides and public utility property represents a potential addition guidelines for determining what transient accommodations to the base. If the State is unwilling to repeal the PSC tax are. Rather than having inconsistent definitions and an and subject public utilities to the general excise tax,there overlapping between the GET and the TAT, it would be is a possible conflict between the interests of the State and simpler to exempt all lodgings, whether residential or the interests of the counties that could be resolved by a transient, short-term or long-term, and then tax transient sharing of the PSC tax accommodations under a single tax. Since the TAT has already been suggested as being suitable for county control--it is more often a local tax elsewhere—the unified County Supplements Unlike a shared tax,which remains taxation of transient accommodations could properly rest entirely a State tax,a county supplement is a tax levied by with the counties. the counties as an addition to an existing State tax (a A transfer of taxing power should include the ability to "piggybacking* onto a State tax). The county supplement impose any rate that a county might choose; a cap could is collected along with the State tax and remitted by the be set on the rate if there were some matter of Statewide State to the counties. The most frequently mentioned concern that warranted imposing a limit on the extent to candidate for a county supplement is the general excise which rates might be raised. tax. As a county supplement to a State tax is really a State-administered local tax, any proposal for a supplement must be considered with a view toward the Tax Sharing A tax sharing arrangement is an alternative appropriateness of the tax as a source of local revenue. to a shift in revenue raising authority. A tax sharing On balance, it would seem that the GET would not be an means that the counties would receive a portion of an appropriate tax for the counties. existing State tax. Shared taxes arc essentially grant-in- One consideration is the complexity of identifying the aid programs funded by earmarking a part of a particular source of GET collections. There have been a number of State tax and thus are unattractive for the same reasons as proposals to require the identification of the source of a grant-in-aid: they diminish accountability, and they are income by county, but it still is not certain how much of more likely to be revoked than would a grant of taxing an additional compliance and administrative burden would authority. result from such a requirement. In addition, as a State Despite the drawback of shared taxes, a candidate for administered tax,it is uncertain how much of an incentive tax sharing is the Public Service Company (PSC) Tax the State would have to monitor the reporting since its because of a possible overlap in jurisdiction. The PSC tax share of the tax would be based on total collections is a State tax on the gross income of public utilities, without regard to source. common carriers by water, motor carriers, and contract Another consideration with the GET as a source of carriers. The tax rate for public utilities ranges from county revenue is that its apparent incidence among 5.885% to 82%; the rate applied to the others is 4%, individuals bears little relation to the distribution of the Annual collections of the PSC tax arc about 560 million, benefits of public services for which the counties are of which 550 million is from public utilities and the responsible. The evidence suggests that the incidence of balance from the carriers. the tax is regressive, whereas it is likely that the The PSC law specifics that the tax is a means of taxing distribution of the benefits of services for which the the property of public utilities. With the counties now counties are responsible is more or less proportional to having complete control of the property tax, there is a income or to the value of residential property, If this is potential overlap in jurisdiction between the State PSC the case, the GET is not well suited as a means for the 56 Tax Review Commission counties to finance, in accordance with the benefit underestimation of the costs imposed by development. A principle, their service responsibilities that cannot be more consistent and uniform application of fees and funded by fees and charges. exactions, with a more realistic assessment of additional A final consideration is that a county supplement,like costs,should be considered. a shared tax, tends to cloud accountability. If there is an issue of possible Statewide concern,such as with proposals for mass transit systems, there is no reason for preferring a county supplement to the GET over categorical State grants as a means of financing such projects. Existing Revenue Authority As of November 1989, the counties have full control of the property tax. By many measures the property tax in Hawaii is below national averages,but peculiarities of the State/county relationship in Hawaii make comparisons less helpful. The issue of additional revenue authority for Hawaii's counties is one of efficiency and revenue flexibility and should not be obscured by whether Hawaii's property tax is or is not in line with national averages. Nevertheless,the property tax is a cornerstone of local tax systems and should be recognized as such in Hawaii, The policy of county officials should be the same as that of State officials with respect to the tax system: the base should be kept broad and the rates low, The tendency to provide tax relief and erode the tax base through exemptions should be avoided,as should the inclination to . adopt policies that result in less than 100 percent assessment of property. The counties should guard against the proliferation in the number of tax classifications. In addition to property taxes,the counties have control over user fees and benefit charges for county services. Fees and charges should generally be a preferred means of financing county services because they more nearly reflect the benefit principle. By some measures, the degree to which counties in Hawaii rely on user charges is substantially less the averages nationwide and for the western states. The counties should make best use of such fees and charges. Finally, a major concern of the counties is the cost of development. Many of the arguments put forward in support of requests for money by the counties center around infrastructure costs. An analysis of the counties' use of development fees and exactions suggests that these sources of revenues, which should cover much of the infrastructure costs imposed by development,are not being properly utilized. It appears that development fees and exactions have been applied on an ad hoc basis that has tended to focus on high-visibility projects while neglecting other developments. Overall there has probably been an Tax Review Commission 57 Taxes on Hotel Rooms—An Informal Survey of Various Cities March 27, 2015 In its report to the 2010-2013 Tax Review Commission, the PFM Group calculated total taxes on hotel rooms in cities that the U.S. Census Bureau identified as the top ten travel destinations. Some of the destinations get mostly business travel, but some (Las Vegas and Orlando) are tourist destinations. The taxes include hotel room taxes and sales (or excise) taxes. City Taxes Honolulu 13.96% Boston 14.45% Chicago 16.39% Las Vegas 12.00% Los Angeles 15.57% Miami 13.00% New York City 14.75% + $3.50 per night Orlando 12.50% San Francisco 15.57% Washington, D.C. 14.5% The average tax rate on hotel rooms in the top ten destinations (excluding Honolulu and New York City's fixed fee of$3.50 per night) was 14.3%. The following data showing the breakdown of the taxes for these cities and for a few others were compiled in early 2014. In some places, changes to the hotel taxes were being considered when the data were collected. The data should be considered as preliminary, because they have not been extensively edited for completeness or for accuracy. Anaheim, California City tax on hotel rooms: 15%, plus 2% for properties in the Anaheim Resort and the Platinum Triangle Total taxes on hotel rooms: 15%to 17% Page 1 of 4 Los Angeles, California City tax on hotel rooms: 14% plus 1.5%fee on hotels with 50 or more rooms Total taxes on hotel rooms: 14% to 15.5% San Diego, California City taxes on hotel rooms: 10.5%, plus 2% Tourism Marketing District imposed on lodging businesses with 70 or more rooms Total taxes on hotel rooms: 10.5% to 12.5% San Francisco, California City tax on hotel rooms: 14%, plus Tourism Improvement District levies of 1%to 1.5% Total taxes on hotel rooms: 15% to 15.5% Miami, Florida City sales tax: 1% County taxes on hotel rooms: Convention Development Tax: 3% Tourist Development Tax: 2% Professional Sports Facilities Franchise Tax: 1% State sales tax: 6% Total taxes on hotel rooms: 13% Orlando, Florida City sales tax: 0.5% County taxes on hotel rooms: Convention Development Tax: 3% Tourist Development Tax: 2% Professional Sports Facilities Franchise Tax: 1% State sales tax: 6% Total taxes on hotel rooms: 12.5% Chicago, Illinois City taxes on hotel rooms: Municipal: 1.08% Home Rule: 4.5% Metropolitan Pier and Exposition: 2.5% Sports Facility: 2.14% State tax on hotel rooms: 6.17% Total taxes on hotel rooms: 16.39% Page 2 of 4 Boston, Massachusetts City taxes on hotel rooms: 6%, plus 2.75%Convention Center Tax State tax on hotel rooms: 5.7% Total taxes on hotel rooms: 14.45% Las Vegas, Nevada City taxes on hotel rooms: 12%, plus 1%tax on hotels near the "Fremont Street Experience" Total taxes on hotel rooms: 12% to 13% New York, New York City sales tax: 4.5% Surcharge for the Metropolitan Commuter District): 0.375% State tax on hotel rooms: 5.875% + $3.50 per night State sales tax: 4% Total taxes on hotel rooms: 14.75% + $3.50 per night Portland, Oregon City tax on hotel rooms: 6%, plus 2% Portland Tourism Improvement District fee for facilities with 50 or more rooms County tax on hotel rooms: 5.5% Total taxes on hotel rooms: 11.5% to 13.5% Austin,Texas City tax on hotel rooms: 9% State tax on hotel rooms: 6% Total taxes on hotel rooms: 15% San Antonio, Texas City tax on hotel rooms: 9% County tax on hotel rooms: 1.75% State tax on hotel rooms: 6% Total taxes on hotel rooms: 16.75% Washington, D.C. City tax on hotel rooms: 14.5% Total taxes on hotel rooms: 14.5% Page 3 of 4 Here is a summary of the expanded and updated list: Total City County State Destination Tax Share Share Share Anaheim, CA 17.00% 100% 0% 0% Los Angeles, CA 15.50% 100% 0% 0% San Diego, CA 12.50% 100% 0% 0% San Francisco, CA 15.50% 100% 0% 0% Miami, FL 13.00% 8% 54% 46% Orlando, FL 12.50% 4% 48% 48% Chicago, ii 16.39% 62% 0% 38% Boston, MA 14.45% 61% 0% 39% Las Vegas, NV 13.00% 100% 0% 0% New York, NY* 14.75% 33% 0% 67% Portland, OR** 13.50% 59% 41% 0% Austin,TX 15.00% 60% 0% 40% San Antonio,TX 16.75% 54% 10% 36% Washington DC 14.50% 100% 0% 0% Unweighted Ave. 14.60% 67% 11% 22% * Plus$3.50 per night(not included in the calculated percentages). ** For facilities with 50 or more rooms. „,ooN22 2222 0 0 M N O M m Y O O O N N x * ' } M M [V h If) . O a Q+M tlD m Cm�i N coN s .- U7 ., 90. O tO t0 * es * N m P ^ m'1 N W a f `,, o to o M rn yt $e N O �� :', :. O 0 0 M t0 N N .5 ,-, M to M N . N M ',. 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O N N O m 0 0 rr r ti "0 i - - :::::] 0O~ " I MOONO Nxey c m ) O1LvC I .-hT OtON 0tOtO O QO EI O = o* , M646 Ot O V' m tp O m LL O:.: ' C co 1 COM a " a a d ' n^o . o N u � a mroY J _0 C U l .,ma0mtn m 4t( vTi I I p PmN O 0 (Doo P 0 0 Hv. C r • eee Ew+.+�.��� t+1 r 0 0 N 0 C O O 3e """.1 2C, 0040. a0 O O N i P 0 . 0 . — N ( �` 0 m O a N 0 I „'1 _P O O Y C O O Yt C i . Tti L -0 O O u) N awe C N00toCO m . ' oO P C . O . pi LL dt 1 w) C OOOuNN 0000 m *7.3 w o 0 0 mN a o 0 oa m . 2 C e; 000r. 00 ' •C a a /j o O O o O w 0 0 0 w . 0 0 0 0 m '++ to L000mm o .. r32 h j O 0 m Doo N.r- Oo00 0 0p otntn ., o o 0 M M 0000 p 8 p 8 o o c NN o o o . O ffi c `. c 3 C 3 W � )- U E C ®V E o i t i'C m t" c i`C O l O O 3p c QO O O A Brief History of the Transient Accommodations Tax (TAT)Allocations The TAT was established by Act 340, SLH 1986. The rate was set at 5%. From January 1987 through June 1990, the TAT collections were General Fund realizations. Act 185, SLH 1990 changed the allocation of the TAT collections beginning July 1990, so that 5% went to the General Fund and the remainder went to the counties, with shares distributed as follows:' Oahu 44.1% Maui 22.8% Hawaii 18.6% Kauai 14.5% The Conference Committee Report to bill that introduced the county allocations (and became Act 185) contained the following statements to justify the change: "Your Committee agrees that a more equitable method of sharing state revenues with the counties must be provided. A stable and continuing source of revenue will enable the counties to provide for their needs. Currently, the counties must come before the legislature each year to request financial assistance. This process discourages long- range planning. During this legislative session, both houses considered several proposals to determine the most equitable means of sharing state revenues with the counties. Among the proposals that were considered were the transfer of revenues collected from the transient accommodations tax, a portion of the public service company tax, animal fines, and unadjudicated traffic and parking fines and forfeitures to the counties. Your Committee finds that the administrative costs and burdens of distributing revenues from several smaller sources will be considerably greater than the costs of distributing from one large source. Your Committee also notes that tourism is the largest industry in Hawaii, and many of the burdens imposed by tourism falls on the counties. Increased pressures of the visitor industry mean greater demands on county services. Many of the costs of providing, maintaining, and upgrading police and fire protection, parks, beaches, water, roads, sewage systems, and other tourism related infrastructure are being borne by the counties. 1 The shares of the individual counties in the total TAT allocations have remained the same ever since. Your Committee finds that sharing TAT revenues with the counties by distributing the revenues among the counties in proportion to the population of each county would best accomplish the intent of this measure in an equitable manner. Your committee further finds that this method will provide the counties with a predictable, flexible, and permanent source of revenues. Since your Committee intends this measure to be an equitable plan to distribute funds, your Committee notes that the Legislature may re-examine this TAT sharing mechanism if the county uses its present real property taxing powers to selectively impose a heavier burden on one industry over other industries who are currently paying the nonresidential real property tax rate. The distribution of the TAT revenues to the counties does not mean that the Legislature has lessened its state support and commitment to the tourism industry. On the contrary, your Committee finds that because of tourism, Hawaii now enjoys economic prosperity. Your Committee further finds that past state support for tourism marketing and promotions programs have resulted in making tourism Hawaii's largest industry. It is the intent of your Committee to continue its financing of the Convention Center Authority and future funding for statewide tourism marketing and promotion to ensure the continued vitality of the tourism industry of Hawaii." 2 The final county shares were not based on county population, however.3 Instead, they appear to have been based on visitor statistics. The tabulation below shows the share of TAT collected by establishments located in each county. The county break-downs in the tabulation differ from those provided in the Department's monthly collections reports, which show TAT collections by address of the taxpayer. Since many of the companies offering transient accommodations in more than one county are headquartered on Oahu, the data in the monthly collections reports show Oahu with a larger-than-warranted share of the total TAT collections. County Shares of TAT Collections* Calendar year Oahu Maui Hawaii Kauai 2013 48.7% 29.4% 12.1% 9.8% 2012 47.5% 30.4% 12.7% 9.5% 2011 46.5% 31.4% 12.5% 9.6% * Preliminary calculations 2 See Conference Committee Report 207 on HB 1148,SLH 1990. 3 An allocation by population would have given Oahu 75%of the total in 1990. Act 7, SSLH 1993, allocated one-sixth of TAT collections to the convention Center, starting July 1994. Of the remaining TAT collections, 5% went to the General Fund and the remainder went to the counties. Act 156, SLH 1998 allocated 37.9% of the TAT collections to the Tourism Special Fund and increased the allocation to the Convention Center from one-sixth to 17.3%. The amount allocated to the counties was set at 44.8%. The allocations made under Act 156 began in January 1999. Allocations to the Convention Center were allowed to expire at the end of fiscal year (FY) 2000. In FY 2001 and 2002 the Convention Center's share was instead deposited to the General Fund. Act 250, SLH 2002 reduced the allocation to the Tourism Special Fund from 37.9%to 32.6% beginning July 2002. Act 253, SLH 2002 capped the allocation to the Convention Center at $31 million per year, starting in January 2002, with the excess amount of the Convention Center's share of 17.3% of TAT collections over the cap going to the General Fund. From 2005 to 2008, various changes were made to TAT allocations, but the counties' share remained fixed at 44.8% of total TAT collections. Act 61, SLH 2009 increased the TAT rate from 7.25%to 8.25% for FY 2010, and from 8.25%to 9.25% after June 2010, with the increased collections dedicated to the General Fund. The share of the counties in the collections from the base tax rate of 7.25% was not changed. The reason for the increases was to replace budget shortfalls caused by the Great Recession. Act 103, SLH 2011 capped the amount of the TAT allocated to the Tourism Special Fund at $69 million per year and capped the amount going to the counties at $93 million per year from July 2011 through June 2015. The purpose was again to address the State's budget shortfall.° Act 268, SLH 2013 ordered that starting in FY 2018, if a county failed to pay in full the annual required contribution to its employees' health benefits trust fund, the shortfall would be made up directly from the county's share of the TAT allocations. Act 174, SLH 2014 increased the cap on the counties' share of TAT allocations from $93 million to $103 million for FY's 2015 and 2016. The Act also established a working group to recommend the proper allocation of TAT collections to the counties. 4 See Conference Committee Report No. 139 for Senate Bill 1186,April 29,2011.