ISLAND VOICES
Hotel tax credit good for state

By Rick Egged
President of the Waikiki Improvement Association

If Gov. Lingle would like to improve the state's tax revenues both short and long term, she should sign HB 1400, the Hotel Renovation and Construction Tax Credit Bill.

How can that be, you say? Hasn't the state Tax Department blamed tax credits, the hotel credit included, for recent shortfalls in state revenues? Wouldn't the extension of these credits result in even greater revenue losses?

The answer to this apparent contradiction is simple: Since a tax credit by its very nature will always result in a reduction in a taxpayer's liability, it will always be defined by the Tax Department as a "loss." Unfortunately, what is not accounted for is the amount of additional revenues created by the credit.

As an example, hotels often offer discounts as a means of generating increased sales. While the discounts may appear to be a loss since they are deductions from the full price, the amount of additional room rentals that the discount generates cannot be ignored. These additional revenues are the reason the discounts are offered. Ask Longs Drug Stores or Foodland why they have sales; it's the same principle.

The hotel tax credit works the same way. In other words, to determine the actual value of the credits, we must weigh their "costs" — or, in the case of Tax Department terminology, "loss" — against the amount of economic activity they have spurred.

A recent study prepared by Hospitality Associates Inc. and economics professor James Mak did just that. It found that:

• The tax credits have produced a sizable increase in hotel construction and renovation activity. Realize that prior to the establishment of the credits, hotel construction activity had been languishing. Against the backdrop of a sluggish state economy, the jobs, earnings and tax revenues generated by this increase in construction activity are extremely significant.
• The gain in tax revenues from increased hotel construction and renovation activity far exceed the estimated amount of the tax credits given. In addition to increased tax revenues from construction activities, the improvements are generating higher room rates, which translate into higher excise and transient accommodation collections over time.
• The renovations spurred by the credits are attracting higher-spending visitors. The key to sustainable tourism in Hawai'i is our ability to increase per capita visitor spending. By facilitating hotel renovations, the tax credits have proven to be an effective tool in helping to improve the quality of Hawai'i's hotel and visitor market.

Higher visitor spending, of course, produces even greater tax revenues.

In addition to bolstering Hawai'i's No. 1 industry and generating increased tax revenues in the long run, the hotel construction tax credits have the advantage of providing immediate economic relief.

The majority of construction spending will be used for labor costs, immediately providing paychecks for working people, which in turn, generates payroll and income taxes for the state each pay period. Labor and materials generate excise taxes paid monthly or quarterly. Importantly, any potential tax credit can only be redeemed after these tax-producing expenditures have been made.

Finally, while there has been quite a bit of rhetoric over the applicability of tax credits for resort-related commercial construction activity, a close review of the language of HB 1400 shows that only commercial construction that is integrally tied to a hotel business would qualify for the credit. This is far more restrictive than originally thought, and should quell earlier concerns over the possible "open-ended" nature of the credit.

Typically, a hotel business would not be able to claim the full credit in one year. Anyone who has followed the monthly economic reports knows that few, if any, visitor industry businesses will make money in 2003. That means that any credit earned can only be collected in future, more prosperous years.

Hotel construction and renovation tax credits are a proven commodity. They have served the state well in a time of extreme economic distress. They are helping to fuel our economic growth. The governor should sign HB 1400.